What Drives Successful Exits in Canada
Read the first half of this interview on Remi’s career and experience building a business in agricultural technology here.
ICTC’s Mairead Matthews and Faun Rice sat down with Canadian entrepreneur Remi Schmaltz to talk about his experience successfully scaling his second business, and to hear his advice for new startups. Mairead and Faun are the authors of an ICTC study on the relationship between intellectual property (IP) and scaling up. Remi is Co-founder, Director, and VP Corporate Development at Index Biosystems; Founder and General Partner with Koan Agetch Capital; and Co-Founder of Decisive Farming (acquired by TELUS).
In our first interview with Remi Schmaltz, he discussed his experience of building two companies, scaling an IP portfolio, and exiting to TELUS. In this follow-up Q&A, Remi shares his insider’s perspective as an agtech investor and offers advice for entrepreneurs.
Photo by Anoo, Adobe Stock
As an investor yourself, how do you choose companies to invest in?
It’s still a person-to-person relationship. A lot of it is about the team. A key part of my career has been about judgment of character and being able to build relationships with people and build trust. It’s the same in business and investing. A company could have the greatest thing since sliced bread, but if I don’t align with it or fit with the CEO and management team, I probably won’t invest in it.
Because Koan Capital does early stage agtech deals, there needs to be a data component and a positive impact on the environment. Going to market and strategy is also a fundamental part, and the CEO’s understanding of [their go-to-market strategy] is really key. If they’re not a coachable CEO and haven’t figured out their go-to-market strategy, they’re toast. Ag is a really tricky market to penetrate, and most people really underestimate that. Market strategies are the most common Achilles heel I see.
And the third piece is an IP component. It’s less whether the startup is going to be litigious in nature and more about their freedom to operate in the short term, and the long-term value for acquirers. I also think startups that are able to create patents have a [certain] level of sophistication. They have developed something novel and defined it and will probably do that again and create additional IP along the way. They think strategically about what they’re doing.
Is there anything unique to Canada that’s not about ag that you see in startups?
It all comes down to product-market fit, right? I think that when I talk to founders and try to understand how they’re going to market, I really jump into what their process is for product-market fit. Are they talking to their customers? What assumptions have they made about the market? It’s really about understanding those things. If it doesn’t make logical sense that they’re trying to sell to this person, this way, and they can’t explain why they’re doing it, that’s a pretty big red flag.
Thinking about your long-term goals, do you, as an investor, look for a particular type of exit? Is there a journey you would advocate for?
You don’t know who you’re [actually] going to sell your business to. It’s great to have some ideas about who that might be, and it’s important to build relationships within the industry. But the bulk of [your industry relationships] should be built around strategic partnerships, not around acquisition. If you do a great job of bringing your product to market and you build the IP and a great team, the acquisition will take care of itself. Too often, when I see a startup slide deck for investors, they say, “We’re going to sell to one of these three companies, this is our multiple, and here is how we will finance along the way.” As if you know any of that! Ultimately, it’s about the ability of the entrepreneur to pivot because there are always bumps along the CEO road that will need to be navigated.
Could you talk a bit more about what types of strategic partnerships young companies should create, with what types of companies?
If you can find multiple companies who might be a potential acquirer in the future—because of their size or what their strategy is—focusing on a strategic partnership with them to commercialize and bring your product to market will do a few things. One, if you’ve created your partnership right, it will hopefully bring you revenue, which will help you finance your business. And two, if you finance your business right, you will create competitive attention between your strategic partners, who could become acquirers.
Depending on the company, the partnership could be about making the production of something more efficient, or to scale it. Or it could be about your sales or marketing channels, which are very tricky. [In your partnerships], you want to make sure that there’s a win-win, and there’s alignment. You can spend a pile of time creating partnership agreements just to have them not go anywhere because, even though the big company’s intent is right, they can’t execute on it. Partnerships can be positive or negative.
What can a small company do to make the most of these types of partnerships?
It’s tricky as a Canadian business to grow your business and scale into a large entity. It’s really tough to do, so you often see Canadian startups exit earlier than U.S. startups. I don’t have the stats, but Canadian startups exit earlier just because of the market dynamics and things like access to capital. Startups in the ag space that have scaled are primarily U.S. based. We have Semios in Canada that has gone to scale, but that’s about it. I’m talking billion-dollar-valuation type level. And to me, [the ability to scale] comes back to being in the U.S. market in a meaningful way, having more aggressive investors, and also having an office in the U.S. can help.
