A Q&A with Mike Edwards, director, president, and CEO of Canadian investment firm LX Ventures. The firm, which launched last October, is an incubator of early-stage, high-growth technology companies, and invests mainly in health, finance, and advertising startups.
SUB: Please describe LX Ventures and its mission.
Edwards: LX Ventures is a publicly traded incubator that launches, integrates and acquires early-stage high growth technology companies. Our mission is to gain early entry and significant ownership into a diversified number of high growth tech companies from around the world. Our ownership and strategic portfolio exits, combined with the rapid capital rotation to tech and the consolidation of the tech sector, will provide shareholders with exceptional returns on their investment.
SUB: In what types of startups—stage, market, etc.—are you looking to invest?
Edwards: At LX Ventures we invest in early-stage high growth technology companies that are disrupting the industry they operate in. We focus our investments into three market verticals: HealthTech, AdTech, and FinTech. We also engage in strategic investments with companies that we feel have the potential to create volumes of growth and multiples on our invested capital.
SUB: What are the major positive characteristics that you look for in a potential investment?
Edwards: When conducting our due diligence on potential investments, there are a few specific elements we analyze before moving forward. What we like to do is see where the company fits on the lifecycle map of a startup. Identifying if the company has endured the typical launch pattern of a startup is critical in terms of funding, launching their beta product, gaining traction and reaching a pivotal point before a Series A crunch, or as we call it: the ‘Plateau of Despair.’ At this point, the company doesn’t have further capital to continue on and is unaware of what direction to take. This presents a good opportunity for LX Ventures to step in and take the reins of a company that has a good team, has a growth opportunity, has traction, but is in need of that missing ingredient—the ability to get back onto that growth trajectory that LX Ventures can bring based upon our track record of building and growing companies.
SUB: What are the red flags that you look for in a potential investment?
Edwards: Due to the nature of the startup scene, there are unfortunately a large number of red flags that we need to sift through to ensure that our capital is being invested in the right companies. For instance, companies that state that they have ‘no’ competitors is a major concern, as there is bound to be an indirect or direct competitor present in that space. Stating this one fact shows lack of research and knowledge, and is an immediate red flag for LX as we invest in thought leaders. Another red flag would be companies that have bootstrapped for years on end and have not accumulated any revenues or profits. This raises our suspicion as to whether or not the service being provided is really needed and if it can ever scale.
SUB: As the head of a firm based in Canada, what are the differences you’ve seen between investing in Canadian companies and investing in American startups?
Edwards: In Canada, there’s less overall capital and the talent is more geographically scattered. Therefore, more-and-more, promising Canadian startups head South to raise capital. But, at the same time, U.S. Angels and VCs are looking North of the border for opportunities. The differences in U.S. and Canadian companies are less than they used to be; the border is becoming more invisible.
Just as in the U.S., we also have a Series A crunch for startups in Canada, but with little more than 20 VCs controlling the market up here, it’s important to engage these companies early to ensure we are incubating something worth pursuing, as capital in addition to talent is required for outsized winners. I would say screening and selection for investment is even more important in Canada.
SUB: You’ve talked before about a trend that you describe as the ‘pixelization’ of entrepreneurship. What do you mean by that and how is it significant to the future of entrepreneurship?
Edwards: By ‘pixelization’ I mean that it has never been easier, cheaper, or more popular to start a technology company, and the pace of development of technology only continues to accelerate.
The problem with this pixelization phenomenon is that there is a tidal wave of entrepreneurship that’s coming up against the challenge of raising Series A—initial—financing. The result is that there are suddenly a huge number of companies facing this Series A crunch.
Ultimately, it is positive for entrepreneurship—innovation happens through experimentation and iteration and at scale this will result in some truly remarkable opportunities. But, we all need to be prepared for the messiness of this unique process.
# # #
Mike Edwards is a life-long entrepreneur—for the past 20 years, he has started and invested in technology companies. Prior to taking the lead at LX Ventures, he headed up Growlab and co-founded Initio Group and AreaConnect.