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A monthly column focusing on new and emerging BC publicly listed technology companies     Technology Futures:     November 29, 2004 By Michael Volker Entrepreneurship 101, Building Better Boards, and the Patent Game In this month's column, I'll touch on three of my favorite topics - Entrepreneurship, Directorship, and Inventorship - with a view to providing some new insights - many of which I only recently gleaned at the numerous workshops and conferences I attend. Indeed, it's been a busy month! Entrepreneurship 101 By running the Vancouver Angel Network and being a fairly regular investor myself, I see lots of deals. I've been working with startups since the early 80's - after I sold my own. After 25 years, I ask myself each day - how can I spot a winner? In the past several months, I've looked at more deals than I have in the past several years. This isn't because there are more deals - it's because through the WUTIF Fund (see www.wutif.ca), I'm keen to find some worthy startups. This recent intensity has caused me to once again attempt to define winning entrepreneurial characteristics. While the presence of such entrepreneurial characteristics does not guarantee a winning outcome, the absence of any of them almost certainly lead to failure or marginal outcomes. So, what are the essential characteristics? Commitment, Integrity, and non-procrastination. The third one - non-procastination (not really a word) bugs me but I cannot find one that is the true opposite of procrastination. Pro-active and driven come close but they don't exactly say "getting something done today" - the opposite of "putting something off till tomorrow". [If any of you can come up with the right word, there's a nice bottle of Burrowing Owl with your name on it!] These are the three words that to me describe the successful entrepreneur. You're probably thinking of others. Indeed, there are many attributes and descriptors of entrepreneurs - tenacious, ambitious, inventive, innovative, enterprising, leader, visionary, driving, indefatigable, in-control, relentless, domain expert, quick learner, marketer and even promoter. However, all of these others can be grouped in one of the top three. Besides, they are harder to quantify or assess whereas the top three are a little more black and white. Let me explain why these are important and how they come into play when an angel investor is assessing an opportunity - which as we all know comes down to the entrepreneur and her ability to execute. First, commitment - this means that the entrepreneur is totally, unequivocally, 100% duty bound to make the venture work. Unconditionally. No strings attached. No outs. Commitment applies to customers, to quality, to diligence and to others. Example: one fellow I was keen on supporting did not want to meet with an investor group one Wednesday evening because that was his sailing night. Against my better judgement I went ahead with an investment anyway - and it went into "irons" and got nowhere. One of my favorite examples involves an entrepreneur who had all the signs of a true entrepreneur. Some months after making the investment, it was that time at which shipments were supposed to begin. Well, the company was late and the entrepreneur blamed his parts suppliers for the delay. I wondered who is in control? Him or his supplier? Now, I have certain little "tests" that I like to use to see if there's any wavering on this point. For instance, I request certain deliverables (eg a business plan) and get a time commitment on same. If these little commitments are not lived up to, why take a chance on missing a bigger one? Second, integrity - this one is, interestingly enough, often not singled out as an all-important one. I believe it is. It comes down to trust. One of my board members recently noted that a startup entrepreneur is really involved in a "search for the truth". I never thought of it that way before, but I like it. Avoiding hyperbole while being confident in one's abilities and honest or forthcoming about one's lack of abilities or skills is essential. An honest entrepreneur is one that can be trusted by customers, investors, and employees - one that will be respected and one that will not hide problems. It's not easy to be totally honest about bad news. This characteristic is number one in my book. Example: a prospect told me something verbally but when I asked for an email confirmation, it was materially different. Not good! On a few occassions, student entrepreneurs have told me that they would give the University some stock options for helping them get off the ground.  