Something
Ventured:
December 7th, 2001
By Brent
Holliday
Greenstone
Venture Partners
"Got
a different way a walkin'
I got a different kind of smile
I got a different way a talkin'
Drives the women kind of wild "
- Randy Newman, I'm
Different
{My
last
column (on policy ideas for stimulating the
technology industry further) garnered a flood of e-mail
responses. Some of these letters and my responses are
below today's column.}
A
good venture capitalist is a technology marketing
person's worst nightmare. Imagine the frustration when a
marketing person's sweat and tears to create cleverly
and carefully positioned company and/or product are
immediately and unceremoniously pigeon-holed by a
hand-waving VC. Every executive summary or business plan
contains some effort by the company to make their
company/product unique in the face of competition. In
order to immediately figure out if the opportunity is
worth pursuing, a VC peels away the marketing spin and
tries to lump the company/product in with others.
Exactly the opposite to what the marketing objective
was.
Of
course, this is merely quick filtering and it is
terribly frustrating to the entrepreneur because the VC
will immediately discard the idea if it is in a
"busy" space. The situation is most prevalent
in software applications. In other categories (see, I'm
a VC and I love categories) of technology, intellectual
property plays a more fundamental role in the uniqueness
of an idea and patents help show that the idea is
original. While there are patents in software
applications, the truth is that software apps are
eminently easy to duplicate. This means that the
software entrepreneur's job is much harder when it comes
to convincing an investor that their idea today will be
Pivotal or Crystal Decisions tomorrow.
There
are areas of software that are esoteric or arcane or
even ground breaking, but they are not usually
applications. They are embedded software, protocol
stacks, algorithms and new languages, for example. In
and of themselves some of these inventions can create
big companies, while others are important parts of
hardware solutions. But they are not applications. What
I am talking about are enterprise or consumer
applications written using an abstracted software
language to help make people more productive, more
educated or less bored (games, etc.). This is still the
largest area of activity in investment in early stage
companies when you include enterprise software, Internet
apps (web services or xSPs), wireless software apps and
e-Learning/new media.
Getting
back to my original point, if software apps are not
differentiated on intellectual property, then how are
they unique? If this is the largest investment area for
VCs, then how do they make decisions to invest when any
of these applications are fairly simple to duplicate?
You
might think by my comments that I don't think software
application companies are a good investment at the early
stage. Actually I like the vast sea of possibilities for
software applications because of the ubiquity of
computing devices in our world today. The investment
decision process for a software application company is
one that weighs management capabilities much higher than
other intellectual property companies in the early
stage. Why? Execution is everything in determining the
success of a software app.
Identifying
The Value Proposition - Before anyone writes a line of
code, the idea needs to spring from inspiration. Most
software applications come from identification of pain
and a way to solve that pain with software. It takes
real expertise and experience to identify a problem
that, when solved, people will actually pay money to
you.
Development
- Well written, clean code using today's best practices
in software development is fundamental. Proper
architecture to allow scalability, code re-use and other
methods of lowering the cost of future generations of
the original code is also fundamental. I'll say it
again: Anyone can duplicate the functionality of a
software app. One of the key advantages of a company
making software apps is their execution of a better
development plan to end up with more robust foundations
underneath the end-user functionality.
Quality
- Often overlooked as a key advantage in a software
company, creating bug free code saves development and
configuration costs down the road. The days of
"ship it, then fix it" are dying as customers
quickly tire of upgrades, patches and delays in using
the product. QA (Quality Assurance) departments are the
airport security personnel of the software industry.
They are low wage earners that get no credit when
everything goes well and crapped on when things go
wrong. Effective QA can be the difference in the market.
Market
Positioning - Aha! Remember the clever positioning of
the product and the company that was shredded by the VC?
It is actually a very important art form and certainly
critical in the early success of a software application
firm. You have to create your own category and own it.
When you have 30 seconds in the CIO's office of your
customer, you need to deliver a concise set of messages
that explains the value proposition and separates you
from the other companies. Clear and simple is key. Too
many adjectives and superlatives trigger the bullshit
detectors.
Distribution
and Partnering - The executive of the early stage
software firm has to identify, pitch and close on key
partners that allow your application to get to the end
user. Sometimes its pure resellers and other times its
through integrated solutions with other companies or
service providers. This is easy for a smart person to
research and plan. Many an MBA can identify who you
should go to market with and why. The really hard part
is execution. Actually getting the deal done. The
experience factor here is tantamount to an investment by
A VC these days.
