By Dawn Calleja
Globe Investor Magazine, Feb. 21, 2008
Photograph by Christopher Wahl
Nearly a decade ago, Microsoft veteran Rick Segal packed up his wife, two kids, horses and sailboat and moved from Seattle to Aurora, north of Toronto. He’d spent the previous year building Chapters Online, and was asked to run the site full-time. “But I wasn’t destined to run a bookstore,” says Segal. After an ill-advised stop at an Internet-era software maker, he landed at JLA Ventures, a venture capital firm that focuses on high-tech companies.
So what can the average investor learn from a VC who spends his days vetting small, private companies? As it turns out, a lot.
Canadian companies are worth
investing in—honestly
Most venture capitalists operate on the standard 10-2-8 model, says Segal—“Of 10
investments, two are going to be home runs, and eight are dead.” But that requires a large chunk of capital, which most Canadian VCs don’t have. It also requires some tolerance for risk—another commodity that’s in short supply.
The way Segal sees it, we Canadians are too conservative for our own good. “When the dollar hit parity, I was expecting parades down Yonge Street,” says Segal. “When it busted through $1.05,
I thought, okay, now they’re going to have the parade. When it hit $1.08, I thought, when’s the party?” Sure, conservatism saved us from getting slaughtered during the Internet meltdown, and it’s helped us rack up record federal budget surpluses. But Segal wonders when Canada is finally going to wake up and realize that this is the best place in the world to do business (he attributes this, at least in part, to our publicly funded health-care system and our tort law, which discourages class-action lawsuits).
Segal says our inferiority complex clouds our thinking when it comes to investing in Canadian companies and opportunities. “There’s a myth that the only way you’ll have a decent level of success as an entrepreneur is if you’re selling outside of Canada,” he says. “Well, not quite.” The Canadian advertising market is worth more than $1 billion, and spending on entertainment is in the multibillions, Segal says. “So there are pockets and big swaths of opportunity that get missed because there’s a general belief that the market isn’t big enough.”
Invest in people who’ve failed
In 2000, Segal took over as CEO of “a little disaster called Microforum,” a software
company that got slammed during the tech bust. He learned his lesson, and that’s why he’d rather give money to an entrepreneur who’s hit bottom than to a first-timer. “I love guys who come in here and tell me they mortgaged their house and bet on this first business, and now they’re living in an apartment,” says Segal. “I love this person because they have a real sensitivity to spending money, and they know the mistakes they’re not going to make a second time.” Granted, you probably don’t want to back anyone who’s tanked three or four times. “But just because somebody has failed is not an indication of anything but, okay, there’s some experience there—let’s dig into it.”
Great ideas can make bad businesses
Companies that fall into this category can be tricky to spot. But all it takes is a little common sense. Take Dexit, for example. A few years back, the company-—which was hawking a swipe-card system for cashless transactions—knocked on JLA’s door. “We ran from the room screaming,” says Segal. The reason? The banks and credit card companies had already started experimenting with smart-chip-equipped credit cards—Segal even had an American Express Blue card, an early version of the technology, in his wallet. So, Segal knew that if Dexit took off, the banks would kill it. “After the Dexit people left,” he says, “I pulled out that card and said, ‘This is where it’s all going, and there’s not a chance in hell we should do that deal.’ We didn’t, and we all know the end of the story of Dexit.” (It carried on with its original business plan under a new name, Hosted Data Transaction Solutions, and had a $475,000 loss on revenue of $614,000 in the third quarter.)
Follow the pack
Five or six years ago, Segal returned from a trip to Europe and told his partners they should get into text messaging. “I’d be sitting on the tube with guys in three-, four-, five-piece suits, and they’d be text messaging,” he says. “I came back and said, ‘I’m telling you, it’s coming.’” His partners weren’t so sure (only teenagers were texting on this continent), and JLA lost out. “Since we missed that one, we all got religion,” says Segal. “We said, ‘We’ve all got to start paying closer attention to these things.’”
As part of his trend-spotting routine, Segal attends tech conferences around the world, and whether he’s in Seoul (his fave city for people-watching), Hanover or Toronto, he spends a lot of time in crowds—on public transit, in shopping malls or just walking down the street. “It’s fascinating to watch the masses,” he says. Now, he puts all potential investments to the crowd test. For instance, a while back, JLA got a pitch from a company that was installing video screens
in PATH, Toronto’s 27-kilometre-long underground walkway. The idea was to sell advertisers on the fact that some 50,000 people stream through the walkway every day. So Segal took the elevator downstairs—PATH runs beneath JLA Ventures’ building—and wandered around. “I watched the hordes as they were coming through,” he says. “It’s real simple: Nobody looks up.” JLA took a pass. Ditto for the Elevator News Network, which brags on its website that it reaches a captive audience of 2.4 million elevator riders in office towers across North America. “All you have to do is ask people getting off the elevator, ‘So, do you remember what you just saw?’” says Segal. “They might remember a news headline, but can they tell you who the advertisers were? Never.”
The bottom line: If you’re considering buying a stock, you should get out there and see how—or if—people are using the company’s products. “Most people who do investments, they don’t look,” he says. “Go figure out what people do, how people work. Will my mum use it? Will my granny use it?”
When everyone’s buying the product, buy the stock
One of Segal’s favourite maxims comes from legendary Wall Street investor Peter Lynch. “Lynch wrote that if you’re standing in Wal-Mart and you see a widget in every cart, you should check out the company,” he says. Segal cites a classic example: As soon as people started to get mugged for their iPods back in 2001, it was a sure sign that Apple had a hit on its hands and its stock was about to explode. “All you had to do was pay attention to what people were doing,” says Segal. “You don’t have to be great at technical analysis or know how to read a Bloomberg screen. Pay attention.”
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