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The California Reelin'
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
August 22nd, 2003

By Brent Holliday
Greenstone Venture Partners

"So the people of the Valley
Sent a message up the hill,
Asking for the buried treasure,
Tons of gold for which they'd kill.
Came an answer from the kingdom:
"With our brothers we will share,
All the secrets of our mountain,
All the riches buried there." - One Tin Soldier (The Legend of Billy Jack)

Everybody is dumping on California these days. It was bad enough that there was a televised debate between Gary Coleman and a porn star, both of whom are running for governor in the crazy recall election (I actually thought I saw a reference to that match-up in a recent spam...). But now in an interview in Business Week , the king of the California start-up, the subject of the New New Thing himself, Jim Clark, founder of Netscape and Silicon Graphics says that he has given up on California and that it is "an insanely depressing place". Yikes. He's a real estate developer in Florida now.

What's next? Vinod Khosla moving to Scottsdale and selling time shares (He would predict the market to be in the trillions within ten years on a dizzying amount of infomercials)? Or Steve Jobs sells Apple to Gateway and becomes a senior executive at Pepsi ("I do want to sell sugar water for the rest of my life.")?

Forget that California is still 1/8th of the American economy and that Northern California is still home to almost ½ of the country's venture capital firms (if you count ones that still operate at least one office there). Something is rotting on the left coast and businesses are moving out of the state.

Now we have all heard about the recall election and the intense media scrutiny that would be far less intense if it was Busamante vs. Reardon for governor. But there's this guy, Ahhhnold, who is likely to win and most of the good people of California are a little sheepish when you call and needle them about their politics. Which is refreshing for people from BC, the heretofore leader in ridiculous politics and politicians. This circus is nothing new for us, really. Call me when Ahhhnold gets nabbed for drunk driving...

The Silicon Valley is a veritable ghost town in the summer of 2003 when you compare it to the summer of 1999. The massive overbuild of office space has left landlords with the ridiculous situation of offering negative rent. That's right, you can pay -$2 a square foot in rent and tack on the $10 in operating expenses (leaving your net at $8 a square foot) for prime office space in the Valley right now. You can shoot a cannon through a lot of the industrial parks down there and not hit anyone. Most people I have talked to say it is a pleasure to drive the 101 now, given that it was a parking lot 10 hours a day in 2000. And yet some things haven't changed much. Housing prices are STILL ridiculous compared to anywhere else. Draeger's still sells ostrich salami at $35/lb. And most of the residents in the tech community are still very faithful to the California tech dream. Even those struggling to find work believe.

Sure, the technology market collapsed and a few thousand Valley start-up companies went along with it. Cisco laid off its first employees ever in 2001. A whole bunch of other companies followed suit. Venture firms gave more money back to their investors (not profits, but actual raised capital) in 2002 then they had raised to invest. Enrollment at Stanford's business school shot up, which is a definite change from the days when "wet-behind-the-ears" students were leaving early to start wedding dotcoms. But the Valley has endured this twice before during its 45 year technology history. And each time it has come back stronger and bigger than the previous period.

In 1983-84, the Valley melted down after a long run precipitated by the PC revolution and Apple in particular. Many naysayers, a la Jim Clark, predicted that it was back to apples and cherries for the miles of orchards around San Jose. Then the defense contractors started to light up the Valley again because of Mr. Reagan's Star Wars initiatives and in the mid 80's, Intel got out of memory and into microprocessors, a flunked out salesman from Chicago started a database software company called Oracle and a crazy couple from Stanford scared away most venture capitalists in the day as "unbackable". But in 1985, Don Valentine said "I can find someone to run this thing" and Cisco was off to the races.

Then in 1992, the new Democratic leadership in the White House killed the defense business and the Valley slumped badly again. But tech was still chugging along under the radar, mostly. In the recovery from this bad recession, Jim Clark started Netscape with Marc Andreesen and, well, you know the rest of the story. Insane amounts of wealth, yada, yada, yada.

California will be back. There is absolutely no doubt. If residential real estate markets are a somewhat liquid, leading indicator of sentiment around the technology business, then you start to understand why prices have not plummeted. People are hanging around, confident that the Valley will come back and not collapse completely.

Which brings me, rather late in the column, to the relevance of California and its current state to BC and the technology industry here. In the past 8 months, I have seen struggling young tech companies here hire seasoned executives from the Silicon Valley and become much more focused, highly backable companies. Now is the time to do this, not during the peak of the market. There are very, very good, very, very experienced California executives who will look at interesting opportunities outside the Valley today. They may not re-locate here however, which raises some difficult issues, especially for a start-up. But the talent floating around is impressive. Tom Ku, ex of BEA Systems and Sun Microsystems, is leading a renovation of Axonwave (formerly Gavagai) that has attracted some of the excellent NCompass Labs people back from Microsoft. He is but one example of this trend. How did the company find Tom? Why, their VC, of course. Pangaea Ventures had a contact that lead to him getting excited about the company.

Another big reason to pay attention to California right now is because, despite the downturn and the depressed office real estate market, it still costs way too much to operate a start-up in the Valley. In a twist to the aforementioned attracting of management talent to BC based start-ups, why not attract California companies to hire BC talent to build and manage their products? At Greenstone, we successfully employed that model in a couple of our companies and continue to make attempts to match exceptional talent here with VCs and start-ups there. Vancouver makes so much more sense than India or Mexico for finding real start-up expertise, the kind of talent you keep, not rent. The focus on research and the credits that you can apply to the work being done is a big eye-opener for California companies. We have a real opportunity to further establish the link to California now, before they get humming again and get their usual top of the market xenophobia about anything "more than a bike ride away". Greenstone has been working for 4 years on this model, but a little push from someone a little louder than us would be helpful.

One final link to California that we need to establish loudly… Their new governor, the lucky guy that will lead them out of this funk (not necessarily by anything he does directly, but because the cycle is trending up all by itself), has a summer house on Kalamalka Lake outside of Vernon. We should make sure that when Ahhhnold visits, he leaves with a better impression of our capabilities and not just of our natural beauty. Let's make BC his second home, shall we?

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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