Venture Tech Investment 101: A Conversation with Mike Hollinger, Partner at Dentons

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Leader of Dentons’ Toronto venture tech practiceThe leader of Dentons’ Toronto venture tech practice shares the keys to a fintech startup’s success and how companies can build lucrative relationships with angels.

For most founders, the road to funding starts very close to home—they call their families, friends and mentors, running through every name in their address books. But in the last decade that MO has changed significantly due to the formation and mobilization of angel groups. There’s a dramatic shift towards a more sophisticated and strategic class of investors who are placing their bets on budding talent in all industries the world over.

Mike Hollinger at the global law firm Dentons has had a front-row seat to the startup and angel group boom in Canada. As the leader of their venture tech practice in Toronto, he provides strategic advisory work to growing companies and investors and has negotiated momentous deals for both sides. His wealth of experience in the investment space has produced invaluable insights for companies from their earliest stages and beyond.

Mike’s colleague Andrea Johnson will be moderating the panel on “Trends in the funding continuum” at this year’s Mobey Day, August 30–31 in Toronto.

Carta: What makes a fintech company attractive to investors?

Mike: In general, what any startup is trying to do is show investors two things: 1) How are they going to get a return on the investor’s money? and 2) How likely is the return of their money going to happen? So, upside and risk—because that’s what investors are thinking of in respect to any investment.

Upside includes things like the size of the market, the unique technology that the company brings to access the market, traction with its business, as well as demonstrated sales, revenue, growth, and profit—all of these elements are of key importance to investors in any startup. Also, the team matters: Who are the founders behind the company? Who is in the technology team? What have they done before and what is their track record of executing and delivering success?

Fintech is much the same with some additional nuances. It is a hard market, particularly in Canada. Canada has a small number of large financial institutions that are relatively concentrated across different sectors and are somewhat advanced in also thinking of themselves as technology companies. They are, frankly, excellent at making money.

The next wave of fintech companies that are enabling large financial institutions are performing well. We’ve seen a renewed focus by the large financial institutions at starting their venture units over the last couple of years—they see the opportunity to add new line items or to protect their line items against outside threats.

Carta: What are some barriers to a startups’ success that investors think about?

Mike: We have some interesting examples of companies that have encountered resistance to regulatory change such as Uber and Airbnb. Those are great stories that illustrate growing within regulated markets and then driving corresponding changes in law, policy or application of the law.

For fintech startups, this is a unique challenge because the financial industries are heavily regulated in most parts of the world—not everywhere, but they are heavily regulated in Canada. To adopt new lines of business that require regulatory change is an uncertain bet. We’ve seen a lot of buzz in investment in blockchain-based technologies and coin offerings, and a substantial amount of money has been poured into that sector. But as we’ve also seen from recent decisions of US securities regulators, the path isn’t 100% clear.

So what does that mean for an investor? The questions they should ask founders are:

  • Will the technology be valuable with respect to its intended use?
  • Will its intended use be permitted?
  • Will its intended use be permitted within a time frame that is short enough to ensure that the proprietary elements of the tech are still unique during its window of opportunity?

Businesses that have already solved regulatory issues and have found a way to legally generate revenue and cash flow are often easier bets for investors.

Carta: Do you see a trend toward more strategic involvement of VCs in the businesses they seed?

Mike: Formalizing angel investors into groups has dramatically changed the way they invest and the path to investment. It has driven standardization in deal terms, but there is also an interesting dynamic of angels becoming founders, founders becoming angels, and then founders becoming founders again. Someone who is wealthy but has no subject matter knowledge may be an angel but isn’t likely to step in and operate the business. Whereas someone who has the means to invest but also has subject matter knowledge and has been a successful entrepreneur in their own right in a related field, may have more to offer. We do see the path of investors stepping in and taking more active roles over time. This isn’t necessarily a new trend.

The key changes have been disaggregation of who investors are at the early stages, formation of angel groups, and companies’ ability to close quickly with groups of investors that aren’t part of the founders’ existing friends and family network.

The bigger trend is the involvement of strategic VCs and corporate VCs. For instance, Google’s venture arm has, for many years, been a major, and at times the top, early-stage investor in the world by deals and dollars. The trend of strategic VCs acting as investors and driving heavily into a space that, in Canada, was at one time dominated by independent investors has been a major change. This change is now omnipresent even at earliest stages of investment.

Carta: How are angel groups affecting the Canadian entrepreneurial environment?

Mike: We have seen angel groups, experienced entrepreneurs, and other people who have worked in the startup and growth economy—namely incubator and accelerator groups—giving back substantially and driving more opportunities into the market. While working with the Founder Institute, we were involved with what I believe was the largest mass incorporation in Canadian history. That was an example of groups coming together to spark new opportunities at the earliest stage.

A few other things that are lining up are the organization of capital, resources, and educational opportunities. Our firm is very committed to acting as mentors to a variety of associations that promote early-stage entrepreneurship. One of the reasons we’re able to do so is because groups like NACO provide resources for investors, which creates more investors, which ultimately means more possibilities for founders to take the next step down the road.

NACO and others also provide great educational resources to help founders get off the ground more quickly as the Canadian ecosystem matures and as incredible talent continues to emerge from the Toronto/Waterloo corridor as well as from Montreal. There’s an influx of talent that is creating other talent osmotically.

Another interesting trend is government support for finding and relocating foreign entrepreneurs to Canada through the startup visa program and other initiatives. I think that’s also a remarkable development, but you can’t look at any of these in isolation. The reason this is an exciting time is because all of these things are happening together and at an age where Canadian academics like Geoffrey Hinton are seen as leaders in emerging spaces. In his case, it’s AI and machine learning, but the general trend is Canadians becoming leaders in a variety of different technologies.

Join the Denton’s team and other fintech leaders in Toronto at Mobey Day 2017, on August 30–31. Denton’s partner Andrea Johnson will be leading a panel exploring Trends in the Funding Continuum. Register online.