Wellington Financial Provides New US$10 Million Growth Capital Facility to Exinda

Published on May 2, 2016 by in Portfolio

One of the luxuries of having a large capital base ($300M) is that we get to grow with our companies as their needs evolve; it also means we have the firepower to keep them, too, should the need arise.

An example of that came today when we announced that we had recently closed a US$10 million venture debt financing for Exinda, a Toronto-based company dedicated to delivering the best application performance possible on its clients’ networks. Exinda’s solutions help IT teams manage the way users, traffic, devices and applications behave across networks. To date, more than 4,000 customers have placed their trust in Exinda to help them understand the various application types running and orchestrate the perfect network to match their business needs. Although headquartered in Toronto, Exinda has a significant development operation in Waterloo, Ontario. OpenView Venture Partners and Greenspring Associates are the lead equity backers of Exinda.

We first financed the Company back in 2012, and have been pleased by the consistent growth both in revenue and profitability that Exinda’s leadership team has delivered. I’d like to think that our True Growth Capital has played an important role in management’s execution of its business plan, but all of the credit goes to CEO Michael Sharma and his team.

Thanks for your continued confidence and partnership!


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Acquisio taps Wellington Financial Fund V for Financing

Acquisio, a world leader in performance marketing solutions for small businesses and the companies who serve them has announced a True Growth Capital financing from Wellington Financial LP. Based just outside of Montreal in Brossard, Quebec, Acquisio is backed by Emerillon Capital, Fonds de solidarité FTQ and Tandem Expansion Fund.

Acquisio’s product enables digital marketers to optimize the results of, and report on, their search, social, mobile, and display marketing programs. Acquisio uses machine learning to dramatically improve search marketing results while streamlining and automating the campaign management and reporting process. With more than 400 clients and $2 billion ad spend under management, Acquisio is recognized as being one of the fastest growing companies in North America, winning the Deloitte Tech Fast 500 and Fast 50 awards for five consecutive years. Acquisio’s software is used by category-leading companies like Sensis, Hanapin Marketing, iRep, Yellow Pages and Microsoft.

And if any of you have been led to believe that our 6+ years of U.S.-based activity has meant that the Wellington team has taken our collective eye off of Canada, four our of last six Growth Capital financings have been for Canadian-based companies.

A hearty welcome to Marc Poirier and his team.


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Mistaking a “Premium” for a “Ratchet”

Tobias, Neil, John, Sandy…passionate folks all.

It was interesting to follow the debate in yesterday’s StartUpNorth repost of the Bloomberg News story regarding the latest Real Matters M&A activity and associated financing (see prior post “Bloomberg: Real Matters Deal Said to Set Stage for Canada’s Next Tech IPO” Mar. 17-16). According to Bloomberg:

…a C$74 million funding round it raised to help pay for the latest acquisition came with a catch — the company has to list on public markets before the end of 2016 or it will have to issue more shares to investors, the people said.

Now, if you work on either side of Bay Street, Wall Street, or Silicon Valley, this concept will not be foreign to you. When passive institutional investors (such as AGF or Fidelity) buy equity securities in late-stage private companies, such as Box or Real Matters, they are doing so in the expectation that their investment will be trading in a liquid market before too long. As managers of mutual funds, and not traditional venture capitalists, these Portfolio Managers cannot sink capital into a company that’s on the “never, never” plan.

VCs can wait for 5 or 10 years before a “liquidity” event on their portfolio of companies. That’s something that stock brokers and their clients would fire a PM for. But that doesn’t mean that traditional mutual fund PMs don’t play in-and-around the VC space. They do, and entrepreneurs / CEOs of late-stage companies love having them as shareholders.

As I highlighted in a recent — unrelated — blog post, there are several recognized benefits to taking passive institutional money: better valuations, seeded IPO buyers, and no additional Board members or veto rights (see prior post “All is not dire in sunny California” Mar. 1-16). Like everything, there’s a price to be paid for those key benefits. In the case of Real Matters, it appears that investors negotiated a normal term for such late-stage transactions: if Real Matters isn’t publicly traded by a certain date, the institution will be issued additional shares to compensate for the extended “hold period”.

This is normal. It is expected. It happens with the best Silicon Valley stories, too. Box is one example of a Valley-backed story that took late stage passive money with a ratchet. For those who don’t know the name, it was backed by Andreessen Horowitz, Bessemer Venture Partners, Draper Fisher Jurvetson, General Atlantic, Meritech Capital, Scale Venture Partners, U.S. Venture Partners. Many of which would be included on anyone’s list of the premiere VC funds on the planet today. Were they duped into agreeing to compensate late-stage passive investors with additional Box shares if things didn’t go according to plan? Not a chance.

