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Something Ventured:
April 16th


Insight For BC Technology Entrepreneurs

By Brent Holliday

Damn Yankees

"Here we are, now where are we?
It's like nothing I've ever seen. "
- Tragically Hip, On The Verge

If you're going to run with the big dogs, you better get off the porch.

We have a big, comfortable porch here in Canada. Eighty-five percent of Canadians live on this porch (within 100 miles of the border). It is the best seat in the house for watching the real traffic on the information highway. I figure we are a bunch of sado-masochistic voyeurs, hungry for the hot, steamy world out there, but more geared to self-flagellation than participation. It is so fascinating to watch the Americans with their hyped companies and pumped up stock valuations. We are really enjoying the spectacle, aren't we?

Are you getting the feeling that I am? Are you feeling like some huge opportunity is just about past you? Are you wondering why THEY get to have THEIR companies go from $11 to $100 on the first day of trading? Are you positive that THEY aren't any smarter than us? Are you starting to say, "How can I get ME some of that?"

Well, let me stoke the fires a little more...

Here, for the record, is the perception they have of you:

· Canada, that's somewhere north of here right?
· Hell, yea... I've heard of Canada. Half of my Net development team is from Waterloo and my business development guy is from Alberta. I heard there were 100,000 or so Canadians here in the Valley. That would be nearly 10% of the technology workforce, some with green cards, most without.
· Nice and Polite.
· I looked at the company and I like the technology. The market opportunity looks huge. But my experience with Canadian companies is they lack the management to compete with US opportunities.
· Nortel is Canadian? Wow, I thought it was from Dallas. Hey, that's a big company. You guys should be proud of them. They just bought Bay Networks, you know.
· I won't invest anywhere where I have to put on a coat.
· Last time I went there, I had to take, like, 4 connections to get to the company's location. It's just not convenient. [Actually, they have opened up the flights with Open Skies. That shouldn't be a problem.] Well, it's too far. [2 hours to Vancouver] OK, look, I'm just not interested.
· My cell phone doesn't work up there. Do you guys have PCS, yet?
· We beat your women's and men's hockey teams. What do you have left to offer the world?
· Have you ever tried to ship something to Canada? Your customs officials are like the SS. It's not like we are *all* Ted Kyczinski, you know. It adds at least a day for parts that have to get there immediately.
· I think of Canadians as Ned Flanders on the Simpsons. You are the super polite, slightly annoying do-gooders that work 9 to 4:30pm and spend far too much time in your garden. You're nice, but nice doesn't win, you know?
· Clean cities.
· You have the CFL, we have the NFL. Your technology community and ours. Am I painting a picture here?
· Way too much government.
· Don't you people pay, like, 75% tax or something?
· Why, on God's green Earth would I want to go and work there, when there is so much going on here? No, I don't snowboard... why?

Some recent news items caught my eye regarding Canada and its perception in the US.

A study found that patents files by Canadians had declined relative to other countries around the world. The total is still in the vicinity of 2% of the total patents files each year in the US Patent Office.

Sergio Marchi, Minister of Nothing Important (oops, International Trade), went to The Silicon Valley to espouse the Canadian technology scene. A well-planned and promoted gathering of Canadian tech entrepreneurs and local VCs and entrepreneurs was a bust. The only people in the crowd were those that came with Marchi and some Canadians that live and work down there. The ex-pats must have thought he was bringing some poutine and a few Molson Exports to the shindig. He actually defended the stab at brain drain by stating that the demand for our graduates showed a superior education system. Yes, Sergio, but what about the fact that all of our tax dollars going into that system aren't realizing tax revenue in Canada?

Speaking of Molson, even our great bastion of Canadiana, Bob and Doug Mackenzie are suffering in the US. Molson pulled the two from their US-only advertising, citing no measurable rise in sales. Is nothing sacred?

Message: the old perception of Canada ain't working in the US. We need an overhaul. Let me state for the record that perception is everything.

