Some Northern Exposure on Software Innovation | AMR Research

Some Northern Exposure on Software Innovation | AMR Research

We recently spent a couple of days in Toronto to meet with a leading Canadian venture firm and three software companies. While it had been years since my last trip to Canada, the combination of beautiful late summer weather and the buzz around the start of the International Film Festival made Toronto the ideal September destination.

The trip was proposed by Derek Smyth, a partner at EdgeStone Capital Partners, whom we first met when he was COO at Ironside Technologies, one of the e-commerce pioneers. Ironside was acquired by SSA Global Technologies in June 2003. While at Ironside, Mr. Smyth helped grow the company from zero to C$50M (Canadian dollars) in four years.

While many U.S. venture firms shy away from enterprise software startups, EdgeStone focuses almost exclusively on this sector. In fact, the firm’s preferred role is to be the lead investor in early stage companies by taking a healthy equity position in exchange for cash and expertise.

Best early bets: SlipStream, Taleo, and Workbrain

The EdgeStone Capital Venture Fund I raised C$104M in 2000, which as been invested in 15 companies. Key investments included Workbrain, Taleo, and SlipStream Data. Workbrain and Taleo went on to have successful initial public offerings, while SlipStream was acquired by Research in Motion (RIM) (Blackberry owners) in July 2006. To date, that fund has returned 1.6 times in invested capital to investors, ranking it near the top of all North American tech venture firms in the post-bubble period.

Four years later, EdgeStone raised C$108M for Fund II. I was struck by two differences between the portfolios of the two funds: the newer fund broadened EdgeStone’s portfolio outside of enterprise software and beyond Canada, too. To date, Fund II has been invested in eight companies. There is capital available for one or two additional investments.

The Fund II portfolio includes Solace Systems, pVelocity, Shoplogix, CiRBA, RedMere Technology, Varicent Software, MusicIP, and RapidMind. On our trip, we met with pVelocity and Shoplogix (see below). The others seem intriguing, too. Solace is in the XML routing market. CiRBA, with its virtualization software, would love to be the next VMware. RedMere is an Irish fabless semiconductor company that serves the consumer electronics and multimedia markets. Varicent provides incentive management software. MusicIP is a digital-music platform, which helps listeners discover similar types of artists that map to their favorite music. RapidMind provides development tools for multicore platforms.

Steady deal flow, fewer VCs, tighter pockets

EdgeStone has begun raising money for Fund III. The goal is to build a C$150M fund. The Canadian VC market has changed dramatically since Fund I. In 2001, there were 55 early stage Canadian VCs; now there are 12. More than C$4B was raised in 2001 compared to C$1.5B in 2006. Despite the contraction, deal flow has remained relatively constant over the same period. EdgeStone looks at 150 to 160 deals a year, before settling on the two or three best.

One advantage of investing north of the border is the R&D tax credits that the Canadian government provides for early-stage companies. This can result in a 45% lower net cash cost compared to their U.S. counterparts. In some provinces like Quebec, the net cash cost delta is even greater. On the flip side, the primary challenge for firms like EdgeStone is finding experienced CEOs to run the startups. As a result, Canada has a greater percentage of first-time CEOs.

EdgeStone is well-positioned to take advantage of gyrations in the tech market. Its parent company is GMP Capital Trust, one of Canada’s leading investment banks with a strong technology investment practice. In addition to its venture group, EdgeStone has a buyout/later stage equity team. That side of the firm has raised nearly C$1.35B for its three funds. These have gotten progressively larger. Fund I raised C$179M in March 2000. Fund II took in C$361M in October 2003. Fund III generated C$800M in summer 2006.

Meet the portfolio companies

Our journey took us to two companies in EdgeStone’s portfolio, three if you count the Shoplogix customer we also met with, and one company not in its portfolio, but with which Mr. Smyth is highly enamored. For each of their stories, click the following links:

“pVelocity: Software Plumber for Profit Leakage”
“Shoplogix: A Single Version of ‘Machine Truth’”
“Panorama: Silicon Valley Meets Toronto”.

SupplyScape Adds New CEO to Team and $10M in Financing

We also recently met with Mark O’Connell on his sixth day as CEO of SupplyScape, the fast-growing provider of software and services for the life sciences industry. If the name is familiar, Mr. O’Connell was the former CEO of MatrixOne, a leading product lifecycle management (PLM) software company. At MatrixOne, he led the company through several milestones: a successful IPO in March 2000; achieving the status as the largest independent provider of PLM software ($145M in revenue); and the successful sale of the company to Dassault Systemes for $408M last year. Mr. O’Connell joins SupplyScape as president and CEO.

On the same day, SupplyScape also announced it raised $10M in Series C financing from its existing investors: IDG Ventures Boston, North Bridge Venture Partners, Pilot House Ventures, Bethesda Partners, and Pfizer Strategic Investments Group.

SupplyScape is an interesting company to watch. The 70-person company has emerged as the software leader in the nascent e-pedigree market. E-pedigree is designed to secure the distribution channel for pharmaceuticals as finished goods move from the manufacturer to the dispensing point (such as pharmacy or hospital) and guard against counterfeit products and diversion. To date, the company has 63 customers, including many of the best-known pharmaceutical manufacturers and top retailers and pharmacies.

Coming next week: salesforce’s Dreamforce and SAP’s A1S launch

By the time you read this, we will be at salesforce.com’s annual Dreamforce user conference in San Francisco. This event has traditionally provided a sneak preview of the future of software. From there, we head to Manhattan for the official launch of SAP’s new business offering, code-named A1S, for the small and midsize market.

As always, I welcome your feedback and ideas. Is EdgeStone smart to focus on the enterprise software market? If you were a gambler and could only pick one, would you bet your retirement fund or kids’ college fund on pVelocity, Shoplogix, or Panorama? Will Benioff surprise the world at next week’s Dreamforce? Is A1S truly designed exclusively for the SMB market or will this ultimately become the R/3 replacement product? Let me know—brichardson@amrresearch.com.




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