When we started McRock Capital five years ago, we had a vision and a blank piece of paper. We believed in Al Pacino’s speech from the film, Any Given Sunday, in that “life is just a game of inches” and the inches we need to succeed are everywhere. We fought for every inch to get McRock’s first venture capital fund launched, and our portfolio company entrepreneurs fight for every inch to change the world. The difficult part, however, is recognizing the inches that will end up helping you the most.

Looking back, we know there was one inch we fought for that turned into a mile; having access to funding through the Venture Capital Action Plan (VCAP). VCAP was announced by the Federal Government of Canada in 2013 and launched in 2014. The VCAP was intended to fill a market gap and attract capital to Canada’s venture capital (VC) fund managers from private investors such as pension funds, high-net-worth individuals, corporations, and banks. Having a well-capitalized VC industry, would, in turn, create a sustainable ecosystem for new and innovative businesses in Canada to access capital.

Today, everyone is talking about the VCAP and whether the Government of Canada should continue the program, modify it, or abandon it entirely. Like any broad-reaching government initiative, there have been plenty of supporters but also some detractors. Concerns have been raised regarding the additional layer of management fees resulting from the fund of funds (FOFs) structure, the slow speed that the Canadian economy may benefit from VCAP, and whether the program is a prudent use of taxpayer dollars.  

We recognize that, as direct beneficiaries of the VCAP, our objectivity on the subject could very reasonably be questioned. Since we are analysts at heart, we set out to take an unbiased look at whether the VCAP had been successful so far and also find a clear way to illustrate that success. The Canadian Venture Capital Innovation Tree shows how the VCAP impacted the Canadian VC industry as a whole and how all of its beneficiaries interact together as one functional ecosystem.
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To begin, we want to highlight how successful VCAP has been in attracting private capital[1] into Canada’s VC ecosystem. Here are some of the key achievements of VCAP to date that you can find within the Innovation Tree:​

• Down in the roots of the tree, the four VCAP FOFs raised a total of $1.36 billion; $906 million from private capital and $450 million from the federal and provincial governments. For every $1.00 of government funding across the four VCAP FOFs, $2.00 of private capital was attracted to the VC ecosystem.
• Up in the branches of the tree, 20 Canadian VC funds to date have received funding from either a VCAP FOF or direct investment from VCAP. These 20 funds have raised a total of $3.34 billion; $2.97 billion from private capital and $369 million from the federal and provincial governments through their commitments to the FOFs. For every $1.00 of government funding across the 20 Canadian VCs, $8.06 of private capital was attracted to the VC ecosystem.
• Looking at the tree as a whole, what began as $500 million in commitments from the federal and provincial governments resulted in an additional $3.88 billion of private capital being attracted to the VC ecosystem, or $7.75 of private capital for every $1.00 of government funding.

​Zooming in on the McRock branch of the Innovation Tree illustrates the benefit of VCAP in attracting private capital on a VC fund level. McRock raised a $70 million VC fund of which $25 million came from VCAP FOFs. Within the FOFs’ allocation of our fund, $8 million was from the government, and this support enabled McRock to attract an additional $62 million from other investors. For every $1.00 of government funding, McRock raised $7.47 of private capital from a group of leading investors such as Cisco Systems, Électricité de France, and Caterpillar. The commitment from our three corporate investors alone exceeds our government commitment and provides these global corporations with direct access to Canadian deal flow and McRock’s portfolio companies.
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Beyond the attraction of private capital into the Canadian VC ecosystem, the VCAP program also fuels extensive job creation across the country. Through the VCAP FOFs and the 20 VCs, a total of 126 Canadian companies have received funding - resulting in thousands of new jobs being created. Further, only 15% of the VCAP’s total commitment to the FOFs has been invested to date, so we have barely even scratched the surface of the potential that this program brings to the economy. Canadian job creation is an important point because it ties directly into one of the concerns raised against the VCAP: that the cost of the program may be too high, partially due to the additional layer of management fees that the FOFs represent. We believe that, in order to fully understand the cost of the VCAP, you must also examine the money that the federal government receives back in the form of income taxes.

