Venture Coaches

CITO introduces new investment program, Ottawa company wins money

Communications and Information Technology Ontario (CITO) has unveiled details of its new $1-million Accelerator Investment Program, the aim of which is to give emerging communications and IT start-ups a financial boost to prove their technology is viable. Ottawa-based TenXc Wireless is the first company to receive money from the program, and the head of the not-for-profit organization tells Report on Wireless that more funding announcements are forthcoming.

"Within the next couple of weeks, we'll be reviewing the second set of proposals and they'll probably be announced shortly thereafter once we get the due diligence done," says CITO president and CEO Darin Graham.

In announcing the new initiative on September 11, the organization said that TenXc Wireless would receive a $100,000-loan to fund the proof-of-concept stage. TenXc is an emerging wireless company focused on developing new intelligence for cell phone base stations and antennas that would allow wireless operators to significantly boost the capacity of their networks. The company already has ties to CITO, which helped fund its technology in the past (see article in this issue for more information on the Ottawa-based company).

The program plans to invest $1 million over the next 18 months in seven to 10 start-up companies, which will receive loans of between $75,000 and $150,000 to develop and market their respective technologies. Funding recipients also have the option to convert the CITO loan into equivalent equity that CITO will hold.

Graham says the loan aspect of the initiative is one of the many vehicles available to provide funding to emerging companies, and it appeared to be the simplest to implement and understand by all parties.

"We went out to the venture capital world, to all our researchers we've helped in the past through this process, formally and informally, and asked them what's the best vehicle that's simple enough, understandable enough and doesn't impede future investment," Graham explains. "Everyone said we don't know what the value of the technology is early on, so (we decided to) treat it as a loan and at some point, the first round of big dollars, we can buy you out or we'll just convert it to the equivalent equity at that point."

The ability of CITO to hold common equity within a particular start-up can also pay dividends in the future as the proceeds can be used as a way to self-fund the organization. Graham says, however, that CITO equity holdings are traditionally at the low-single digit level so the monetary payback isn't that large.

The payback period for loans is flexible, Graham explains, saying that CITO has done them in the past ranging from six-month to two-year terms. The interest rate is usually fixed at the Bank of Canada's prime rate plus 1%, he adds.

Not only is the initiative designed to give start-ups a financial boost, it also strives to attract similar investments from seed investors and help the budding enterprise make the right business contacts. Graham explains that bringing in potential investors from the get-go has two advantages in that it helps the start-up but also gives the seed investors a chance to see what new technologies are coming down the pipes.

"We try to bring the investors, or expose the investors early on because we know that eventually those guys might want to invest in that start-up. They look at CITO as a great opportunity for deal flow and it's an education for them because … they get a feel for what's happening out there through the most recent technologies," Graham explains.

Selection process flexible, but rigorous

CITO and its investor partners undertake a multi-step process to determine the right companies in which to invest. First, researchers interested in taking a run at commercializing their research are walked through a business plan development process by CITO's team, which can take up to several months.

"The goal is really to write a first cut at a very simple business plan, maybe five or six pages, that addresses the technology itself, the marketability and the application of the technology … how they would construct a business and where they think their shortfalls are in doing this," Graham explains.

The next step is to evaluate the business plan and the technology, Graham says, adding that CITO is looking to give a push to the better quality projects. "We evaluate it on the basis of the technology and the product, some of the key differentiators and things like barrier to entry. We look at the team and what's the future financeability of the project," he explains.

Following an internal assessment of the start-up's business plan and technology prospect, about eight venture capitalists and angel investors from across Canada take their turn at evaluating the business plan. The start-up will present their business case and technology during a 20-minute presentation at which the committee asks challenging questions, Graham says. Representatives from Venture Coaches, the Business Development Bank of Canada and some purple angels are on the committee, he adds.

The committee doesn't make the final decision to fund the company, Graham says, adding that "what they do provide us is: do they really see something here? Do they see that there is a long-term marketability and where the weaknesses are."

After the feedback from the committee is tabulated, CITO then decides whether there is an opportunity for the start-up. "If it does, then we go do our due diligence to make sure all the intellectual property is taken care of and finances are in order," Graham says.