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Financing Solutions that Fit
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 Tuesday about the difference between a successful startup and a flame-out and why post-IPO companies might need his help too. 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?

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