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If Not You, Then Who?
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 27th, 2001

By Brent Holliday
Greenstone Venture Partners

"Now's the time that we need to share,
So find yourself, we're on our way back home "
- Supertramp, Give A Little Bit

A month ago I wrote about the need for early stage companies to cut, cut, cut in order to survive the ugliest market for financing in a dozen years. I had some good feedback from that article. For example:

Hello Brent,
Excellent article (Something Ventured, Mar. 30). People have witness the tech wreck over the last year and will relate to the fact that many software companies in North America are unsustainable given their current burn rates. Unless these companies are sitting on heaps of cash, or have the ability to raise money through the market, wouldn't they consider the ability to produce the same product at a fraction of the price advantageous? Companies need to further their business model and service their existing clients in the absence of investment capital. These are the same companies that are laying off and cutting costs at a break-neck pace. Please correct me if I'm wrong but given this developing trend, don't the companies that have set up off-shore in places like India where a similar product can be produced for a fraction of the price stand to grow exponentially? I foresee the software development sector being commoditized, much like the textile industry in the past. Companies will seek cost-effective production of their more generic programming needs, and are less hindered than ever by geography. India's competitive advantage is its abundant, high quality and cost effective human resources. They boast the second largest IT workforce in the world, next to the U.S. I submit to you that this area of the world is ripe for a boom. Interested to get your thoughts on this.
Ben Craig

It is true that everyone at the early stage needs to look to cut costs in the wake of diminished availability of venture capital and angel money. The big public companies are cutting costs left and right to reach profitability. Sub-contracting to India is certainly one way to achieve lower costs. But there are many others. (By the way, did any of you see the joke press release from Nortel that said that if the company could save $1B by cutting 20% of their workforce, then they would be profitable if they cut 120% of their workforce over 2001.)

Regardless the size or scope of your technology company today, you need to get cash flow positive faster than you had hoped. The result is likely a smaller revenue number than you have in your plan. But you will be alive. And you will not need investment to survive to see another day. But what if cash flow positive is more than 6 months out, even after cuts to expenses? What about the seed stage or development stage company that has no revenue? Where in this desert wasteland of capital, in this deer-in-the- headlights-knee-jerk-response-by-VCs-with- dotbomb-portfolios, in this pendulum swung too far towards cynicism… where do you get a dime these days? What, for the love of Pete, will get a VC to open his/her wallet and shovel you some cash?

Let's start with the assumption that you have not tried the Canadian VCs yet. Let's also assume that you have a BIG idea. That never changes for a VC, regardless of market conditions. It has to be BIG and it has to be UNIQUE and you have to have a TEAM to get it to the next major step. But you knew that already. Because you read Something Ventured {**smirk**}.

Canadian VCs were an anathema in 1999-2000 because they did not invest heavily in dot-coms or big telecom service companies (the CLECs). Thankfully for anyone needing money today, they didn't and therefore, they lack the stinking animal carcass portfolio that the US VCs have today. We should make any US VC walk through disinfectant on a carpet before they come into Canada. To keep the animal metaphor going, the VC herd used to move towards "hot" sectors, based on IPO and M&A activity. With no IPOs and very little positive merger and acquisition activity happening, many of the technology sectors are now all over invested and "cold". The herd is standing still.

Whatever the reasons, Canadian VCs have not closed for business as many of the US brethren have. But, with the current conditions, they will be very selective. They will be doing smaller investment rounds, reflecting the lower cash burn rates that the companies must show. They will be looking for a real pain in the customer and a value proposition from your company's product/service that will generate sales today or in the very near future. They will not invest in as many conceptual product companies. In other words, if your product is bleeding edge, where the market is in its infancy, the VCs will be very hesitant. Very early stage companies will only get VC money today with solid science/intellectual property that addresses real market needs once it is developed. But it can't be a better mousetrap. It has to be very unique to be compelling today.

With fewer VC deals being done, where do you get cash if you can't get VC? You have to be creative. I am asked this question three or four times daily now. Entrepreneurs or their agents are looking for something, anything to get their company some fuel. Here's what I have been telling them:

· Government or quasi-government agencies - hey, they have always been there. IRAP/NRC, Science Council of BC, BC Advanced Systems Institute, CANARIE, Human Resources Canada, SRED tax credits and many more industry specific agencies. Look 'em up at http://www.vef.org/moneylnk.htm While they might have matching money requirements or take the form of loans with strings attached, you may qualify for some of it and the government is not slowing down any of these programs just because the market is crap.

· Strategic corporate partners - this is the next most likely source of money these days. But it takes a long time to get to a point where you have money IF you get to the decision making person right away. You need to look at your business, wheat you are offering and match that with a company that is big and has sufficient cash. The matching has to be a win-win scenario. You will not usually get cash from a customer beyond what they would pay for you product. You may get cash from a potential customer if they want to co-develop your product or can see enough value in what you have that they spend some R&D dollars on you. Another type of relationship to develop for money is one where your product offers the bigger company an opportunity to sell more either through access to new customers or increased value in the total product solution. The trick is to convince them that they should invest in order to help you deliver the product.

· Contract or consulting work - you may be forced into taking your really smart and savvy team and selling their time in order to generate cash. The big problem with this tactic is that they will not be spending their time on your product. Once your company starts down this road, it is very, very hard to get back to developing and selling a product.

· Credit cards and garage sales - take a really good look at your business plan again before you dive into deep personal or family debt. There should always be some risk for you personally in the company, be it cash, opportunity cost or money from relatives. Before you run that bill up beyond the few thousand to get the company off the ground, make sure you have exhausted all other sources and you still think you have a business.

· Sell for scraps - If you have something of value, rather than running it to zero and letting creditors take everything, go to companies that compete directly or that have complementary products or customers and sell them you, your team and your assets for some piece of their company. A combined whole may be better than going it alone in this market anyway.

In any search for money, ask for advice and contacts from your lawyer, your accountant and your business associates. It is possible, in desperation or sheer naiveté, to make a really bad deal that will haunt you later. It might be better to kill the thing now rather than sell your soul to the devil.

So, good luck. Take some small comfort in that your competitors and potential competitors are in the same boat.

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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