As we all know, there are three basic reasons why Real Matters won’t be public later in 2016: i) by choice, ii) because its accounting, reporting and regulatory backbone isn’t ready for the quarterly regime of being a public company, or iii) because market conditions are lousy and the IPO window is closed. Although our Wellington Financial Fund III provided growth capital to Real Matters in 2010 and again in 2011, I have no inside knowledge about either i) or ii); although I can surmise that CEO Jason Smith wouldn’t even contemplate going public if he didn;t think his team was ready. However, as a former tech investment banker and someone who has been putting capital into innovation companies on a principal basis for more than 15 years, I can assure you that iii) is outside of his control.

That said, I think this traditional 10% penalty (or whatever it was in RM’s case) is mischaracterized, misunderstood.

It might seem florid to some, but it is little more than a normal trade-off between the buyer and the seller. On either side of the border. And I think that’s what Shopify CEO Tobias Lütke misses when he said yesterday:

Please let this be the last Canadian company that ever signs crappy terms like this. Forced to go public? I’m sure those are quality VCs.

As “quality” VCs go, there’s no debate that Andreessen, Bessemer, DFJ, GA, Meritech, Scale and USVP fit that label; they agreed to an even tougher deal than RM did. I’m concerned that Mr. Lütke doesn’t appreciate the inherent trade-off in what was negotiated (assuming Bloomberg has the theme and figures correct in the RM piece). Perhaps he didn’t get exposed to these kinds of transactions when he was raising private capital. The fact that it is believed that passive institutions bought this RM round, and not VCs, doesn’t change anything for those of us who have been around the block a while.

Near as I can tell, the passive investor group agreed to give Real Matters a higher valuation than it otherwise would, on one condition: that the company generate liquidity for their investment within a certain time horizon. If Real Matters doesn’t get them their liquidity with the specified timeline, the company will issue more common shares (I’d assume 10% more than originally agreed to).

Based upon the Bloomberg story, the new RM investors received $74 million of shares on a valuation of “more than $600 million”. For simplicity, let’s assume it was a $600M pre-money valuation at $10/share: with the covenant that RM will get the new folks liquidity in 2016. If that doesn’t happen, and the new investors receive their 10% share penalty this winter, the implied pre-money valuation of the current round would drop, in essence, to around $545.4 million. A great number, but not as good as $600 million if you are an existing RM shareholder or employee.

Now, I’m sure the new investors would have been only too happy to invest at $545 million pre-money without the penalty clause. But, if I’m Jason Smith and I think there’s a chance I might be able to launch an IPO this Fall — IPO market willing — wouldn’t I be better off to go for $600 million pre and agree to the 10% penalty?

As someone whose Fund III owns warrants in Real Matters stock, I answer an emphatic “yes” to that rhetorical question. It’s an usual win-win, in fact.

If the penalty doesn’t kick in, these institutions get liquid shares in one of Canada’s fastest-growing — and now public — tech firms. If the IPO window is shut this Fall, and the penalty shares are ultimately issued, Mr. Smith hasn’t missed a beat. He still raised the $74 million (which might not have been otherwise available), added another suite of products and services via this most recent acquisition, and drives forward with a broader, larger and mollified shareholder base.

Who doesn’t salute that deal?

(disclosure: I own Shopify shares)

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Bloomberg: Real Matters Deal Said to Set Stage for Canada’s Next Tech IPO

In case you didn’t see today’s article from Bloomberg News about our Wellington Financial Fund III portfolio co. Real Matters, I thought I’d take the liberty of posting it here. Our firm had the pleasure of backing CEO Jason Smith and his team with two separate rounds of growth capital on this name. First in 2010, with a follow-on six months later in 2011. That’s one of the great things about managing a venture fund with heft; it gives us the capital we need to be able to support entrepreneurs as they grow their companies:

Real Matters Deal Said to Set Stage for Canada’s Next Tech IPO

A little-known company called Real Matters Corp. is poised to be one of Canada’s next technology companies to go public, and it doesn’t have anything to do with social media, e-commerce or selling software through the cloud.

The real estate-data company has signed up most of the top five U.S. banks as customers with the promise of turning the art of valuing homes into a data-driven, high-tech science. With a valuation of more than C$600 million ($448 million), the company is likely to hold an initial public offering this year.

While other Canadian startups, such as Hootsuite Media Inc., BuildDirect and D2L Corp., have garnered more attention as leaders of a renaissance in the country’s technology industry, Real Matters has quietly been growing. The Markham, Ontario-based company pulled off two major acquisitions since 2013 and is seeking to close a deal to buy a property-title business in the U.S. in the coming weeks, according to people familiar with the deal who asked not to be identified discussing private matters.

And while public market investors keep waiting for word of long-speculated IPOs from companies like Hootsuite and Vision Critical Communications Inc., Real Matters is almost certainly set to come to the markets this year because a C$74 million funding round it raised to help pay for the latest acquisition came with a catch — the company has to list on public markets before the end of 2016 or it will have to issue more shares to investors, the people said.

Chief Executive Officer Jason Smith, 41, who founded the company in 2004, declined to comment for this article.

Appraisers Ranked

“He has the energy and focus to make this the billion-dollar company he had in mind more than half a decade ago,” said Mark McQueen, CEO of Toronto-based Wellington Financial LP, who originally invested in Real Matters in 2010 and has known Smith for 15 years.

