CVCA EXCLUSIVE: Inside The Winning 2017 Venture Capital Deal Of The Year – Yaletown Partners and BitStew Systems
The CVCA was proud to award Yaletown Partners with the 2017 Venture Capital Deal of the Year Award on June 7th, during the Invest Canada ’17 conference in Montreal.
Yaletown Partners is a Vancouver-headquartered firm that invests in emerging-growth technology companies in Canada. Yaletown invested CAD $7.5 million in BitStew Systems, and realized proceeds of CAD $31.9 million representing 7x on its initial capital and an aggregate 4.3X through all rounds of financing, generating an internal rate of return of 98.3% in just under 3 years. Bit Stew, now known as GE Digital, expanded to become the premier data integration platform for the Industrial Internet of Things (IIoT). Bit Stew’s artificial intelligence machine learning technology is used by global customers in a variety of industries including utilities, manufacturing, aviation and oil and gas.
The CVCA had a chance to discuss the big win with Salil Munjal, Managing Partner and Hans Knapp, Co-Founder and Partner at Yaletown Partners earlier this month.
CVCA: Tell us the story, how you got involved in the deal – basically how you first invested in BitStew.
Salil: We made our first investment in December of 2013. We began looking at the company early that year. The back-story is interesting:
A good friend of mine who is a fund manager from New York, where I lived for a while, called me to say a close friend of his, Tal Slobodkin, from Cisco was looking at a deal in Canada and recommended we connect. Tal was responsible for IOT investments at Cisco. A little while prior to the call from my friend, I had reached out to Kevin Collins (co-founder of Bit Stew). I had heard about Bit Stew and was interested in learning more. Well, interestingly enough once I connected with Tal we shared some ideas and it turns out the company he was interested in was Bit Stew. I took this coincidence as a good sign!!
We both undertook due diligence together — it culminated in the Series A in December of 2013. Having a common friend facilitated immediate transparency.
The other part of the back story was that about a decade before the Series A in a prior career when I was President of Leitch Technology, a large public technology company listed on the TSX and NASDAQ, I encountered an innovative technology company in Silicon Valley. We were in the business of intelligent routing and switching and this company was at the forefront of managing and analyzing data using AI type tools before anyone was really using the word AI. It was well ahead of its time. Well, the guys behind the technology were none other than Kevin and Alex, the founders of Bit Stew. For a variety of reasons, our companies never ended up in a commercial arrangement but I recall being impressed. The three of us didn’t realize this past connection until after the investment but it was pretty uncanny and yet another reason this convergence over a decade later was special. I was impressed back then and again when I got to know Bit Stew.
CVCA: Is there anything particularly interesting about BitStew that caught your eye?
Salil: In terms of machine learning and artificial intelligence and the IoT space, we’ve been active in the space for number of years and know well. I had the privilege of running one of Canada’s larger intelligent routing companies, well before AI became fashionable, and so lived first-hand the challenges Alex and Kevin were trying to solve. So for us at Yaletown, the opportunity that Bit Stew presented was one we recognized straight away — as did Cisco. They are also experienced IOT and AI investors. What really stood out was the real-time nature of what Bit Stew was doing and the sheer volume of data the platform could ingest. There were a number of good companies out there that provide analytics capabilities however Bit Stew provided data integration capabilities that most did not have. And data integration across hundreds of millions of pieces of data s that is what is referred to as “unstructured data”, which makes the challenge that much more difficult. The fact that their initial customers were in the utility industry – renowned for its rigorous requirements – demonstrated the robustness of the Bit Stew platform. That’s what stood out, that’s what made it special.
Hans: So the point that Salil has put his finger on is critical: that the strategic investor, partner and ultimate acquirer of Bitstew was so impressed by the value Bitstew generated that they coined a new phrase to capture the dichotomy between life before BitStew and life after. They talked about it “moving from calendar time to wrist watch time”. You have multiple examples where computations and data analytics would literally take days or weeks – when instead it could be rendered in mere minutes when using the BitStew engine.
CVCA: Why do you think that this particular deal was so successful? Was it because of what you just explained? Was it “the perfect storm” scenario – with the right people at the right time?
Salil: If you look at what’s happening globally, particularly in so called “traditional industries” such as utilities, agriculture, manufacturing – these industries are undergoing one of the most significant transformations that’s happened certainly over the last 40 years. This transformation is driven by the increasing ability to crunch huge amounts of data to provide valuable operational business insights on a real time basis. Everything from how to increase agricultural yield to predictive maintenance on equipment so someday unscheduled maintenance will be a rare occurrence. This evolution is enabled by the Internet of Things with more and more devices and sensors collecting data and connected to each other and the internet. It now becomes less a challenge of collecting the data, but more about how you do something valuable with it. That’s where Bit Stew comes in. The value that a company like General Electric and other leading industrial technology companies can provide their own customers by embedding technologies, like BitStew, it’s significant. If it can sell you a device or some equipment and can now also offer you business insights and an increase in efficiency savings on a scale that you have not seen it now becomes a game changing proposition – both the device and the data analysis that comes with it. This is a new way of thinking and we are in the early innings. Kevin, Alex and the Bit Stew team provide GE with lots of firepower in the Industrial IOT and machine learning race.