First, let’s look at how much the VCAP pays in management fees versus how much the federal government receives back in income taxes from the people who work at the FOFs and VCs. We looked at the Canadian workforce of the VCAP FOFs and 20 VCs and, using some standard VC industry assumptions, we estimate that the current employees of the fund managers will pay $106 million in federal income taxes during the full fund lives. Using the same assumptions, we estimate that VCAP will pay only $89 million in total management fees during the full fund lives, including all fees paid directly to the four FOFs, directly to the four high-performing VCs, and indirectly to the 20 Canadian VCs. To sum up, the federal income taxes paid by the VCAP FOF and Canadian VC fund workforce offsets all of the management fees paid by the government across all levels of the program with a surplus of $17 million in the government coffers.

Next, let’s look at how much the federal government receives in income taxes from all of the portfolio companies that the VCAP FOFs and Canadian VCs invest in. Across all of the funds, a total of $453 million has been invested into 126 unique Canadian companies. Applying some basic assumptions based on our experience investing in tech, we estimate that these 126 companies represent $63 million in federal income taxes based on their current employees. Since only 15% of the capital has been called by the VCAP FOFs, we can expect that a few hundred additional companies will be started through the program during the next few years. Put simply, it’s not unreasonable to think that the entire $500 million VCAP program could be paid back entirely through income taxes paid by the new portfolio companies. How do you like them apples?

We can use the McRock branch of the Innovation Tree again to serve as an example of this last point. Using the $8 million that our VC fund received from the government, we looked at the government’s pro rata investment into each of our Canadian portfolio companies. We then compared that pro rata investment to the total amount our portfolio companies’ employees paid in federal income taxes last year. We found that, in all our portfolio companies, the government’s pro rata investment into each was paid back through federal income taxes in a single year.

Even with the success of VCAP, there are hundreds of early-stage Canadian companies with incredible innovations that need access to capital to move forward. The capital needs of these companies are far greater than what the Canadian VC ecosystem can currently support. The VCAP benefits Canada and its economy as a whole and we believe that these benefits far outweigh the costs. However, ongoing support is required to create a strong, sustainable Canadian VC ecosystem.

To sum it up, the Canadian economy is already seeing significant benefits from VCAP only three years in. As VC-backed exits continue, the recirculation of capital and the success of the program will expand even further. We believe the VCAP program was a brilliant move by the government and, more specifically, the Honourable Jim Flaherty. VCAP provided the necessary nutrients to grow a Canadian VC innovation tree that is seeding an entire forest of unique, high-growth companies.

 [1] “Private Capital” is defined as any capital that was not directly invested into VCAP by the federal or provincial governments. For greater clarity, BDC, EDC, AEC, and other similar institutions are considered Private Capital for this analysis.

Sources: McRock Capital, CVCA, Government of Canada, Pitchbook, PEHub, Teralys Capital, HarbourVest Partners, Kensington Capital
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The statistics are that 50% of startups don't make it to year 5. However, if you make it to year 5, your odds of not making it to year 6 drop to a relieving 10%. Phew because today marks the 5th anniversary of the incorporation of McRock Capital. A name, an idea and two co-founders with energy, experience and naivete. Kind of Ironic that McRock was a startup that if successful would fund and help grow startups.

As we reminisce today about the adventures of the past 5 years,  we decided to write them down. We got some things right, we got some things wrong but in the end these 5 factors made the difference for us. We do this as a way to celebrate, to share but mostly to not forget.

1. Fun Matters
A key ingredient to being good at anything is having a passion for it. That doesn't exist unless it's fun. We have been told that fun is irrelevant. We totally disagree. Being able to have fun during the most productive waking hours of our lives is simply a necessity. It gives us the drive to succeed.

2. Two Is Better than One
There is lots of research around the single founder vs co-founder advantage. Most reports agree that two is better than one for many obvious reason. We couldn't agree more. Of course having two people to split the work is the obvious reason but the real value is having someone play the cheerleader role when the other has hit bottom.  

