Scaleup Q&A: Lavalife founder and “The Disruptors” host Bruce Croxon on fostering high-growth tech companies in Canada

Long before personal computers were a thing, Bruce Croxon was building arguably the first technology-based social network in the world. Founded in 1987, his company Telepersonals used interactive voice response — the same technology as voicemail — to help strangers connect. At its peak, Telepersonals hosted a billion and a half minutes of phone traffic per year across North America. Ultimately, that service would evolve into the online dating site Lavalife, which grew to 600 employees and over $100 million in revenue, with more than two million users.

Croxon and his co-founders sold Lavalife in 2004 for $180 million, and he left the company in 2006. He became a TV personality on CBC's "Dragon's Den" from 2011 to 2014 and a host on BNN's "The Disruptors" for the last five years. In 2013, he and co-founder John Eckert launched Round13 Capital, a VC firm that invests in Canadian growth-stage technology companies. Round13 has so far raised two funds together worth $114.5 million and invested in 14 companies, of which two have exited, Hubdoc and BLUERUSH.

In this month's scaleup Q&A, Croxon shares about adapting to rapid technological change, adopting the right attitude to venture capital, and what the government can do to help Canadian tech companies grow.

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Research Money: You founded Telepersonals in 1987, well before personal computers became ubiquitous. What was the opportunity that you recognized and how did you move on it?

Bruce Croxon:

We take it for granted today, but the late eighties was the first time that you could measure people's activity using a technology system. We could see where they were hanging out, what they were and weren't interested in. And that led us to the business, because the computer printed out a report that showed the level of activity. So the measurement of data led us to the idea.

We figured out that all of the applications for interactive voice response that we were experimenting with — and that included information lines, talking classifieds, weather reports— far and away the most popular was helping people connect with each other.

Telepersonals was the late-eighties predecessor to a service called Web Personals that we bought in the mid-nineties, and then combined both of those services and advertised them together, because we realized that the technologies, although different, were serving the same end. Whether it was voice, text or email messages, we saw them as the same market.

R$: Between the late eighties and when you left in 2006, there was an incredible amount of technological change. How did you cope with so many dramatic shifts?

BC: I'll never live through so much profound change as the mid-nineties when the internet became commercialized. All of a sudden, our version of scale changed. Until then, we had to set up in every city that we went to, with a local 24-hour call center to handle traffic and customer service. We built it city by city. Now you can launch something, and as long you've got a good translator, you can be global a week Saturday.

As it turned out, the internet dating business is characterized by a large volume of people that spend a relatively small amount of money. The phone was characterized by a lot smaller number of people, but they spent a lot per person.

R$: As a leader of a company going through such basic changes to your basic business model, how do you adapt?

BC: When I stop and think about it, it was our relentless focus on bringing people into the organization that were comfortable with change, that were curious by nature, that were continuous learners, and that didn't let their ego get in the way of a decision. Because nobody has all the answers.

R$: Did you have to create new systems along the way?

BC: Continuously. And we were willing to do that work because we bought into the benefits of having strong organizational development systems to deal with change. We were also very fortunate that we were growing the business in an era when the technology itself was a barrier to entry for other people coming in, because it was big, it was expensive, and it was complex. So we were able to make a lot of money as we were growing because other people couldn't figure out what it is we were up to. And that's a very different situation than it is today, when the cost and the complexity have gone out of the technology. Now if you have an idea that's getting traction, your competitors are going to be hard on your heels pretty quickly. So you have to move faster.

R$: It sounds like you were profitable early on. Did you ever have to take external financing in order to grow?

BC: We didn't have to, but we did. After 1997, two things happened: we wanted to do a technology transformation that was going to be expensive, and we wanted as founders to take some money off the table. We took in outside financing at that time, for that reason.

R$: Was that a good decision?

BC: I would call it a 50/50. It was not a slam dunk, but I'm also not upset that we did it because everything worked out in the end.

When you take in outside money, you give up equity to the outside investors. The calculation is whether the outside money allows your remaining equity to be more valuable than if you hadn't taken the outside money and just continued to go it alone. I'm not convinced that we made the most money we could have by bringing in outside investors, but we had a very successful outcome for our shareholders, it launched me onto a different type of career, and it exposed me to the pros and cons of venture capital.

R$: Now that you're on other side of the equation at Round13, what are the lessons or principles about venture capital that you share with founders?

BC: A venture capital partner should be given the same level of importance as picking employees, because they are going to become part of your culture, and they are going to be partners. Not all money is the same. Especially if you're looking for value-add from your partners. Before taking in money, entrepreneurs should apply the same screening as they would taking on an operating partner or hiring a VP of sales or VP of product.