CVCA: Pivoting just a bit, can you go into what it was like working with the BitStew team?
Salil: I should say at the outset that the relationship is incredibly close between Yaletown and the founders, Alex and Kevin. It’s largely because of their generosity in including us from the very beginning in all aspects of their business, including the strategy, people, and capital raising. Through all the conversations, including many late in the evening when our families were asleep, we became great friends on a shared journey. We each had the comfort of being open and transparent on ideas as friends do.
Hans: My observation here is that it was like two teams that came together to work as one larger team. On the Bitstew side we had Alex and Kevin who, combined with other senior management at BitStew, really created a culture of openness, collaboration and frank interaction with our firm. That in turn allowed us to bring to the table multiple people from Yaletown who could work on the file at different points in time. This was all happening in real time as we were getting the first round done, getting the Series B done, doing some of the other evaluation work, doing work on valuations, and going through the exit process. Throughout all of those steps, this was a coordinated multi-party effort.
CVCA: Are there any particular lessons learned in this specific deal for you guys or is there anything that you find interesting about this deal?
Salil: One of the things that stands out was Bit Stew’s ability to engage business unit owners of relevant verticals, for example the IIoT area atCisco, or relevant industrial business lines at GE and at other leading multinationals. These units are the ones charged with developing and selling products and this direct engagement provided a real time feedback loop from the customers and prospective customers of these multinationals on what they liked about the Bit Stew product, what was missing and so forth. Bit Stew was also engaged with the sales folks in these units. All of this led to more focused development of feature sets and the right sales tools that all led to accelerated adoption. It highlights the impact that a small company can have in a large multinational by structuring its arrangements to engage the P&L owners of the relevant business units in the larger company.
Hans: So, just adding to Salil’s comments, which I agree with; I’ll make two observations: First, the deep level of meaningful operational and business interaction between a strategic investor and the company. As the VC, there are many examples where the strategic invests into the company and you kind of don’t get “Part B” of the engagement and it thus there is no major value creation. That brings me to my second point: the key achievement in my mind here that triggered the eventual unlocking of value in the exit was the manner in which the company and Salil were able to structure the strategic operational engagement between GE and BitStew. By bringing the company into multiple GE operating divisions this activity generated value and put Bitstew on a plateau where they were able to work with anyone. Now GE in particular, was in a great position to harvest that value, but the strategic work that was done, and the business that they were able to drive made BitStew more valuable to everyone.
CVCA: That answer sort of segues into our final question: Has this deal shaped Yaletown’s investment thesis in anyway?
Salil: I don’t think it has shaped it, but I do think it is another validation point for us on the path we set out on 5 years ago. This has involved focusing on the themes of IIoT, artificial intelligence and the cloud coupled with a great management team and finally addressing globally relevant problems in the transformation of so called “traditional industries”. Interestingly, enough this also gives me great optimism about Canada’s role in what’s going to unfold in the later innings over the next 10, 20, 30 years. If you look at sectors such as manufacturing, next generation networking, agriculture etc., Canada has historically has been very strong in those areas. We have excellent domain knowledge – for example around manufacturing and now you also have an emergence of technologies catering to these industrial sectors. You can’t have one without the other. In other words, you need the industrial background in order to be able to incorporate the new technologies such as artificial intelligence into industrial processes. Canada has both and the future looks bright.
Hans: I’d like to add that the execution of our investments here across three stages is a textbook example of carrying out our emerging growth investment strategy. This is a strategy that we have defined, we have researched, and for the last six years we have executed. BitStew was the third exit out of that strategy which has now returned more capital than we invested into the entire strategy. So, for us, I think it was a validation of what we’ve been doing and what we will continue to do with our new Innovation Growth Fund.
CVCA: Is there anything else you’d like to add that we haven’t discussed?
Hans: There’s just one high-level observation: this is a great story. Here you have two gentleman that relocate from California (of all places) back to Canada, with the assistance of Canadian VCs they build a company with lots of great technology, they partner with a Fortune 50 company, sell it to that company, and now that company is hiring more people in Canada to continue to grow the business. It’s an excellent story – and along the way Canadian investors and the Canadian economy have benefited.
Salil: In respect to the ecosystem build, it’s a topic we hear about almost daily in the media innovation being the central theme in 2017. If you look at the ecosystem impact, sometimes there’s a sentiment that an acquisition sometimes isn’t a good thing for the ecosystem or the economy. It can be positive if the company continues to thrive and grow its roots in Canada. GE is using the BitStew acquisition in Canada as a key centre of IIoT excellence. One of the more challenging aspects in technology has been about getting the right combination of skills and experience. GE is harnessing the power of that team and growing its presence in Vancouver, home of Bit Stew. What that means to the ecosystem is that now you’ve got all kinds of inbound intelligence flowing, from a global perspective into Vancouver and the cross pollination that happens with the best of the IIoT technology being developed around the world and in in Canada.
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