3. Founder Alignment is Critical
If you go with multiple founders, you need to pay close attention to alignment. Resentment can grow fast when financial and career stakes are high. The startup environment is a perfect breeding ground for resentment when different work ethics, financial situations or even holiday destinations creep in. Even this picture from Scott's daughter years ago showed the natural equality. We found that when those feelings of "not fair" show up, it can be the beginning of the end.

4. The Inches You Need Are Everywhere
We live by Al Pacino's famous locker room speech in the movie "Any Given Sunday" in that the inches you need to win are everywhere. Fight for every inch and you will end up down the field. Succeeding at any ambitious goal requires this approach. Map the strategic path, break it up into pieces and fight for every inch one at a time. If not broken into manageable tasks, the larger vision can be paralyzing. We would also add that being naive to the magnitude of a challenge actually makes it possible to achieve. Knowing what we know today would have made that first day at McRock in 2012 beyond overwhelming.

5. Never, Never, Never Quit
If you have fun, if you have the support of others, if you are set up for resilience and won't easily crumble, and if you understand how to win one day at a time, the last piece of advice is the only one that really matters. Just don't stop. It's impossible not to be successful in the end.

This was a note we put on a bottle of Champagne. Good thing that stuff gets better with age as it took longer to pour on our heads than expected.

We started McRock Capital on March 1, 2012 and we closed our first venture fund on Dec 12, 2014. Today we have $70 million of capital under management from 15 investors including large corporations like Cisco Systems, Electricity de France and Caterpillar. The fund has made 5 investments with a sixth coming soon. We opened a second office in Calgary in 2015. We are now a team of 5. Now that we are statistically beyond the death zone, there is nothing but excitement for the next 5.

Unilever paid $1 billion for a startup selling f**king great razor blades. Sure there was brilliant business execution in an undeserved market but the value of great video is now undisputed. Dollar Shave Club launched an epic viral marketing video that has seen over 23 million views - yip for a company selling men's shaving products. The power of story telling, humour and a clear message can be communicated incredibly well using video. The trick is that video needs to be done well. If you haven't seen the awesome Dollar Shave Club video staring CEO Micheal Dubin, its worth clicking the thumbnail below and checking it out (also check out the short McRock video above).

It's obvious why Dollar Shave Club was so successful. They told a f**king great story while entertaining the viewer. Like us, they also inserted a random bear. Why? The video market is a "bear" necessity when it comes to telling your story in a powerful way.

Disrupt or Be Disrupted. In the ever accelerating world of technological advancement this statement is not just a clever tweet, it’s a sober competitive reality. We live in a digital world where every company, industry, city and country is being disrupted at a very fast pace. Recent history proves that new winners are emerging and past champions are afforded no certainty.

The Digital Age, which officially began in 2010 and is expected to continue until 2030, will be 5-10 times bigger than the Information Age (1990 – 2010)[1]. This Digital Age is driven by the Internet of Things (IoT) and is estimated to have an economic benefit over the next decade of $19 trillion, or the equivalent to the US economy today. The Digital Age takes us beyond simply accessing volumes of data. It moves us closer to controlling and predicting complex outcomes. Advancements in software analytics and operational automation will drive a major wedge in the growing digital divide.

The inflection point of the Digital Age arrived in 2015 when we looked back to see how far we had come. Here’s the IoT growth by the numbers[2] since 2012:

• 18.2 billion things connected to the Internet today versus 8.7 billion[3];
• 13x growth in sensors shipped;
• 5.9 billion machine-to-machine connections (M2M) in place today versus 2.6 billion connections;
• $779 billion in IoT revenue today versus $450 billion;
• 2x growth in M2M service revenue of $122 billion today up from $66 billion; and
• $1.4 billion in predictive maintenance revenue versus $400 million.

Over the past five years we have seen the number of corporate groups engaged in the IoT and, more specifically, the Industrial IoT (IIoT) soar. Corporate consortia involvement has grown 50-fold since 2012. Today more than 350 different corporations belong to IoT consortiums as they prepare to survive and thrive in the new Digital Age.

McRock was founded in 2012 when only a handful of corporations like Cisco and GE seriously understood the potential of the IIoT. We had a vision that the profound digital transformations taking place in the consumer and enterprise markets would similarly provide massive opportunities and disruption to large trillion dollar industries.

