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Something Ventured:
August 6th

Insight For BC Technology Entrepreneurs

Brent Holliday

Summer Better Than Others

"What goes up,
Must come down,
Spinnin' wheel,
Got to go round."
- Blood, Sweat and Tears – Spinning Wheel

Summer is usually a time for reflection.  Before he handed the day-to-day reins to Steve Ballmer, Bill Gates used to take a couple of weeks of summer time to kick back, relax and strategize.  Depending on your point of view, he was either a) reading someone’s business plan and taking notes on how to “embrace and extend” them out of the market OR b) setting the course for our collective technology road ahead… (the smart kids picked a).

Summer is also hot.  Except in Vancouver.  In fact, the only thing hot in Vancouver this summer has been Haus.  But, I wrote about that last time. 

So, while reflecting in the heat (in Toronto, not Vancouver), I have come up with a few random thoughts on the events that affect our lives in BC technology circles this summer.  It is also an excuse to write a shorter column, with little preparation, from a crappy, borrowed computer with a 28.8 modem, while away from home.

In no particular order,

1) Hot IPOs? – Mike Volker, my partner columnist, will no   doubt write about the Pivotal and Creo IPOs on the NASDAQ over the past 7 days.  Suffice to say that Creo exceeded expectation and Pivotal wilted below expectation.  The Creo opening (up 48% on the first day) was as lofty as a few recent Net IPOs.  It was quite amazing when you consider the NASDAQ was in the middle of an official correction.  I think Pivotal is a victim of bad timing.  Its competitor, Onyx (ONXS:NASDAQ), went public in March of this year at the peak of market hysteria and jumped 50% on its opening day.  But it is now trading below its IPO price.  Combine that company’s stock performance with a dismal market over the past two weeks and you have a recipe for a flat opening.

Only two months ago, Sierra Wireless opened trading on the TSE.  It was also flat.  Then it dropped like a stone, only to come back near its IPO price with an outstanding quarterly performance.  This is a very solid company that has zero visibility to the US market.  Sorry to say, but the TSE is a farmer’s market in the world of Wall Street.  Did you know that Tuesday July 7th, Sierra Wireless traded zero shares in eight hours of trading?  None.  Nada.  Today, Pivotal traded 2.7M shares (granted, it was an opening day and the average volume will be lower), Creo did 360,000 shares and PMC-Sierra traded 1.6M shares all on the Nasdaq.  Now that’s liquidity!

I believe that all of these companies are on the track to bigger and better success.  And that helps all of us.

2) Cooling Markets? – I don’t need to tell you that the Net stocks have been battered recently.  The broader markets have cooled, as well.  Call it the summer doldrums… call it whatever you want.  I read today that there are 100 Net IPOs in registration, yet to hit the market.  You will start seeing the postponements in the next few days.  Like déjà vu all over again, last August/September we saw a big correction and a whole slate of cancelled IPOs.  One lonely company braved the waters in late September.  That was eBay.  That’s when this whole silly season got started.

Along the technology company equity financing food chain, there are angels, VCs, mezzanine players or strategic partners and finally the public markets.  This is a very well-connected chain.  Shake it at the public market end and watch the ripples spread quickly down to the other end.  VC’s have been accused of travelling in herds, which they do, but the real reason for pouring money into a particular industry segment is because at the end of the day, the public market is buying.  A valley VC told me in May that when the ducks are quacking, you feed them (meaning that if the public markets are paying, take the companies public).  That’s great, if you have a pipeline of companies that you already invested in that are in the hot segment.  The real trick for VC’s (and entrepreneurs) is to predict a couple of years ahead what the hot segments will be.  That ain’t easy.

The most recent quarter, ending June 30, showed a massive increase in VC funding of technology companies in the US.  The $8.7 billion invested in the quarter is more than half of what was invested in all of 1998!  Guess which segment received the most money?  The dotcoms.  Well, gosh, if the market keeps crashing and all those Net IPOs get postponed, then the segment that just received the most money may not be hot.  Then what?  If these fledgling companies with no hope of profitability (because they need to achieve market share) can’t access the hordes of public money, how will they survive?  It’s not as simple as saying that “They won’t.”  Sure, there will be consolidation and a few will crash and burn.  When the IPO well runs dry, the private financiers must pick up the slack.  There is a ton of money out there today being invested in early stage companies.  It won’t dry up immediately.

If the market stays cool until the end of the year, you will see a slowdown in new venture financings.  There is no doubt about that.  It might be time for the VC’s pouring money down the dotcom drain to consider what might be hot in a couple of years.  Wireless data?  Post Y2K service companies?  Bioinformatics?  Business to business e-commerce?  Dare we say, interactive content?

3) Makes Me Hot Under The Collar – Government that is out of touch with reality. Can you believe the arrogance of Chretien last week?  In response to a question about lowering taxes to stem the brain drain (which he has concluded does not exist) he says that if we don’t like it, we should leave.  Yeah, and that’s exactly what the captain of the Titanic said when the boat was listing to one side.  What an ass!  Then he tells us the next week that if we want to stay then he would be happy to lead us through a third mandate.  His first term was great.  His second is mediocre.  A third would be a disaster.  This is not a man that will help change Canada into a global technology player.  No way.

He (along with a growing chorus of Ottawa people) says that lowering taxes will not help productivity and will only hurt health and education.  Let’s see, Mike Harris cut taxes and Toronto now has a .9% residential vacancy rate and health and education don’t seem to have suffered.  Ask Quebecers what their high health tax bill has gotten them recently.  Well, Jean, if you don’t want broad tax cuts, then how about getting a little creative for the technology sector.  Here’s one from California that I bet you haven’t heard of:  Any taxes for personal capital gains made through investment (or holdings) in private companies (when they are bought or go public) can be deferred indefinitely if the gain is reinvested by calendar year end.  What does this do for technology?  Angel investors can defer capital gains taxes by investing their money back into new companies.  So, let’s say the new multi-millionaires at Creo or HotHaus want to avoid paying tax on their gains for a few years.  Instead of putting it in some off-shore tax avoidance scheme, they can put some of it into new emerging companies.  This has the huge circular effect in California of putting money back to work in growing new companies.  Since most of the gains in California are by technology entrepreneurs, they become sophisticated value add investors for these new companies.

28.8 is no longer the speed limit for the Net.  Some sites don’t even work at this godforsaken speed.  Give me back my cable modem…

That’s all from the weary traveller. I will be back in a couple of weeks with a full-length feature and responses from my last column on HotHaus.


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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