R$: At Round13, you describe yourself as investing in growth-stage companies. What does “growth-stage” mean for you?

BC: Growth-stage for us means that you have established product-market fit and you have enough customers using your service or product that we can get in and understand where those customers have come from, what it cost to attract them, and what it looks like they're going to be worth over time. If we're going to invest $5 to $15 million, we expect that 80% of that money will go into attracting a lot more of those customers. We would like to have some confidence that the market is big enough to keep doing what you're doing, largely through the channels you've already established.

R$: How big do those companies tend to be?

BC: Most of the companies that we engage with are north of $300-$400K a month in terms of revenue. We will look and engage earlier, but where we tend to write checks seems to be more in that range.

R$: How do you know when a company is ready to become global?

BC: Ideally, they've started to prove it by having a user base that is outside the country. It's usually evident. Whenever you're looking at something that hasn't been outside the country, depending on the industry, it adds risk, because you have to ask, what are the competitors like in the U.S.? How similar are they? Is there anybody out of China or Southeast Asia that's about to launch over here? Is there something about your offering that's Canadian-centric? That might apply to some of the cleantech startups that are counting on the protection of the monopolistic banking system.

R$: Canadian-based companies face a recurring challenge with talent. How do you help companies to find the talent they need?

BC: That's a big part of our job. We're fortunate that we're an operator-led fund. Two of the three partners have grown businesses, and the third one has been in the ecosystem for 25 years. We know a lot of people, and our networks are deep. We've done a good job of building a reputation for being very helpful to founders. The culture that we've actively tried to build at Round13 is to be the most active board member in the investment. We like to lead. And I think the word is spreading on that. It's not that big of a country, so when the word starts to spread among founders that that's the kind of value that they're getting, it’s a short leap to reach people that are looking to work in the tech sector. That might be larger enterprise people that are looking to add their expertise. Word does get around.

One of the issues I've had is how anxious we seem to be as a country to court US multinationals to set up headquarters or branch offices here. It leads to a direct drain on our available talent, and I would argue that it hurts our ability to grow our own Amazons. Part of my job is to spread the word that we can build that scale of Canadian technology companies here if we get the private sector and the public sector on the same page.

R$: Are there any government programs or policies your companies benefit from?

BC: The government has done some very helpful things for the ecosystem. One is that they have provided capital for early-stage companies. We probably have more incubators per capita than anywhere outside Silicon Valley. I think we have enough now.

The SR&ED tax credit has been very helpful for technology companies that are pushing the envelope in terms of new product breakthroughs. I think that's been effective. But offering SR&ED credits to foreign multinationals to take the IP that they create off the backs of Canadian workers back to the U.S. is not a smart use of money.

The recent move to fast-track immigration has given us a little bit of an advantage over the United States, where they haven't been as immigrant-friendly. There are a lot of smart people coming in here. I can't tell you the number of first-generation entrepreneurs that have walked into my office that have brilliant breakthroughs.

We've done a lot right, but we have to be vigilant not to fall into the trap of thinking that the government is the answer to everything. When you run the kind of deficit that we're running, and you take your eye off the ball in terms of spending, and you're not able to balance budgets, often the immediate place they go is taxes. I think we're taxed enough. I don't think we're overtaxed, but we're certainly taxed enough. And as we're trying to compete with the U.S., who seem to be going the other way, I think that is potentially an issue.

Another area to keep an eye on is that one of the ways that early-stage technology companies compete with the Amazons and Googles of the world is by offering stock options. That is, by convincing people to take on a little bit of risk to earn a little bit less money, in exchange for getting a piece of the company, so that if the company wins, then everybody wins. And the government's decision on how to treat those options from a tax perspective is very important. There's been noise over these last couple of years about increasing the taxes on those options. That would be counter-productive to the progress being made on creating world-class technology companies.

R$: You often talk publicly about the importance of culture. What are the keys for creating a growth culture?

BC: Every company has a unique set of attributes that separate them from being successful or not being successful. Taking the time to identify what you believe those attributes are, hanging a definition on them, and then actively finding a way to screen for those characteristics are a lot of what separates successful companies from ones that just do okay. If you wanted to kick around a few universal characteristics of companies in today's day and age, I would be looking for people that are curious, that are continuous learners, and people that recognize that they don't have all the answers. Demonstrate that you have some degree of introspection that you can go to work in the morning and say, I made a mistake yesterday, or good point, I never thought of that. You have to be comfortable in a consensus decision-making environment. Because it's increasingly difficult for one person or a small group of people to have all the right answers

R$

This interview has been edited and condensed for clarity.