Today companies such as Électricité de France, Schneider, Pitney Bowes, SKF, Siemens, Rio Tinto, and Schlumberger have now started the transition into the Digital Age. GE has aggressively positioned itself as the Digital Industrial company.  This provides exciting opportunities for venture-backed IIoT tech companies looking for reputable customers, channel partners and ultimate acquirers. 

Canada is well positioned to be a leader in the IIoT given its formidable resource sector, highly technical workforce, and innovation eco-system. Companies like Dundee Precious Metals have created a completely connected underground mine. BC Hydro has reduced energy theft by 75% and generated $224 million in self-service savings. The City of Mississauga has sensored the city to significantly improve public safety. Equally as exciting, IIoT tech companies in Canada are leading the charge with global deployments, profitable business models and demonstrable scale.  

Take industrial app company, RtTech Software, based in New Brunswick. RtTech has deployed its industrial apps with 30 top-tier customers in 67 sites across the world. In 2016, GE Digital said, "One Canadian IoT technology company that has figured out the ROI from its products is RtTech Software, a Moncton, N.B. firm. The company has developed apps that help industrial clients − ranging from window and door manufacturers and bottling plants to corporate giants such as Michelin, Rio Tinto and Potash Corp − improve their operational efficiency".

mnubo is another example of a Canadian IoT tech company that has experienced impressive growth since its inception only four years ago. The team has worked with a variety of customers in the smart home, manufacturing and agriculture sectors. In April 2016, mnubo announced it was collaborating with CaSA, a Montreal-based energy management company, to deliver actionable insights to thousands of connected smart home clients.

These are just two of many examples of how Canadian IoT tech companies are working with corporations to enter the Digital Age. The companies, industries, cities and countries taking action today will be the leaders of tomorrow because they understand they must keep moving or die. Which side of the digital divide are you on?

Author: Whitney Rockley

[1] Cisco Chairman, John Chambers, IoT World Forum December 2015, Dubai
[2] Source: Machina Research, IDC, ABI Research, Cisco Consulting Services
[3] Source: ABI Research, Business Insider, Cisco, EMC, Ericsson, Forbes, Gartner, Hammersmith Group, Intel, Internet Consensus, Internet World Stats, Machina Research, Navigant Research

The 2016 Budget is just out and concerns from entrepreneurs and investors were heard loud and clear. Despite Trudeau's election promises to increase the taxation on stock options, the government has decided to not touch this innovation lever. “I heard from many small firms and innovators that they use stock options as a legitimate form of compensation, so we decided not to put that in our budget,” Finance Minister Bill Morneau told reporters. Asked if his government might increase options taxes in future budgets, he said: “It’s not in our plan.”

Similar to the US, startups and high-growth companies use stock options to offset expensive salaries in order to attract and retain high-caliber employees. At McRock, we are breathing a huge sigh of relief as a change to the stock option tax treatment would have instantly made Canadian tech companies unable to compete on the global stage.

Another piece of good news from the 2016 budget, was the reinstatement of the 15% federal tax credit for Labour-Sponsored Venture Capital Corporations (LSVCC). This is a u-turn in the previous government's plan to wind down the federal LSVCC tax credit. In provinces like Quebec, which still have an active Federal and Provincial LSVCC tax credit program, this ensures a return of investment capital to the innovation ecosystem. Congratulations to our LSVCC friends. This is a long time coming and a big win for the Canadian innovation eco-system.

Four years ago today a McRock star was born. On March 1st, 2012 we incorporated McRock. Four years later we would say things are going great. However, it took a ton of grit and perseverance to get us here and a little brain damage along the way.
 
As venture capitalists, we meet a lot of people who talk to us about quitting what they do today, to do something they are passionate about tomorrow. The reality is that many people let dreams remain dreams - they never take the leap into entrepreneurship. 

Occasionally we watch people actually go for it “all in”. For this we have the utmost respect. To prove we "get it" even as investors, we have documented our entrepreneurial journey. We did it so we would never forget and so that we could show our humility and appreciation for the path and lessons of an entrepreneur.
 
