After six years in the rocky VC business, Minhas Mohamed talks about why he's
starting a new financing organization specializing in technology firms. Plus:
In search of 'pain thresholds'
by Neil Sutton
A venture capitalist says he's ready to focus on technology funding because
the technology market is ready for him.
After the bust years, says Minhas Mohamed, the start-up market was in limbo
for a time but has now matured to the point where young companies are ready
to address real customer
needs. Mohamed's firm has changed its name slightly (from MM Venture Partners
to MMV Financial) to reflect his new approach and is ready to start apportioning
$300 million to deserving companies. Mohamed has also formed partnerships with
private equity firms like Wells Fargo and Montreal's depot et placement du
Quebec.
Mohamed spoke with ITBusiness.ca Tuesday about the difference between a successful
startup and a flame-out and why post-IPO companies might need his help too.
ITBusiness.ca: What prompted this change in approach?
Minhas Mohamed: MM Venture Partners was doing this form of financing for over
six years. So we had invested in some 45 companies over the last six years
-- mainly early to mid-stage companies. We'd invested over $150 million. We
then decided we'd relaunch our platform through a specialized technology finance
company. Last year we bought out our limited partners, GATX Corp., with whom
we'd had a joint venture for over five years. We decided to relaunch the company
with new partners, with new capital, as a specialized technology finance company.
ITB: Why did you decide to specialize in just technology and life sciences
funding?
MM: The business fundamentals definitely demand a specialized finance company.
But we can also use a very efficient capital structure which brings down our
cost of capital. We can then introduce new products in the technology sector
as well, which you can't do as a fund. And we don't have to worry about capital
for the next five years. This gives us a $300-million investment program.
ITB: What market conditions have changed to make this feasible?
MM: Well, No. 1, we've got a pretty stellar track record. Really, we're the
first ones to create this form of financing for Canada. The trends that we're
seeing over the last couple of years have been kind of challenging, but they've
also brought a lot of reality back into the market as well. We're seeing company
formations continuing in the technology sector. That's pretty encouraging.
We're also seeing more pools of capital coming into the technology sector,
which is also interesting. It leads to more innovation and more financing and
more activity. We believe the long-term is going to be very much positive for
the technology sector and we wanted to create this very specialized platform
to take advantage of this growth sector.
ITB: Is the market more stable than it was?
MM: We don't have those lofty valuations that we had in 2000 and 2001, so
there's a lot of fundamentals that have come back into the market. As I put
it, all the tourists are out of the market and what you have (left) are really
good, solid companies with really excellent business fundamentals -- good value
propositions. You've got very solid management teams as well. What's remaining
in the technology sector is very positive. Anything that is formed in this
market has got a good value proposition and a good valuation as well. So that
makes sure that these companies will really have the opportunity to survive
through a long period of time.
ITB: What type of technology companies are you looking for?
MM: The sectors we will be targeting are early- to mid-stage. Anywhere from
Series A rounds to pre-IPO companies. Our focus is going to be very much in
Canada. A little bit in the States as well. But essentially our segments are
going to be in the telecom sector, network management, semiconductors, enterprise
software (and) wireless.
We are planning to look at public companies as well, which we didn't do much
in the past. We think there's a big opportunity to provide our sort of financing
for public companies where the stock has really fallen but the business fundamentals
would still be the same.
ITB: Are there any potential companies you've already considered for funding?
MM: We just approved an investment yesterday at our first investment committee
meeting. I can't name the name, but it's a company based in Ottawa and essentially
provides OSS (operating system support) for all kinds of telecom networking
companies, which is a pretty big pain threshold right now.
ITB: Are there more companies cropping up now or has the quality just improved?
MM: Well, the quality is better, but as time's gone on, more companies are
cropping up as well, because entrepreneurs that are not with some of the larger
companies are beginning to create their own companies. So you're seeing a little
bit more on the company formation side. A certain amount of confidence is returning
back to the market. Canada remains very good when it comes to some of those
fundamental technologies. In the telecom sector and the financial services
sector, we still remain world leaders.
ITB: How much guidance will these companies get from you?
MM: Currently there's over 60 years of technology experience in this firm.
We all come from the technology finance area. We don't tend to go on the boards
of companies because we don't think that's where our value comes in. We really
try to bring new networks and relationships to companies. So we will take on
areas where we can add value on a project basis. Even the specific background
and stage of development of a company and what they're looking for. For instance,
when it comes to companies raising their next rounds of financing, our networks
in the United States are second to none when it comes to strategic partnering
opportunities, when it comes to introducing companies to different customers.
ITB: How many companies are you targeting for investment?
MM: We are targeting to invest anywhere from $50 to $60 million a year. So
we're talking about 15 to 20 companies a year. The sweet spot is $3 to $4 million
per company.
ITB: How long would you be looking to ride that investment?
MM: About three years is our time horizon, usually.
ITB: What are these companies going to have to bring to the table in order
for you to consider investing in them?
MM: What we definitely look for is: does this company's technology resolve
a pain threshold anywhere in the technology sector? We're talking about proprietary
technology, we're talking about good, solid management teams that have done
it before. Then we're looking for a business plan that attacks a market that
is definitely growing. And the fourth is customer validation. Where can a company
demonstrate customer traction, strategic partnering opportunities? How quickly
can they get to that?