Real Matters runs an online platform with more than 30,000 property appraisers and insurance inspectors. They report their findings through Real Matters, which measures and ranks each appraiser to help buyers and mortgage companies see which ones are the best, similar to the way Uber riders rate drivers. Its appraisal business serves more than 50 of the top 100 lenders in the U.S., according to its website.

With the acquisitions, Real Matters has expanded into other parts of the real estate data-collection market, giving it a trove of information that can offer insights into pricing trends that other companies don’t have. That opens up new options for selling data to clients beyond mortgage providers, such as contractors looking for neighborhoods where renovations might be in demand and homeowners who are curious about the value of their house.

‘Real Numbers’

The U.S. housing crash put pressure on mortgage providers to have a better understanding of the homes they were financing, said Thomas Caldwell, chairman of Caldwell Securities Ltd., who invested in Real Matters in 2013 through investment firm Urbana Corp.

“Real estate appraisals are a big, big deal since 2007, 2008,” Caldwell said. “You’ve got to start having real numbers.”

Aggregating data from multiple appraisers isn’t a novel business model. About 90 percent of the home appraisals done by U.S. lenders are done through appraisal-management companies, according to Jonathan Miller, president of New York-based appraisal firm Miller Samuel Inc.

Appraisal-management companies like Real Matters can give banks data in a cheap and efficient way, but sometimes the quality of the information suffers because they attract a lower-quality worker, Miller said.

Pays More

Real Matters, which operates its mortgage-appraisal business under the brand name Solidifi in the U.S., has tried to upend that model by paying appraisers more and using software to make the process more efficient, said Griff Straw, chairman of Solidifi’s advisory board. Real Matters acquired Kirchmeyer & Associates in 2013 and Ohio-based Southwest Financial Services Ltd. in 2015.

“From the very beginning we had a very different business model,” said Straw, who was formerly Solidifi’s president and first met Smith 18 years ago when Straw worked at Freddie Mac and collaborated with Smith on technology systems.

“Where our competitors squeezed the appraisers on fees, we went in and said, ‘we will pay the appraiser whatever they want,’ and then add our small marginal fee on top of that,” Straw said. “Our business model was to do it more efficiently through the use of technology and pay the appraisers more. We got the better quality appraisers.”

The company has also mulled expanding into Europe and Australia, Straw said.

In the past six months, Real Matters has won contracts with most of the top five banks, including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., according to a person familiar with the matter.

Diversification Play

If Real Matters does pull off an IPO in 2016, it will be a welcome addition to Canadian public markets, which are geared toward mining and energy companies that have been feeling the pain from a global rout in commodity prices.

“There are not enough small and mid-cap tech names” on Canada’s public exchange, McQueen said.

It would also be a win for the country’s technology industry. Although more startups are finding financing, no Canadian technology firm has gone public since Shopify Inc. raised $131 million in its IPO in May 2015. The Ottawa-based e-commerce software firm now has a market cap of C$2.8 billion. North American technology companies that enjoyed sky-high private valuations, such as Square Inc., are facing lower valuations once exposed to the public markets, which have been rocked by volatility in recent months.

The lack of venture capital investment relative to the U.S. has often limited Canadian companies from becoming world-beating firms, Caldwell said. “This company does have the chance to do that.”

(disclosure: our Fund III Institutional LPs own warrants in RM)

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QLess Raises US$3.5 Million Growth Capital from Wellington Financial

Who wouldn’t want to be doing due diligence in Pasadena, California in February? But that’s not why we did this financing. It was for the greater good, with you in mind!

QLess has built a queue management software system that helps its clients optimize their customer experience process by providing an interactive platform for employees to manage customer service flow. Which gives the management teams of QLess’ clients real-time reporting and analytics to boost operational efficiencies.

More importantly, its cloud-based patented application eliminates physical lines by allowing customers to instead join a virtual queue by mobile phone, website, or via an on-site kiosk. With its learning algorithms, QLess delivers more accurate wait times via text or phone message and notifies customers when it’s their turn. QLess’ queue management software is being used by a diverse range of industries, as you’d expect. Key partnerships include Vodafone, Dow Chemical, Renown Medical Group, the University of Texas, as well as government offices in Michigan, Nevada, Texas, New Jersey, Kansas, and many more.

QLess CEO Alex Backer is on a mission “to eliminate customer lineups around the planet.” Who doesn’t want that?

Our due diligence proved out the global need for a transformative queue management solution. Not only has QLess improved the customer experience, but employees using the system also benefit from manageable scheduling and a more pleasant interface with their customers. Naturally, we are excited to be partnering with Alex and his team as they endeavor towards a world without lines.

And because Wellington provides non-amortizing growth capital, QLess doesn’t have to worry about setting aside a chunk of this US$3.5M of capital for the eventual principal payments that come with term loans from banks or most of our competitors. It’s far better that our funding go towards growing their client base, which makes us a great fit for most mid-stage growth companies.


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