How do you start? That’s easy, you pick a simple task and you do it. Pick a name, create a logo, or rent an office – anything.
 
When do you start? Right now. If you have it in you, you start right now because there is no perfect time. Just big balls.
 
How do you keep going? It will get hard, tough, and seemingly impossible. Now this is the only question that real matters. And here is the only answer that matters - Passion & Grit.
 
Passion & Grit - the recipe for never giving up. Zero to hero stuff. Those that want it more, work harder and those that work harder eventually win. You can’t beat somebody that just won’t give up. Not to mention that the harder you work the luckier you get.
 
However the secret to greatness requires more than just perseverance against adversity. It requires a contagious level of energy and fun. This way you infect others along your journey.
 
Six years ago we recognized a massive new technology wave was coming – the Industrial Internet of Things or, as we call it, the IIoT. Four years ago we started McRock to get ready for it.  One year ago we succeeded to launch a venture capital fund. Today we have $65 million under management and we are just getting started. We are passionate about entrepreneurs and building companies. We are excited about how profoundly the world will change in the digital industrial era. We hope this might inspire you today - McRock On.

Last summer when I wrote the blog “No, This Is Not My Boyfriend’s Computer”, I embarked on a mission to understand resiliency.  When I think of resiliency, I am not talking about how people overcome everyday challenges but rather how people overcome life altering challenges.  When facing adversity, why is it that some people stand back up and thrive while others don’t?  Why do some people fall victim to circumstances while others push forward, stay positive and figure things out? 

My quest to understand resiliency started because of three reasons.  One, I met Ping Fu, the founder of Geomagic, at a GE Leading & Learning Event in NY.  Her story of persistence in the face of adversity is simply incredible. Two, I judged a First Robotics competition and saw underprivileged kids triumph against kids that were given every luxury to succeed.  Third, I started my own company, McRock Capital, my dream and passion and in order to be successful, I needed to be resilient.      

My first revelation is that the topic of resiliency is a fairly new area of investigation.  Researchers have been trying to figure out why some people are more resilient than others and whether we can learn to be more resilient. 

Here is what I found. Resilient people are flexible, adapt to new circumstances quickly and thrive in constant change.  They are inherently positive, empathetic and have confidence they will bounce back even though they may feel totally overwhelmed at first.  They take responsibility for their actions, think through consequences and have a certain level of self-control and discipline.   They allow themselves to feel grief, anger, loss and confusion but they don’t let it become a permanent state[1]. When we fall, which we all do, resilient people don’t automatically say “here we go again…I am failing” or “that idiot, his actions have ruined my life and made me miserable”.  The resilient person says “what can I learn from this experience so I can do it better next time.” 

Researchers know that resilient people are less likely to become ill during difficult times.  They heal and bounce back stronger than before. They give their families a better chance of bouncing back from tough situations and even help their communities get through hard times.  But one of the most interesting findings I read was that researchers believe that experience trumps genetics.  The key is to find your passion and purpose in life[2].

When I think of the entrepreneurs I have known that have demonstrated incredible resiliency and achieved outstanding success, they had, without a shadow of a doubt, an incredible passion and purpose in life.  Many of them also stared adversity in the face at a young age and bulldozed through it.  They did not give up because they couldn't out of necessity.  They didn’t have a safety net.  They didn’t have parents running to their side to rescue them.  They had to figure things out for themselves.  Self-managed learning is one of the cornerstones required to being resilient.   

As I was doing this research I realized that I loved the underdog.  The person who defies all odds and wins (like Ping Fu) or the robotics team from Runnymede Collegiate, the inner city school that kicked the butts of the private schools.  Perhaps it’s not surprising that I prefer to work with resilient underdogs and, on the other end of the spectrum, I want to tornado kick the parents who call in a favours to get their kids jobs.          

I do know one thing for sure.  Resilient people don’t give up.  They are unstoppable, relentless and possess all the great attributes characterized by researchers.  The resilient underdog is the royal flush.         

Author: Whitney Rockley

[1] Dr. Al Siebert, The Resiliency Advantage
[2] Dr. Robert Brooks, The Power of Resiliency