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Something Ventured: August 29

Insight For BC Technology Entrepreneurs

By Brent Holliday

Currency Crunch Reality Check

"Dreamer, you know you are a dreamerŠ
You know, - Well you know you had it comin' to you,
Now there's not a lot I can do"
- Dreamer, Supertramp

Here's a news flash for those of you that just woke up from a 3-month nap: Things are about to get really ugly here in BC. And, for that matter, across Canada. I don't mean to be a "Chicken Little," but the economic sky is falling. Our currency has lost 10% of its value against the US buck in one quarter of the year. The TSE is now comfortably below its lowest point in the past year. The VSE is somewhere really south... last seen near a jungle in Borneo. OK, so I am not enlightening you with this news. What if we talk about what it means to BC's surging technology sector? Perhaps this week's column will be relevant to both the folks running and those employed by technology companies in BC.

Before I ramble ahead, a warning - for the most part this is really depressing stuff. Should you feel the urge to pack up the personal possessions, head for a small cabin in the woods and write a manifesto, please leave this scribe off your mailing list.

Since Canada and BC are perceived by the rest of the world as a resource to be mined, we will not be back at US$0.70 any time soon. In fact, we should be prepared to be a US$0.60 nation. We export 40% of our GDP, while the US sends roughly 10% abroad. The US has a prosperous, captive audience for almost any product or service they create, at least for a while longer than the rest of us. And look at the rest of the world. Yikes! After Asia and Russia, Latin America is next for a meltdown, followed quickly by Eastern Europe. How did this happen so fast? Whatever happened to the long boom of prosperity?

The local media (Canada and BC) have played up the decline in the dollar as a benefit to our exporters. Absolutely true. But the ramifications of a weak dollar are far more profound over the longer term, especially to technology companies. There are many CFOs licking their chops at the overnight 10% increase in the margins of their US priced goods. For most software and biotech companies with significant US revenues, the news is doubly good, because most of their costs of goods sold are Canadian. Pay Canadian dollars for labour and materials, bring in US sales. This sounds too easy.

In the end, will any technology companies be better off? What happens when you try to recruit the US talent to BC? You can try to get them to sign the contract while sailing at sunset in Howe Sound, taking in the gorgeous mountain views. But then you have to mention what it means to be paid and taxed in Canada. That's when they snap a few photos and catch the next plane home. And a US programmer making $40,000 US in Portland will need to be paid $100,000 CDN to compensate for the exchange rate and the increase in the cost of living (more on that in a moment). It is now next to impossible to lure someone here.

Here's the interesting bit: While the Canadian exporting companies may benefit from the lower currency, the individuals that work for the company do not. All of us worker bees are now a lot poorer than we were last Christmas. We still get CDN dollars to try and buy our existing standard of living. Only problem is that all of the imports from the US and UK just got more expensive. Even the "Canadian made" stuff we buy will likely go up in price. You have now stopped reading this paragraph intently and have gone back to the part about the programmer from Portland getting paid huge bucks in BC. You are now saying, "Wait a second, that person is no better than me, how come I¹m making half of what he/she supposedly deserves?"

This is the acute problem for BC's technology companies. As our dollar plunges, the reasons for talented, mobile workers staying here and getting paid what they are getting are diminishing.

I did pay some attention in my one course in International Finance. Seems to me that there is something called Purchasing Power Parity that says that, all things being equal, all goods will be the same relative cost, regardless of currency. So, the car in Portland may cost less in US$, but after you convert to CDN, it costs exactly the same. Makes sense, right? Only, it never works. Why? Two reasons: 1) Because the currency tries to reflect the entire country¹s value, when in fact each small bit may be more or less valuable (What if we had provincial currencies?) and 2) because the wages of the people do not adjust with the currency swings resulting (in our case) in less purchasing power for the individuals. Before you run to your boss and demand a raise, though, consider this: Would you be willing to take a pay cut when the dollar rises because you can afford those imports now? Didn't think so.

I believe that, despite the good news of increased revenues in the short term, BC technology companies will become less competitive in the long term because of this currency devaluation. The "brain drain" to the US will grow and that hits tech companies hardest.

If that isn't bad enough, investment money will be harder to come by in the next while. If the stock market continues to tank, the ability to raise public money goes away. The inability to do an initial public offering means that venture investing becomes more long term than it has been recently. That means venture investors put more money into existing investments and bet less on the earlier stage companies. And who gets hurt the most when the venture capital belts are tightened? Technology companies.

Is it the end of the world? No. Will there be exciting new technology ventures and opportunities in the next few years, even if my dire predictions are true? Yes, just not as many. So what is the good news, Brent?

Hopefully the economic woes will be corrected quickly. It seems everything else in the world has sped up, so why not have a mini-recession and then get on with the prosperity again? As for solutions to the current currency crunch on technology employees: Perhaps companies should start thinking about paying employees in US dollars, kind of like the NHL. Sure, it negates any gains made on the revenue side, but it beats having an empty shop.

Actually, I'm getting kind of sick of all of this currency calculating. Why don't we just punt the Canadian currency altogether? Have a one-time exchange of 1.5 loonies for every US dollar and become a "distinct society" within the US, with special powers, unique culture... but I digress.

Random Thoughts

Head on over to http://www.homefair.com and try their salary adjustment calculator for a move to any city in the U.S. You¹ll see that the equivalent US$ you need to make to have the same standard of living are far less. The exchange rate they are using is from May 8th (1.45), which means it's 10% less than that today. My example is this: Average salary for a software programmer in Bellevue, WA is $52,000 US. According to the salary adjustment calculator and then factoring in the new exchange rate, the same standard of living in Vancouver means you should be getting $99,000 US or $158,000 CDN. While this seems a little ridiculous, you should bear in mind the site is merely showing the percentage difference in the cost of living between any two places. It¹s probably plus or minus 10% from actual. And it does not factor in taxes or the lifestyle issues. But it is interesting, 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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