August 30th, 2001
If it keeps on raining,
Levee's going to break...
Crying won't help you,
Praying won't do you no good.
When the levee breaks,
Mama you got to move "–
Led Zeppelin, When
The Levee Breaks
year ago, I was a bit unpopular with my predictions for
where technology markets and venture capital investments
were headed. (A
Chill In The Air) I pointed out that we were headed
for a 6 month bear market in early stage investing. I
received direct and indirect feedback that I was merely
telling the US or Silicon Valley side of the story and
that Canada was in much better shape, thank you very
much. Well, I was dead wrong. It was 12 months, not six.
I wasn't pessimistic enough it turns out. After the doom
and gloom from last year, I'm happy to say we can start
to see light for the early stage entrepreneur, in both
Canada and the US. Maybe.
me take you through some indicators and predictions by
others in the economy and the technology markets to
understand why I think the next four months will be the
bellwether for what direction we go in 2002.
summer was an interesting pause in the technology world.
Bad news continued to pour in and indicators like the
NASDAQ dropped 14% from June 1st to now. But after the
first 6 months of 2001, we kind of expected the news to
continue. Next week, fresh from many long vacations,
venture investors, analysts and investment bankers will
do some serious navel gazing and start to indicate to
the world whether we are going to climb out or recede
even further into the abyss. The big enterprise buyers
of IT and communications also are returning from their
vacations and planning for the next 6 months. Will they
buy? If so, what will they buy? The entrepreneurs, who
did not have a summer vacation, are nearly helpless in
their struggle to keep their companies alive. They also
wait to see what will happen from the investor side and
from the customer side.
start with my favourite topic, venture capital. In
Canada, the Q2 investment numbers were slightly higher
than Q1 (CDN$1.12B to CDN$1.38B). While this was
celebrated as a feat by the Canadian VC crowd,
considering that the US numbers were down from Q1 to Q2
(US$10.4B to US$8.2B (PwC Money Tree)), there is more to
the story. Despite the increase in total dollars in
Canada, the actual number of financings dropped 23% from
March to June. More money went into less deals. This
jibes with another stat from Canada in the first six
months of the year: 68% of the money invested went into
existing companies. Two trends can be confirmed with
these numbers: 1) VCs are being more selective and 2)
VCs spent early 2001 shoring up existing investments
because other VCs are more reluctant to do new deals.
stat that is impossible to find, because VCs and
companies keep the valuations secret, is the decline in
value of the deals. Here are some breathtaking examples:
· Ottawa communications company with initial beta
customers and over 100 employees starts raising money in
November 2000 at US$140M valuation and receives
investment at US$30M valuation in July 2001
· Vancouver technology firm raises significant initial
investment at a low enough valuation that allows the
investor to own more than 50% of the company right out
of the gate (not typically done by VCs, who want to keep
owners and founders motivated)
· Ottawa photonics firm with over US$30M invested
already into the company starts at over US$100M
valuation and now looking at US$20M valuation to get
each case, the company is accepting harsh terms and low
valuations in order to stay alive. These companies are
regarded as success stories because there are many, many
more stories of companies that can't get money at any
price and are failing. The new term out of the Silicon
Valley is the "A Prime" deal. In the
vernacular of the Valley VC, companies go through rounds
of investment (seed, series A, Series B, etc.) on their
way to the golden IPO. With the dramatic downturn of the
last 16 months, companies that raised money at high
valuations then, are raising at much lower valuations
now. No one is immune… it is happening in every sector
in every geography. The VCs with deep pockets are
starting to look at existing companies with full
management teams and customers, raising their third,
fourth or fifth round of funding (Series C, D, E) at
Series A valuations. These are A Prime deals. In fact, a
Vancouver company, Convedia (formerly Starvision), was
cited as an A Prime deal that David Ladd of Mayfield
Fund in the Silicon Valley wants to do (He announced it
to Venture Wire last week). The Burnaby company was a
complete re-start a year ago and would do well to get
Mayfield behind them. But at what price?
what happens next in VC land? Anecdotally, I have seen
some amazing early stage opportunities to invest in
brand new BC companies without the legacy and baggage of
previous investments. For our point of view, we see some
of these deals happening before the end of the year.
From conversations with Ottawa VCs and US VCs, the
sentiment is the same. The house-cleaning of existing
companies is nearly over and it's time to move on to the
new deals again. I think that the Q3 numbers in Canada
and the US will trend down, mainly because activity was
low in the summer. The Q4 numbers will be telling. Will
investments pick up? And in what sectors?
in early stage companies, whether they are A-Prime or
just A, means that there is some faith in the market
growth of the sector that the entrepreneur is after.
Over-investment in sectors has been a problem never seen
before in North America because there is so much VC
money in the US to be invested. So, will the market
grow? If so, am I betting on the 15th entrant into that
market or the 1st? These are the two main questions that
VCs will look at in executive summaries and business
plans today and for a long time coming.
software is a good sector to use as an example because
there is so much activity here in Vancouver. I have seen
a dozen wireless software companies with interesting
technology and good to great technology teams in the
past 3 months. This is the fantastic legacy of the
anchor companies (MDI/Motorola, MDSI, Sierra Wireless,
Glenayre) that spin out expertise and innovation
nowadays. The problem is that the market is crowded,
crowded, crowded. Ask Infowave, eDispatch or Soft
Tracks, three companies that benefited from the initial
wave of investment and hype to raise money and build
wireless apps/solutions, whether they have met or
exceeded sales plans for 2001. All three companies have
incredible technology and superb technical teams. But
the customers are not buying, at least not in droves.
