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Survival Story
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
August 2nd, 2002


By Brent Holliday
Greenstone Venture Partners

 

"The space between
The tears we cry is the laughter
keeps us coming back for more
The space between
Our wicked lies
where we hope to keep safe from pain "
- Dave Matthews Band, Space Between

Most of the time, I print some of the responses to my column at the end. Some times, a particular missive sets up my thesis for a whole column. This eye-opening response from last time (July 12 - A Slow And Sticky Road) deserves top billing and frames the discussion for today:

Brent,

I read all of your columns and they often irritate me! One of your leitmotifs seems to be how soft-bellied and wasteful today's entrepreneurs are. The us-vs-them beast in me rises, and my rebuttle takes shape: "self-congratulatory, condescending VC attitudes towards Vancouver companies aren't doing a hell of a lot to further the spirits of those battling it out on the mean streets, nor those forming the foundation of the future..."

Then it's suddenly 8:02 am and the first fire of the day needs dousing: I'm too busy getting on to the business of running/building/financing my company to bother actually completing the response. But this week's column deserves one, and it is: "Thank you for the great article and words of encouragement!" It is just what those of us with our heads down ploughing through these tough times needed to read.

Regards until we meet on the other side,
Lisa

First of all, I needed a dictionary to look up leitmotif ("a dominant or recurring theme", for those of you needing a $20 word for the day). I take some comfort in her description of how my columns are like fingernails on her chalkboard simply because she keeps reading them. And if one column a year is all it takes to inspire/educate/entertain one entrepreneur, then I guess my time is not all wasted. It was refreshing to note that I am, apparently, no different than any other VC in that I have "condescending VC attitude". I'll forward that to my LPs, who have that on their checklist for giving out money to venture funds like ours.

Lisa founded a technology company here in Vancouver in 2000. Hands up all of you that were part of a company started in 1999 or 2000 that is still in business today. Those of you without two or three companies on their resume from the 1999 time frame are probably living a life much like Lisa's... gutting it out day to day trying to keep the company alive because a) you are passionate about the concept b) you have enough traction to believe that you will be a success when the market gets better or c) you are a solid worker and happy to have a job in this market. Or all of the above.

The column in question last time talked of being patient and the reality that big successful companies are not created overnight. I thought it might help if I pander directly to Lisa in order to win more of her favour. Scratch that. I thought it might help if I talk about the act of surviving which expands on the theme of patience.

I mentioned the success-failure-success roller coaster of Radical Entertainment and Ian Wilkinson last time. Ian does not have millions of dollars to show for his success, at least not yet. But he survived. He has created value. Twice. His initial six year odyssey created a profitable company before he set his sights on expansion and rapid growth. Then things got horribly un-profitable in a hurry with over expansion. It is very rare that a company can spend US$20M of investor money, get creditor protection, return exactly zero to most of those investors, lose most of its best employees and then build the business back up again. Contrary to the bubble in most industry sectors, the video game industry was warm in the late 90's but only caught fire with the sudden proliferation of game consoles (Nintendo Gamecube, Microsoft Xbox and the continued sales of Sony Playstation II) in 2001 and 2002 (right when Ian needed it most, when the company was leaning precipitously over the edge of obliteration). He is not outwardly bitter. He has shouldered the blame for some of the misfortune, even though there are some characters that deserve it more. He just keeps looking ahead to continued better times with experience and better judgment, all too aware of how brutal the act of creating a business can be.

As I may have mentioned before, the hardest part about the technology start-up is the act of creating/developing/building the initial product. This is not a restaurant or a maid service type of business that you can get going with $100,000 and a friendly banker. The initial capital and time requirements of most technology products requires $1M or more. Enter the condescending VCs. That's why we exist in the first place. During a development phase, there is no where to turn for capital to keep the company alive, except to risk investors or government sources. You have no customers. One very big exception is to do co-development with a big customer or have them advance you money against future cash streams (which is how the video game industry works). But in most cases, survival at this stage of a technology company requires you to frugally manage what meager money you have and get the product finished. This is the stage where most young companies in this horrible market are dying on the vine. But there are stories of survival. There are stories of basement development teams and credit card financing (i.e. six new credit cards, all run up to the max). There are stories of sweating it out at night, after the day job, to finish the product with no capital added.

One local group of hard working and talented entrepreneurs, looking to raise some capital, have spent their own money, stretched the beliefs of their spouses, probably missed a mortgage payment or two, and managed to land a purchase order from a major technology company which will help fund their initial development phase and give much needed credibility to their idea. Despite being led all the way down the path by one VC and then dumped, they are surviving. They are going on fumes, but are determined to see the idea through. They readily admit that they were unprepared for the process of getting initial capital. One very smart thing that they did was assemble a decent advisory group of seasoned veterans that has helped them. Even so, it is a tough road to hoe and determination is required to offset disappointment.

Once your company has some customers, survival in a tough market creates a religious faith in "the market turnaround". "If I can just manage my cash until the market comes back, I'll be in a great position." If the market turmoil is long enough, then that statement is true because the longer it goes on, the more your competitors will go away. With customers, you are in a much better position than the initial development stage. You have more options to determine your fate and survive. Consider Paulin Laberge and Altus Solutions in Burnaby. This small company was initially created at MPR Teltech in the early 90's. It was spun out to CrossKeys, a baby Newbridge company in Ottawa, in the mid 1990s. It had a telecommunications network management solution built on one of the standard platforms which was owned by Compaq. The company had customers all around the world. Paulin was promised the moon by CrossKeys in terms of resources. In the late 90's the company began to stumble after its IPO and the Altus part of the business was not getting deserved attention. So Paulin planned their escape.

In what became a pattern, Paulin was left at the altar by some investors that had planned the buyout. Through his own will and determination, he found other money, barely enough, to get out of CrossKeys. The business continued to do well, but the future was staring the company in the face in 2000 and they went to raise money to build the next generation of product. Timing, being everything as you know, was the pits for Paulin and his very credible team. He caught the first major downdraft of the telecom meltdown in late 2000 and saw investors running for cover, leaving him once again at the altar. This time, it got to within a day of the supposed closing of the financing. It almost killed the company.

The survivor entrepreneur is epitomized by Paulin as he scraped together some investment and finally, 14 months after he started trying to raise it, closed on about $3M. In the meantime, the company was suffering from the very real market downturn and lack of spending by telecom companies. Not to mention the delays in getting the new product development finished. Just when you thought it could get no worse, the biggest customers and potential customers started going bankrupt and everyone else froze solid. Welcome to 2002. Nice business to be in, huh?

I spoke with Paulin earlier this week and the clouds may indeed be lifting. Remember that their original product was built on the Compaq platform? Well, the merger of HP and Compaq created the most stress in Altus' history. If the Compaq platform was pitched out, kiss the old somewhat steady business goodbye. Finally, after 3 years of repeated body blows of bad news in a company that still gets new customers and drives revenue, has completed development of two next generation products and managed to raise some money, the good news: It's all Compaq. Welcome to a Greenfield opportunity for the older business. The survivor now has an open door to walk through.

Greenstone is not an investor in any of the companies mentioned, but because they are good guys and have amazing stories to tell AND because they are all a work in progress, I thought I'd share their stories so that the Lisa's of the world might find some comfort.

I'll resume the condescending, self-congratulatory columns next time.


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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