I have yet to see these. I hope they don't approach me for investment. If you can't trust someone, don't invest in them. One of my very first angel investments was a disaster. I was told that there were no encumberances on the company's bank account. No sooner did my cheque hit the corporate account than a secured creditor popped up! On the bright side, I learned what "due diligence" means. Third - non-procrastination. Yes, I admit it's not a good word. But, for me the opposite to procastinating is essential in a highly competitive technology industry. Not waiting, getting there first, carpe diem! I remember well the words of Geoff Ballard at a Vancouver Enterprise Forum event back in the late '80s. He spoke about the Friday afternoon that he was out fishing in the Gulf Islands when he got a call from Mike Brown (then at Ventures West) to meet him to close on Ballard Power's first venture round (around $2m I recall). Geoff got off the boat and they signed on that Friday. Geoff notes that the following Monday was Oct 19, 1987 - the date when the stock markets collapsed and to use his words, "deals were getting done at half the valuation and twice the price". Ballard Power would not exist today had he procrastinated. Another "entrepreneur" recently asked me if he could present to my board. I told him that our board meeting was in a few days and that he was welcome. He declined on the basis that he was too busy that week and besides they needed more time to prepare! He was even irritated with me that I didn't give him more notice! Talk about procrastination and lack of commitment. No deal. I love it when I give someone a lead (eg a sales lead) during a meeting and they get on it within the hour. When I had my own business, my philosophy was to never, ever keep anyone waiting. If it can be done now, then it should be done now. I wanted to be the one doing the waiting. It worked well for me. If you are an investor and any of these traits, in your judgement, aren't there, would you still invest? If you think you are an entrepreneur try scoring yourself on these three points (be honest!). How do you want investors to see you? Way back, I remember being put through the hoops by the venture capital arm of Inco back in the 70's. They took 25 prospective investees and spent three long weekends with us - putting us through "psychological" tests to see if we had what it takes. Most of their investments paid off. Today, we fuss way too much with business plans! Building Better Boards This month's Vancouver Enterprise Forum event focused on the subject of building better boards of directors for your enterprise. The role of a company director has changed greatly in the past five years. Directors and becoming far more involved - and liable - than before. It's a serious job now and not just an occassion to go for a fancy dinner to exchange war stories. My own view is that Directors are the soul and conscience of a company. They are accountable to all stakeholders - shareholders, customers, suppliers, employees, government, the community, etc. The buck stops (or should I say, "starts") with the Board. The five speakers at the event were: David Raffa (lawyer at Catalyst), Peter van der Gracht (CEO at Ignition Point), Michael Hagerman (CEO at Make Technologies and a governance junkie like me), Patrick O'Callahan (a specialist in board effectiveness & recruitment) and yours truly. Grant Weaver (Bull Housser) and Kimberllay Brooks (Corporate recruiters) moderated a lively discussion and although I can't remember everything, here are some of the key points that were made around three key questions: Q: How early in the life cycle of the company do you need to start creating a board of directors? A: Immediately. However, take a little time to get the right directors and keep in mind that as investors - VCs or angels - get involved, they may want a board seat too. Unfortunately, investor-directors tend to dominate and be more interested in themselves as an investor than they are in all shareholders! With respect to board size, smaller is better. For a startup, a 3-person board is adequate - the founder or CEO, and two independents (one of which might be a major investor). Later on, 5 is a good number. More than that is tough to manage. Q: What types of skills are important and for what stage? A: It's a good idea to get people with gobs of experience - especially those that can help you formulate strategy. Directors with domain expertise and connections are invaluable. Helping with customer introductions can go a long way towards getting established in the market. It's good to get a board that will encourage and guide the CEO and her team while holding her accountable for performance. However, you should avoid getting directors involved in running or micromanaging the firm (unless you get one who can be a part-time CFO or something like that).  Business experience is most important - especially relevant industry know-how. It goes without saying that nowadays directors must be versed in the rules and regulations that govern businesses, especially public ones - even junior public companies. A knowledge of accounting and finance and the regulatory environment are prerequisites. On this point, a local investment banker recently asked each board member (on one of my boards) to complete a lengthy questionnaire to ascertain their understanding of various rules and regulations before agreeing to assist in a financing for the company. In the past, they didn't care. Q: How do you best attract, retain, and compensate board members? A: Being passionate about one's venture is a good way to attract directors. It's harder to resist an exciting new opportunity that has a passionate, driven, committed person or team behind it. Finding directors is not easy. A good way to find directors is through referrals or introductions. Increasingly, corporate recruiters (right, Kimberllay?) can be very helpful in this regard. Believe it or not, there