So, for a small company entering into these partnerships, it’s important to have multiple partners and avoid exclusivity, unless exclusivity offers a significant financial gain that’s going to catapult the business. If you have multiple partners that you can create competitive tension between, it will put you in a stronger position. It’s also important to have a legal team, or someone on your team or board who can look at partnerships from a corporate governance standpoint and has negotiated these kinds of deals before. My favourite method was making my board the “bad people,” like “I’d do this deal, but my board says no.” It’s important to leverage those dynamics, kind of good cop/bad cop. You shouldn’t be the sole person in negotiations whether because of ego or other reasons—you lose the ability to create that leverage.
What types of mentorship do you provide to startups?
A lot of my time is typically spent on go-to-market strategies. Some of that has to do with focus—not trying to boil the ocean and be in every market segment, but really making a decision on what the core market will be. Thinking through capital raising is another thing I spend time on. Right now, valuations are high, but you need to be realistic with your expectations and understand the financial mechanics that are at play when you’re raising financing, and what that means for you down the road in terms of business momentum and financing momentum. You can get a large sum of cash, but if it means you’re likely to have a down round in your next financing, because you’re not going to hit the revenue milestone you need, you probably don’t want to do it. Short term, people get excited if they can get a US$5 M seed round, but I’d ask, “Eighteen months from now, how much revenue are you going to have?” If their answer is $1 M in revenue, and their investors are going to want a 3x lift on their investment, that means they’re a 30x revenue valued business, or even higher. So, I like to spend time walking through the simple napkin mathematics of their financing and getting them to think about what they need and how they’ll build that momentum.
Another thing is corporate governance. I’m a big advocate of having a board in place before you get to a series A. It ensures the founder is in control of their board and, if they’re a good board, it shows maturity to investors. When you get to institutional capital, Series A, they will force you to have a board no matter what. So, the question is, do you want whoever is leading your financing round to steer what your board looks like? They’ll have one board seat no matter what, but if you establish your own board beforehand, you can show up with your own set of people.
I see a lot of “advisor boards,” but to me, that doesn’t mean much—a founder has given someone shares to add their name. But how invested are they? Do they contribute time? Are they actually contributing to the business? Sometimes they are but, more often than not, they aren’t.
It’s also important to have an independent board member. Shawn Abbot with Inovia Capital has a blog post about this and corporate governance that is really bang on. I really agree with having an independent board member. I share that with almost all CEOs. It’s lonely at the top as a CEO, and while the board is there to help you, they’re typically also your investors, so you can’t share your deepest, darkest secrets with them. You can’t talk to your family, because you should have separation there, nor with your employees. So who are you going to talk to? There are some mentoring services that tackle that, like VMSA, but I’m a huge fan of having an independent person join your board—someone who has “been there, done that” as an entrepreneur, a CEO or founder, who is ahead of you in the cycle and can understand what you’re going through emotionally and be a resource for you. I was lucky, I had an independent member out of Seattle who was in mobile tech—nothing to do with ag—who had a significant impact on my journey.
What’s next for Canadian AgTech and you?
I’m back in the startup space with Index Biosystems. I mentored the team at Index, joined their board, and joined them formally. It’s about synergies, right? My skillset is fairly external. I’m not a deep tech person, but things like marketing, sales, business process, finance, those are all in my wheelhouse. I wasn’t looking for a job, more for a partnership. I wanted to add value with complementary skills and a deep dive into a startup where I could contribute.
Alongside that, I have a venture fund, which is hugely complementary, just from a thought-process standpoint, because it enables me to see lots of different deals in agtech. They’re not competitive [with my businesses] in any way, but it enables me to see how other entrepreneurs are looking at and tackling problems and making connections, which I can then adapt and implement in Index. I love mentoring, and I learn a lot from founders. For now, Koan Agtech Capital is a five-year term. Once I prove that out and am successful, then maybe I will raise a larger fund—if that’s what I decide to do. Time will tell. That’s the cycle we need to continue to grow in Canada, and that’s how we’ll build this ecosystem out: more people having successful exits and wanting to share their journey through mentorship and by supporting the ecosystem.