If we are going to get off the porch, we need to build a new perception based on the facts. As I see it, here is what is really going on:

· The Silicon Valley is a self-stimulating spiral of wealth that the world has never before seen. It is also a completely closed shop. If you want to take part in their dance (investment, partnerships, customers) you have to be physically located there. In this day of ever increasing bandwidth and connectivity, ain't that a bit ironic?
· With 8,000 technology companies and more than 55% of the entire amount of venture capital pouring into the Valley, the spiral will continue going up at least until the companies realize that the market is bigger than the 650 and 415 area codes.
· Israel is the hottest, most talked about non-American country for technology. $556 million US was spent by US VCs in Israel last year. No fewer than 36 different US venture capital organizations and three investment banks have invested or have offices there. Here's another fact: US VC spending in Canada was less than $50 million CDN last year.
· The attitude of risk is MUCH higher in the US. It's almost like they have a nothing to lose mentality at this point in the bull market of the 90's. Failure is a badge of honour. The scarlet 'F' if you will. It's all about what you learned and how to avoid those mistakes next time.
· In Canada, failure is tantamount to death in business and especially the technology business. Contacts are closely guarded, lest I recommend you to somebody and you don't work out.

· I went to the Silicon Valley with one firm meeting and two wide open days. After the first meeting, I had 3 more and I ended up making 15 meetings and turning down another 3 or 4. If you have something interesting to say in the US, people will bend over backwards to make a connection for you.
· Canada has a great disadvantage in personal tax. It is somewhat offset in Vancouver by quality of life. People (David Duchovny, notwithstanding) do want to live here. But, then again, we have absurd house prices. What is really saving our (back) bacon is the research tax credits that are non-existent in the US. And our very good educational institutions. Our cost of a quality education is a fraction of that in the US. These are the big positives we have.
· Is it just me or do the politicians in the US seem less bumbling than ours? Sure the US Supreme Commander has a gland problem, but the antics of our elected representatives seem to be more idiotic than theirs. The fact is that the politicians reflect the people on a world stage. How do you feel about talking to Tim Koogle at Yahoo about an important strategic partnership, just after he had an official visit from Joy McPhail? Or Preston Manning? Yikes!

The biggest fact that I want to impress upon you is that THEY are not any smarter than YOU. THEY think that THEY are. But, I assure you THEY are not. The US entrepreneur has a head start on you. He/She will maintain some seemingly unfair advantages in building a technology company going forward. But, Canadians have a few tricks up their collective sleeves. It is absolutely fundamental that you, the Canadian start-up, get really, really smart about how you will grow your business. And, to me, that means one more cliché. If you can't beat 'em, join 'em. I don't mean move there and start fighting for a green card. I mean use the advantages of the US to your advantage and make strong, tangible connections to US partners. Gain credibility through key customers and key investment partners. Don't open a US office in Bellingham. No offence to our immediate neighbours, but you might as well be in Alaska. If you are going to announce a US presence and have a hope of attracting top notch people, open up shop in the Valley.

Take a cue from Israel, folks. They have had a string of successful NASDAQ listings in the past five years after they made a conscious decision to focus on their strengths: innovation and engineering in a highly educated and subsidized environment (sound familiar?). Electronics for Imaging, Checkpoint Software, Mirabilis and many others have said, "The way to riches is to take our technology and fund, distribute and commercialize it in the US." Their government takes it very seriously. We, in Canada need to look at the facts. Yes, we can and need to start to change our attitudes. But, in the end, we are still very much in the shadow of our neighbour. Instead of sitting on the porch, let's start to participate and use our advantages smartly. That's what Israel has done.



Random Thoughts

- I went to Spring Internet World this week. Having been to one in 95, 96 97 and now 99 I have to tell you that the Internet buzz is at a fever pitch. A quick synopsis: At least 40 companies were there as back-end processors for e-commerce. They offer the ability to clear credit card transactions as an out-sourced service. With that much competition, you'd be a fool to try and build that functionality yourself. There were another 30 companies doing e-commerce site development and hosting. XML was surprisingly low-key. DataCahnnel and Object Design were making the most noise about new XML tools. Internet telephony and unified messaging are now very real. Cisco showed an entire company Internet, LAN, phone, fax and video system based on IP networks. No more PBX. Now it is very clear why Nortel bought Bay. Cool gizmo of the show was the Novad from Creative Labs. An MP3 player, FM tuner and "note-to-self" digital voice recorder all in one credit-card sized package. And it ships with software that allows you to "rip" songs right off your audio CDs that you put in your CD-ROM drive. Good-bye walkman. I bought one.