What is the current crop of start-ups seeing in the
space that we are not? 3G has been a bust to date. WAP
is a disaster. The hype has died down. The companies
that I am excited about in this space are looking at the
market today and building/selling apps or services that
work on today's network and customers are making orders.
They are carving out new niches and becoming leaders in
them. My biggest worry is what other investors are
thinking. I can't support these companies with our fund
alone. We need to attract more capital now and down the
road. If the sector is perceived to be crowded, it will
be very hard to raise money to lead the pack.
the general tech sector and big public companies, there
is no hope of recovery in 2001. Write it off, folks.
Continued bad news in the third quarter will spill into
the November company reporting times (notice I didn't
say "earnings", because there are none). I
have heard about a pipeline of promising IPOs set to
file at the first sniff of a market uptick. In late
August 1998, the mood was miserable at the peak of the
Asian crisis. On September 24th 1998, a daring attempt
at an IPO was done. And it flew. eBay started the mad
rush that we all now know about. Will there be an eBay
in 2001? I doubt it. In reality it will be 2002 before
we see some return to optimism and hope.
the companies that buy the goods that fuel the
communications and IT sectors are the real wild card.
Will spending increase? Many companies in the "old
economy" are re-tooling in the downturn in order to
be more efficient and more profitable. IT efficiency
gains have been proven. Outsourcing non-key IT tasks is
just starting to boom. This is where I will be watching
with the keen interest to see if we really will start up
again in 2002. What are the buyers actually doing with
their wallets? Any sign of confidence will translate
into profits and then into recovery. Any lack of
confidence, compounded on top of all that already ails
the tech sector and we might be years away from
optimism. One disturbing fact from a survey representing
the 11 million small businesses in the US (<500
employees) was that 33% of them described themselves in
"survival mode" when asked how they see
themselves and given 4 choices (survival mode being the
most pessimistic). Let's say that half of them don't
make it... that's 1.5 million businesses gone and all
their spending with it. Ouch.
1. VCs are moving from shoring up existing companies to
looking at new deals again. The bottom of the trough in
investments may be at hand. But they will watch the
general tech market for indications of optimism before
pouring open the wallets again.
2. The technology public market companies will be in the
doldrums until at least early 2002. IPOs will remain a
3. The wild card is the spending of enterprises over the
next 4 months on communications and IT. If they stay
active and ramp spending, even slightly, the picture
gets brighter all around for 2002. If not, Yikes!
stage companies should remain in "survival
mode" for the time being in order to be around in
early 2002. Am I being too pessimistic? Or not enough?
What are your thoughts?
From Last Time -
Great article today. Like you, I am a true believer in
process. The only way from here to there is process,
process, process. If you haven't read "Strategic
Selling" by Miller and Heiman I strongly recommend
it. This is the bible: Process as applied to selling.
My favourite quote:
"We interviewed literally hundreds of prospective
sales representatives... Not one in a hundred of our
candidates was able to identify the real reason for his
or her success. They talked about luck, connections, or
hard work as the essential ingredients. Only a tiny
fraction understood that it was they way they went about
their work -- what we call their methodology or process
-- that was the real clue to why they did well."
Love the process!
I get a lot of eye rolling from
founders when it comes to process. It sounds too MBAish
for many technoids. The reality is that the best
execution of a plan only comes after proper processes to
ensure execution are put in place. Thanks for the book
referral and the quote.
I was pleased to read your comments regarding the need
to view funding of early stage companies in a different
light than the "government handouts" that are
recently under scrutiny in our fair province. For some
years I have been involved as a volunteer peer reviewer
for Science Council of BC. Although I don't speak for
SCBC, I can attest to the fact that our review process,
and all the regular reviewers are apolitical. The
subject of politics doesn't even make it to the radar
screen. We base our support on whether the proposal has
technical merit and innovation, a sound business and
technical plan, and a strong likelihood of success.
Most of the applicants we see are bright, hard working
entrepreneurs with very little if any financial backing.
As you point out, they are way too early in their
development to attract private sector financing.
Consequently, many of these R&D ventures are
supported by sweat equity or by borrowing from family
members and re-mortgaging the house. In my experience,
if an applicant is an established company that is merely
looking for a government handout, they are very quickly
removed from consideration.
In light of the numerous success stories that have
emerged from SCBC programs, this type of government
funding should be recognized as an investment in a
nascent technology industry - not a handout. Far from
just dispensing funds, SCBC staff and volunteers work
with our clients prior to and during the funding period
to refine their plans and help them to meet their
objectives. We make the investment of dollars and time
to ensure that new technology ventures remain in BC and
hopefully develop into viable companies. Perhaps that is
one of the reasons we have a small, but healthy and
growing BC technology industry today.
The latest that I have heard is that
SCBC is OK. It does fill a rel need where other don't
play. In fact, there should be more money ear-marked for
proper, peer-reviewed (and VC reviewed) technology
commercialization. Then they should spend even more on
educating and training people for the commercialization
and selling process. Thanks for the very thoughtful
Great article Brent!
Many people I run into in business know they want/need a
website but then do not know what to do with it once
it's built. They do not know how to promote their
business through it, or use it as a way to change and
improve their business operations.
I enjoy your column, keep writing!
Thanks and I will. Perhaps this is why
success in business is hard to achieve. You don't have
to be Einstein, you just have to be prepared to do the
work. If you cut corners or make too many assumptions,
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
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