are actually many people out there that want to be directors. I believe that is becoming an attractive post-active (call it semi-retirement) form of "employment" and a way for seasoned executives and entrepreneurs to remain active without the hassles of the day-to-day drudgery. Once a month, we hold a "BC Directors Breakfast Club" meeting at SFU downtown for education, networking and connecting directors with companies. Compensation is a hot topic. It used to be that a nice dinner or some perk would be adequate. In view of the increased time commitment that's required and the liability exposure (and contrary to what many think, it is virtually impossible to bullet-proof yourself as a director - indemnifications and liability insurance won't do it), directors need to be properly and fairly rewarded. After all, you're in it for a huge gain, why not triple the gain and give your board 10% of the deal? I'm always amazed at how many entrepreneurs abuse their directors and mentors. Fact is, you've got to figure on spending 1 - 2 days per month to be a director. That works out to only 22 minutes/day and that's easily gobbled up just by reviewing company emails! While that doesn't sound too onerous, it works out to 5 to 10% of a fulltime job. Therefore, getting back to the compensation question, a director should at least get 5-10% of whatever a senior executive (CEO, CFO) is getting. That means some cash compensation (maybe token for a startup, but there ought to be some hard cash on the table) in the $5K to $10K/year range plus stock (preferred) or options (less preferred) that equate to around 2% per director. Some other points and comments made by the panelists: Board expectations should be discussed at the outset. What does the company expect from each director? What are the time commitments? How many meetings (monthly, quarterly?) What do directors expect in return? What are the directors responsible for? How will they be assessed with respect to their own contributions to the company? A company's key asset is its people's energy. Managing and channeling this energy is important and directors can help a CEO with this. With respect to liability issues it should be noted that directors are allowed to be wrong. As long as they apply prudent judgement and ask the right questions, they are less likely to be liable for "mistakes". Unfortunately, due to new regulations in the USA, eg the Sarbanes-Oxley legislation that was introduced as an attempt to keep companies from screwing their investors, companies are facing increasing costs. While this may apply mainly to public companies (even the junior ones on the TSX-V), even private companies are being subjected to more stringent rules, e.g. accounting and audit rules. I serve on the Board of a small California based software company and I'm flabbergasted at the increased costs of simply ensuring that the rules are being followed. This company pays in excess of $100K (US) for audit fees and a similar amount in annual legal fees - to do the bare minimum in routine filings! It's not quite that bad here in Canada, but it'll come! Unfortunately because of some of this extra red tape, a lot of the fun is disappearing. There's no question that this  does make business a little tougher for entrepreneurs! We often hear investors asking entrepreneurs what customer "pain" they are eliminating with their product. Well, the pain of managing a board is being addressed by a local startup - Aprio Inc. (Check www.aprio.net). This firm has a cool web-based system that allows directors to keep fully informed about their company without having to rely on scads of emails with cumbersome, frequently updated, attachments. As a final note - education of board members is getting more attention. There are many workshops and conferences pertaining to governance practices. As mentioned earlier, there's a local monthly breakfast meeting for directors. Also, SFU along with UBC and Toronto's Rotman School are introducing a high level intense governance course for larger companies that'll get rolling early in the new year. The Patent Game Twenty years ago not a great deal of attention was paid to patenting. Today, it’s a different story. Besides acting as a pheromone for investors, it’s a great checkmark on one’s resume and friends are readily impressed, too. Back then, my firm never bothered with patents because we believed that our technology would become obsolete by the time a patent was granted. And, the time and costs associated with getting one and defending it would be too onerous. We opted for the trade secret route but what we didn’t realize – and this actually happened – is that someone else could patent our ideas and preclude our use of our own intellectual property (IP). So, even if you’re reluctant to invest in a patent as a defensive measure, you may find yourself blocked by those on the offensive. One company that doesn’t want to be on the defensive is Microsoft. It holds just over 3,000 patents as compared to IBM’s 30,000-plus patent portfolio. Jumping vigorously on the patent bandwagon, Microsoft plans to file 3,000 applications this year, an increase of 50% over last year. With respect to patents issued, IBM retained the top spot last year receiving 3,415 patents. There’s a trend now to patenting anything and