Major traction in the U.S. market

Going where the fish are.

For the better part of the last year, our team has been spreading the word about Wellington Financial in the key American VC markets. Armed with a strong 10-year track record, lots of references, and plenty of efficient non-levered capital, we set off to the Northeast, Southeast and California in the hopes that U.S. venture capital firms would be as supportive of our True Growth Capital structure as our VC friends in Canada had been over the past decade.

It wasn’t that we didn’t love Canadian entrepreneurs, or that the Canadian VCs hadn’t been incredibly supportive and made us the most active venture debt firm by the time our 2004-vintage Fund II was but two years old. The combination of positive cross-border tax law changes plus the global credit crisis meant that we could now compete successfully in the world’s largest growth capital market. How many highly successful Canadian firms don’t sell any products beyond the border?

Plus, it was a bit of a collective personal challenge.

The U.S. market represented an opportunity to dramatically increase the deal flow for our 2006-vintage Fund III, broaden our base of high quality industry relationships (which invariably helps every existing portfolio company back home), avoid the BDC’s scofflaw predatory pricing, and insulate ourselves from the long-predicted crisis that had taken ahold of the Canadian venture capital and start-up ecosystem (even as we worked hard with the CVCA in an effort to solve it).

2009 was seen to be a “bad year” for the U.S. VC industry, with only US$18 billion of new capital invested in the space, down from US$29 billion the prior year. Back in Canada, we saw but $1 billion put to work, despite having an economy that’s about 1/11th the size of that of our American brethren.

As I’ve said to some of you privately, senior VCs in the U.S. take their financial partners seriously. They want to size you up, which suits us just fine. When we’d call someone in, say, Reston, Virginia to introduce ourselves (yes, we do cold call, just like any start-up entrepreneur), they’d often buy us lunch…since we’d taken the trouble to fly down and all. And most of the time we’d have the chance to meet with a broad cross-section of the firm’s partners, and not be dispatched to the “business development officer”, whose admirable job it is to manage the needs of the accounting and legal firms (so-called “service providers”), when he’s not at trade shows trying to drum up business himself.

The questions we’d get were wonderful in their precision: have you done tech lending before, who have you done business with who I might know, who are your investors, do you rely on bank leverage, how does a 3 year bullet payment work, what happens when a deal goes sideways….

When you call them up, they call you back. When you put capital into their portfolio companies, they thank you when the deal closes. When you have a great introductory meeting, they don’t want you to leave without one or two live deal leads from their existing portfolio. Never once did someone say “let’s have 36 coffees over 36 months before I let you bid on one of our portfolio companies”. Americans, in essence, are great to do business with. No surprise there.

Being headquartered in Canada turned out to be an asset. The success our financial system had in avoiding the financial crisis was well understood in the U.S. In their minds, they seemed to be doing the calculation of Canadian lender = prudence = stable in good times or bad = good for my portfolio companies.

The VC elephant that is California warranted someone on the ground, which is why we announced our first U.S.-based team member there last November (see prior post “Wellington opens California office” Nov 13-09). The distance from Toronto and the size of that particular market made the decision easy.

With the closing of two more U.S. VC-backed technology financings this week (Congrats Craig and Eric!!), it is safe to say that our firm’s growth strategy is working. The VCs we’ve closed deals with in the past few months include:

Altos Ventures
Atlas Ventures
Boldcap Ventures
DFJ ePlanet Ventures
DFJ Gotham Ventures
Epic Ventures
Grandbanks Capital
Hudson Ventures
Industry Ventures
Longworth Venture Partners
Paladin Capital
Polaris Venture Partners
Presidio Venture Partners
RRE Ventures
Sierra Ventures
Sigma Partners
Softbank Capital
Vulcan Capital
Walden Venture Capital

We’re just getting started, mind you. But I’m really proud of what the team has accomplished in a very short time period. To all of our new portfolio company management teams, as well as their VC backers: thanks for the confidence.

MRM