Elliptic speeds growth by rooming with VC
By Ottawa Business Journal Staff
Sun, Mar 9, 2003 12:00 AM EST

Elliptic Semiconductor Inc. credits its in-laws for helping it save cash early on and speed its growth.

The chip firm, which officially opened its new headquarters last week, took the unique approach of sharing space with venture capital firm Venture Coaches when it first opened for business last August. The arrangement, not unlike moving in with in-laws, was meticulously planned to avoid becoming an incubation arrangement, both sides say.

Despite the horror stories about venture capital firms imposing onerous conditions on young companies seeking financing, Elliptic executive Al Hawtin says the experience "greatly accelerated" the young company's growth.

In November, Elliptic closed its seed round of funding, which ended up totaling $800,000 including some late investments. Axis Partners and Venture Coaches both participated in the round along with some angel investors. When the company's seed round closed in November, it began the process of moving into its own offices.

What made the decision easy was the fact that Hawtin previously worked with Venture Coaches' partners Claude Haw and Larry Perron at Newbridge Networks. In fact, Hawtin hired Perron at Newbridge's business development group.

Nevertheless, a young company without even a seed round sharing space with a VC presented some unique challenges, Hawtin says.

"We had a time when we had a strict closed-door policy," says Hawtin. "We sometimes felt a little uncomfortable talking to investors. You even had to be careful with what you said over lunch."

Venture Coaches partner Jaswinder Kaur says both sides were aware of the "antagonistic relationship" that sometimes exists between startups and their investors. With this in mind, both sides set strict boundaries early in the arrangement to avoid potential pitfalls.

"We laid out the ground rules early on," Kaur says. "I wouldn't really consider it an incubation period because it's not like we had a lot of control over them. Seed investing is really about being in the trenches with companies. We see it as being in the trenches with a company."

Elliptic's experience was a positive one for two reasons, Hawtin says. First, Elliptic saved money by paying its rent with options to Venture Coaches. Second, having an early stage VC in the same office allowed Elliptic to eliminate some barriers to seed funding.

In its seed round, the company raised its money through convertible debentures rather than issuing common shares. This was done to entice angel investors to the table. In the last two years, many local startups have been forced by VCs to expand their pool of common shares with subsequent financing rounds, essentially minimizing the value of the shares held by original investors.

Kaur says the arrangement also helped Venture Coaches to easily size up a potential investment in Elliptic by seeing how the startup's management ranks interacted with each other.

"What we really look for is a company's team and it's not just expertise," she says, "but the chemistry between the team. We were able to see that first-hand."

Elliptic is now working on landing its first round of financing. The company is developing a system-on-a-chip product aimed at reducing a wireless device's power consumption. The firm's chips are also aimed at tackling security issues on virtual private networks.

- By Michael Hammond