everything. The worldwide web has been a major contributor to this phenomenon. Searching for so-called prior art was no small task in the old days. Easy access to vast databases allows armchair inventors to find interesting patents and then file improvements, enhancements and combinations of these and then sit back and watch for infringers. It’s tough to get through the morning paper without some mention of yet another RIM, Microsoft or Intel patent drama. Intel has paid out hundreds of millions to settle patent disputes. Some cases resulted in judgments exceeding $1 billion. What a lot of people don’t realize is that it’s actually quite easy to get a patent. There are some clever techniques for doing this. Some folks even make a living from this. One of the most prolific inventors was little-known Jerome Lemelson who, at the time of his death just a few years ago, held over 500 patents and was taking in some $500 million per year in licensing income. Was he really an inventor who contributed to further IP development – as patents purport to do – or did he discover a lucrative niche for himself? If an inventor is aware of any prior art pertaining to his IP, it must be disclosed to the patent office. Of course, this may weaken one’s claims. One way to assert novelty (patents must meet three validity criteria: novelty, usefulness, and inventiveness) is to do a flimsy job of prior art searching and diligence. Over-worked patent examiners perform only limited searches. Because of this, the vast majority of patents are useless. They wouldn’t pass the validity test. The ostrich method (i.e. what I don’t know won’t hurt me) is an interesting strategic approach being used by many companies. The idea is to get a patent issued without doing an extensive prior art search. They then find an infringer and try to extract a license from the infringer that is less costly to the infringer than incurring the cost of challenging its validity! I was recently chatting with an inventor who has successfully defended his firm’s patents against infringers. He suggests  – and he practices this -  that at least five independent expert searches be conducted. These searches should extend beyond the obvious on-line searches. He uses agents in China and in Russia to search physical libraries in those countries. Any search that comes back with no reference to any prior art in either of those countries is likely not a search worth paying for! There's no question about it, the patent game is attracting more players. Even those that don’t like the game are drawn into it. Regardless of which side you’re on, the odds of winning are greatly enhanced if you’ve done your homework through exhaustive prior art searches! Well, I've got to go now to the annual TIA Christmas lunch. I wish all of you a restful and peaceful holiday season. Oh, and by the way, it's that time of year to make a contribution to a worthy cause. There's a way to do this using various tax breaks so that you can turn  a $2600 dollar donation into $10,000 while at the same time investing in the tech secto. Curious? Send me an email and I'll how you how. Business Centre for non-downtowners If you don't have a Vancouver "office" but find yourself downtown occasionally without a "home", you are invited to use SFU's TIME Business Centre. TIME is an acronym for Technology, Innovation, Management, and Entrepreneurship. The Business Centre (looks like an airport business lounge) is open to technology entrepreneurs and business people to use as a drop-in downtown office facility. Need to plug-in? Make some calls? Do some work? Hold a meeting? There are some great facilities for holding your company's AGM. Why hang out at MacDonald's when you can work productively at the TIME Centre? Drop by and check it out! It is located at SFU's downtown campus at 515 West Hastings St. You won't believe the price!  If you're an entrepreneur looking for a place to get your company started, there's some great office space available at the TIME Centre. There's also access to various resources, e.g. tech advisors, access to capital (e.g the VANTEC Angel Network), mentors, etc. Worried about the high cost of being downtown? Well, not to worry - some payments can be in the form of equity. Check www.sfu.ca/time for contact info. WUTIF...you wanted to invest in a tech startup? The Western Universities Technology Innovation Fund (WUTIF), is an "angel fund" catering to tech startups based in BC (not limited only to universities). WUTIF Capital is a VCC that offers investors a 30% BC refundable tax credit. If you're keen to co-invest with angels in up and coming companies, this is a good way to get started. Check www.wutif.ca for details. Pooling and risk-sharing is the way to go! Michael Volker, a technology entrepreneur, is Director of the University/Industry Liaison Office at Simon Fraser University, past Chair of the B.C. Advanced Systems Institute, Chair of the Vancouver Angel Network and past Chair of the Vancouver Enterprise Forum. He owns shares in many of the companies he writes about. Copyright, 2004. What Do You Think? Talk Back To Mike Volker Tech Futures is a bi-weekly column that focuses attention on new and emerging BC publicly listed technology companies.  Contact: risktaker@volker.org Tech Futures Archive B.C. High Tech Links