Scaling with Angel Money Only in Canada: Joel Lessem, CEO of Firmex (Part 6)

Sramana Mitra: There are tons of unhealthy business practices. Pursuing growth at all cost tends to make people practice unhealthy business practices. We don’t believe in that. We believe in sustainable growth. We are much more in tune with what you’re doing. We actually appreciate what you’re doing. The more fundamental-driven approach is what we promote in our accelerator. Our belief is that over 99% of the entrepreneurs out there actually will never qualify for venture funding. Your TAM is not a venture style TAM, yet with $4 million in capital, you can build a $50 million to $60 million company. What’s wrong with that picture?

Joel Lessem: I employ 80 people here. We’re probably hiring another 20 next year. I’m actually on the Board of an organization called Ace Tech here in Toronto. I helped build it to a 100-member company. I did a survey and half of them are unfunded. Combined, we employ 6,000 people. Obviously, the unfunded ones are generally profitable.

Sramana Mitra: Yes, they have no choice.

Joel Lessem: A quarter are venture funded and a quarter are angel funded. We have audited statements from KPMG. We use these outside-service providers. I said, “The value of us is we can be a client for a really long time versus a venture-funded one.”

Sramana Mitra: The bulk of the economy actually sustains itself on the shoulders of companies more like yours or companies that have no funding. That part of the ecosystem needs a lot more attention and a lot more respect. Somehow or the other, the venture capitalists and the venture-funded companies have high jacked the media.

Joel Lessem: You know what I find interesting. I’m very interested in Psychology among many other things. There was a debate comparing venture capital investing strategy versus Warren Buffet. My comment was, “It’s not a comparison. It’s a Psychology.” 50% of venture capital don’t even return their capital to investors. As an asset class, it’s performing terribly. Warren Buffet’s model has great returning assets. I said, “They don’t do it because it makes financial sense. They do it for the thrill.”

Sramana Mitra: If you look at the top 20 firms in venture, they actually return excellent returns. However, that doesn’t scale. It’s a cottage industry that is trying to pretend that it can be scaled. If you’re talking about psychology, the real psychology is greed. There are fund managers who are tasked with trying to get the maximum returns.

The problem is that it’s a lengthy span. These are five to seven year life cycle funds so the correction doesn’t happen very easily. Even for non-performing funds, the correction doesn’t happen for a long time. It’s a very dysfunctional asset class. However, there is a small group of funds that actually deliver terrific returns. That’s what drives the whole excitement. The truth is the ones that have been successful, like Google, Facebook, and Apples, are such high-impact companies that people, legitimately, get swayed by them.

Joel Lessem: I would agree. I feel that a lot of companies that could be like a Firmex are ruined by venture capital because they’re over capitalized.

Sramana Mitra: Yes. The reason that happens is because there are not enough fundable deals. There’s too much money in the venture capital system chasing too few venture style fundable deals. A lot of companies that should not get venture capital should be built the way you are building Firmex. Actually, they end up getting venture capital because they have to park their money somewhere. They just can’t sit on their money. They go in and invest in companies that don’t deserve investments. Sure enough, those don’t turn out right. With the infusion of venture capital, they’re screwed.

Joel Lessem: I’m sure you’ve seen this a lot.

Sramana Mitra: I see it at scale.

Joel Lessem: I had a small Silicon Valley fund here. I happen to know one of the partners. When I was raising the second round of angel money, I had one call with a venture fund here in Toronto. That fellow said to me on the phone, “We only like to invest in companies that can have outcome of more than $250 million.” I said, “That’s very interesting. I’m looking at your portfolio of companies. How many of these have had a $250 million outcome?” The answer was zero. I said to him, “So you want me to hitch my wagon with your model? That doesn’t make sense to me.” My position is failure is not an option because I’ve sacrificed too much.

This segment is part 6 in the series : Scaling with Angel Money Only in Canada: Joel Lessem, CEO of Firmex
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