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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