A press person I talked to said that she thought the show was too noisy. I laughed and said, "Have you ever been to E3 or the Western Cable TV Show?" It got me thinking... you can tell how successful an industry is by measuring the decibel level at their trade show. In 1995 at Internet World, you could hear a pin drop. In 1999, the roar is almost deafening.





Response From Last Week's Column:

Dear Brent,

I read the BC Technology Report "Something Ventured" and "Fed Up", I found it accurate and a fact of what we are living in Canada. I was just about to compose a letter to Mr. Clark today with a proposal that would give some credibility and offer him a plan to bring technology growth into BC but after reading your "Fed Up" letter, I dont know how much good it will do.

I myself have a very diverse background, mainly technology and currently marketing information on taxation. For the last year, I have received phonecalls from headhunters all over the US for jobs starting at $60K and up. Up to now I have refused them, although very tempting, because I feel this sense of PATRIOTISM. Nobody is biting here, the few that do, are offering me way below what I'm worth.

Your points of view are well taken from a venture capital point of view, but I can also give you some figures on what is going on in the Underground economies.

There are approximately, 23,000 Canadian individuals marketing and advertising their business. Of these 23,000, 19,000 of them are home based, entrepreneurs, MLM (Multi Level Marketing)etc..etc.. I could safely estimate through my research that 80% of these individuals are not reporting their incomes/not paying taxes on these incomes. Now, I don't agree that we should pay taxes, if you look at my website you will see that taxes are unconstitutional in the first place, but we are not on an even playing field.

Those individuals in the underground economy probably could amount to millions of dollars in BC alone in tax revenues lost. 80% of websites that have ecommerce on them are provided for by US companies, our industry is not growing. I have a lot to say, a lot of figures and numbers that I have put together over the last year in trends and Ecommerce, and it is a scary scenario.

My letter to Mr. Clark was to address the growing the Underground economy, and this was how I was going to propose to him to initiate some excitement and growth in the BC sector.

Reduce taxes by 5% to companies that are providing Ecommerce services to the consumer. Any company providing Ecommerce/online payment purchase systems would get a tax break. Any new companies/entrepreneurs etc..would receive a tax break towards development of a Website or Ecommerce on their website.
In order to get the tax break, they must do the following to qualify:
1. Use a Canadians ISP
2. Use a CDN web hosting company
3. Hire Canadian technology workers
4. Basically use all Canadian product, services, developers, programmers etc.

Current Negative

1. Only 3% of Canadian IT sector is providing Internet Solutions . 7% of CDN companies are doing business on the internet in comparison to 72% of the market share is US, the rest around the world.
2. 60% of canadian websites are MLM,entrepreneurs who in most cases dont have to submit their SIN on the distributor applications, therefore, evading taxes. Payments are put through US ecommerce services, deposited in US banks across the border, most even have US postal boxes.
3. Skilled IT people are leaving the province and either going East or South
4. Not enough skilled IT workers in BC
5. Small businesses not reporting income from Ecommerce.

The Benefits:

1. More business encouraged to go Ecommerce and receive a tax credit.
2. CDN Internet/Technology business increases
3. High tech job creation, discouraging migration South
4. More taxes collected from business reporting and from high tech company workers due to newer jobs or more employement/services provided by the Canadian high tech sector.
5. Provide a competitive edge for CDN technology
6. Perhaps even encourage companies to do business in BC with the tax break incentive.

I believe that our tax structure is choking the very essence of our business/IT sector. Without some sort of incentives, I dont think that it will get better and our US competition will continue to have a higher market share.

Although I am pesimistic at Mr. Clark's response to this idea, perhaps he might consider it as it might raise his confidence from the BC people and make up for the scams he has been involved in.

Perhaps you would have time to respond to my letter, a second opinion would be welcomed.

Sincerely,
Paula Richardson

- Paula, obvoiuosly you have given this a lot of thought and research. I have not double checked your numbers, but it's safe to say that many of them are entirely believeable. In your possible solution to e-commerce, I agree that a tax cut is a stimulus for more companies to do business. But there are more issues. Banks aren't giving e-commerce companies merchant accounts very easily. Shipping goods across the border is expensive. And how do you define e-commerce? Just selling stuff on the web or software providers too? Beyond these annoying issues, the real issue is to get noticed when you are starting an e-business. That requires big money and even bigger contacts with established players. Tax breaks don't solve these issues, but they might be a key part of a reason to try in the first place.


What Do You Think? Talk Back To Brent Holliday



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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