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Fast Cash Folly
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 28th 2000

By Brent Holliday

Trouble ahead, trouble behind
And you know that notion just crossed my mind.”
Grateful Dead, Casey Jones

It all started when a little-used military cum educational network became optimized for viewing graphics with a piece of software called a browser.  In the six years hence, except for a little crisis in the Asian market, we have all become steadily and increasingly wealthier.  Some more than others.  I mean really people, did you think you were some sort of genius for getting great returns in 1999?  A cat could have done a 30% gain.  Hands up if you think the NASDAQ will go up 75% this year.  Except for the few of you with title “investor relations”, I suspect most hands remain firmly down. 

The fundamental problem here is that we all want to be rich in 3 seconds.  We have been conditioned over the past six years, but especially the last 18 months, to think that it is our God given right to make 1000% gains.  Yeah, I know, there have been other “Get Rich Quick” bubbles in our history.  But this gold rush has been different.  No other GRQ scheme has been more encompassing of our entire society.  It’s because of and a by-product of the Internet. 

Here’s how silly things were getting leading up to the correction in the market: 

Landlords in the Bay Area were refusing to rent a tech company space without options and only after they (the commercial realtor!) read your business plan. 

A common practice in US tech communities over the past two years has been to “work the cliff” to get a portfolio of early stage options.  All you needed to do at a company was stick around until the date that you accumulated your first options (usually six months to a year) and leave.  So what if you didn’t fully vest.  Four or five of these guaranteed you a few thousand options for at least a couple of red-hot IPOs. 

Nearly half of the potential graduating MBAs for 2000 at Harvard and Stanford never got past their first year, having left for Internet start-ups. 

Tracking stocks were worth more than the companies that still owned 95% of them. 

Mining companies were re-inventing themselves as e-commerce companies. (Think about that for a second and you’ll see how dumb that sounds from the point of view of someone that doesn’t live in Vancouver).  Actually, this is the most ironic data point as the last GRQ schemes and scams that defined the old Vancouver Stock Exchange are now re-inventing themselves in the new GRQ scheme.  Same sheep, different clothes. 

People in Hong Kong were caught in a mad crush as the line-up for IPO shares in Tom.com turned into a mosh pit. 

While the bubble deflated a bit two weeks ago and has lost a lot of air since the beginning of year, I bullishly argued last column that fundamentally we still have plenty of legs left in the technology economy.   That being said, I wanted to go from macro to micro this week and discuss the impact of new market conditions, and the loss of the GRQ capability, on the technology worker. 

Here are some data points from the past weeks: 

724 Solutions has hired dozens of people since January’s monster IPO, some of whom received options priced while the stock floated at $210 to $240.  Those recent hires will not be happy with a $70 stock value.  So much for GRQ. 

Della.com, a wedding registry site backed by Kleiner Perkins laid off half of its staff yesterday.  Then it merged with a competitor, Weddingchannel.com.  Many other e-tailers will be out of cash within 12 months and forced into the arms of competitors or be out of business. 

Onvia.com's stock is at $9.  It’s IPO price was $21.  Many employees will have little to show for their hard work over the past year if things don’t improve.  And this is a B2B company! 

The IPO market is showing signs of hibernation.  Client Logic pulled its IPO altogether Friday and it is a quality Internet services company with better numbers than most that are out there today.  360 Networks is right back to its IPO price.  OnX (A Yorkton promoted company) has never traded above its IPO price on the TSE. 

The overwhelming message that comes from the current unrest and dissatisfaction from employees of poorly performing public dotcoms is that the greed monster is starting to starve.  In the near term it will not slow down the massive employee churn that has defined the IPO crazy 1999.  Why not?  Because the employees that have poorly performing options and still harbour the GRQ mentality will jump to the pre-IPO companies where their options might have more value.  But long term, the craziness will subside and we will write books and see movies about 1999 and wonder how we ever got that lucky. 

Greed is a good motivator.  I’m all for greed.  I am not arguing that people were dumb not to take advantage of the market craziness to try and GRQ.  When the ducks are quacking, you feed the ducks.  Venture capitalists went out and did some crazy things over the past 18 months, investing in businesses that they had no experience in.  Why were guys with tech backgrounds all of sudden investing in retail legwear companies just because they were dotcom?  Not because they were dumb.  Because they could… and for the most part, get rich doing it.  One more time:  I am not pissing on the dotcom parade of 1999.  I am merely saying that those days are probably gone, never to return again.

As an employee with GRQ attitude in the tech business, it’s time to think about holding off on that planned golf-filled retirement at age 32.  We’re already starting to see the early impact in the hiring processes of tech companies.  The stories coming out are about employees demanding more stable (and larger) salaries and benefits packages over more options.  I only have anecdotal evidence, but I would suspect that the earliest stage companies will find it harder to attract experienced managers as they move toward conservatism and prefer companies with market traction over companies with ideas. 

It’s time to start thinking long term again.  Join the company with the biggest and best opportunity and assume that it will take 3-4 years to get somewhere big.  What if, egads, you actually have to be a company with profit in order to go public?  Think about how long you will have to work to reach that milestone!  

The flight to quality has already ensconced the venture investing community.  VCs are actually talking about 10 year lives on their funds again.  Building, defending and winning with great companies takes time.  It’s easy to see why we forgot that Rome wasn’t built in a day.  All of our energy over the past two years was aimed at getting a company public.  Public companies with stock prices in the dumper will struggle to find and keep GRQ people and cash to support their business if they are not profitable or near profitable.  It becomes a downward spiral. Private companies will have pressure on their valuations when raising cash.  But expectations are easier to manage when there is not a public pressure to perform quarter by quarter. 

At the end of the day, you have to ask yourself, “Am I in this to be rich tomorrow, or can I wait for a few years and build something of value, worthy of a big reward?” 

Relax.  The big house in Whistler is still available.  The markets have corrected, but they are still steady.  The future is still very, very bright.  Slow down and enjoy the ride. 

Random Thoughts – 

-         The BC ESTI (Early Stage Technology Index) is at its lowest point since I started 6 months ago: 5 out of 10.  For obvious reasons, the last month has been tough on start-ups.  On the down side, options are worth less or worthless.  This hurts the angel investing community, the lifeblood of our earliest stage companies.  On the up side, our local “anchor” companies have weathered the public market storm well.  Sierra Wireless, QLT and Pivotal took the hardest hits, but Creo, PMC-Sierra and Ballard have remained buoyant.  A few new VC financings happened in the past month as itemus and others cranked up the investment engine. 

-         The Globe and Mail started its Special Report on the investment banking industry in Canada on Saturday.  It focused on the legal, but not apparently ethical, promotion style of Scott Paterson and Yorkton Securities.  As readers here know, I used the Book4Golf story as ammo to show the over-hyping and disregard for value creation that the firm showed in that instance.  I received some feedback on my Book4Golf story that cannot be published.  Nor can I tell you where it was from.  Let me only say that the source and the content helped confirm my suspicions about the company and its investment banker.  It’s a sordid story.  Where is the restraint that I thought was being imposed based on the BreX scam? 

-         Hey angels!  Let me remind you again that despite the downturn in the markets, you still have a new way of delaying paying capital gains tax on your gains in this calendar year.  Up to $500K of any gain made can be invested in a Canadian small company (preferably technology!) with less than $2M in assets (that’s about all of them).  Take your $500K, invest in 5 different start-ups with unique ideas and good, energetic teams and watch the value grow over 2 or three years.  Put the money to work, tax-free!  If you need to know a couple of places to put the money, e-mail me.  We have seen a few that are early for us at Greenstone, but promising nonetheless.

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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