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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