Software
applications are usually developed as solutions for a
particular pain in a particular industry. This
verticalization approach makes a lot of sense in the
world today because the customer needs software that
helps them "out of the box". Long
customization cycles are not ideal and some of these
vertical application companies will tell you about
business that they received because they had a product
with built in domain knowledge that won over larger well
known competitors that needed excessive customization to
work for that industry. In a world of tighter IT
budgets, a quicker ROI after buying your product usually
means a sale.
From
a VC point of view, vertical applications make a lot of
sense from a business case, but might not from and
investment perspective. If the VC wants big returns (and
they all do), then a killer software app for the
vertical blind industry may not make the cut. It might
not be big enough to eventually go public and it might
become a great cash generator but has no exit because no
other company would want to buy it. Having said that,
there are many verticals that are definitely large
enough and a popular theory is that once one vertical is
doing well for the company, they will branch out to
other verticals. I have rarely seen that happen in
practice.
An
early stage software company that has a horizontal
(customers across many industries) app must be out front
in a new category of software if it has a chance to grow
big. For example, Pivotal capitalized on the trend that
moved sales force software to key enterprise management
software and the category became customer relationship
software. The key is to be smart and lucky to be in
front of a larger trend and make sure that your
company's execution makes you the leader or a close
second as the market gains acceptance. Geoffery Moore
wrote Crossing the Chasm about technology companies in
general, but his theory is most accurate in the
horizontal software application space. Today, I see many
wireless application companies vying to be leaders in
what appears to be a large trend in mobile computing. It
is a busy space if you are focusing on a horizontal
application like access to corporate data. With 100
early stage companies doing some form of this
functionality you can see why a VC will be skeptical if
the layers of the marketing onion peel away to reveal
yet another company in this space.
Look
at the public companies in software today. They are
either horizontal platforms (Pivotal, Cognos, SAP) or
they are selling into a very large vertical industry
(ALI, for example). This is what the VCs watch. That is
why they try to categorize the companies that they see
in software applications and figure out what the end
game might be. If the vertical is too small, they won't
see the returns. If the company has a horizontal app,
they must be out in front of a big trend. In either
case, in fact in any case, success is not based on the
category but rather the ability to execute in
development, sales and marketing in order to win
business and create a lasting advantage. If the VC likes
the category, they still need to see a winning team in
order to even consider an investment in the software
application game.
Letters From Last Time:
I have just read your above mentioned article and agree
with you whole heartedly. But I disagree with your
statement, "We have built an impressive industry
here during a time when the government was not only NOT
helping, but was actually hindering the progress of the
industry. Imagine what we can do with a gang that will
stand shoulder to shoulder with us! Clearly, the BC
Liberals want to help". The reason I disagree with
this statement is because the Liberal government,
specifically, Minister Bond and Minister Collins, are
currently deciding whether or not to shut down Canada's
only high-tech University. I am a student at TechBC (www.techbc.ca),
BC's and Canada's only high-tech university. If the
Liberals do decide to shut down our school (as they have
been mentioning) I would have to say that the Liberals
are not interested in supporting the technology industry
of BC or Canada. Granted, TechBC has yet to produce any
graduates yet but from the rave reviews our second and
third year students have received I can imagine the
positive response from the BC technology industry once
our graduates are ready for work in April 2003.
Having worked in the technology industry several years
myself I realized that in order to move up within these
companies I needed more skills and education. So I
choose to attend TechBC. Currently I work for Shaw Cable
and my managers are excited for me to acquire the
education TechBC will provide me with so that I can be a
further asset to the company. Having spoken to many of
my peers about the pending fate of the school, most of
them agree they will leave BC and attend other schools
and get jobs elsewhere should TechBC be shut down. I
would wager that the BC Technology industry would not be
happy to see this happen.
I would like to invite you to have a look at TechBC and
encourage you and the BC Technology industry to not
allow the Liberals to shut down a valuable source of
workers for this field. Please feel free to attend our
open house on November 29th from 5:30pm - 8:30pm. More
information can be found here: www.techbc.ca/openhouse.phtml.
Thanks,
Crystal Lagerbom
Crystal: Your e-mail inspired me to
follow this further and I spoke with some of the
officials at your university. There was also a Vancouver
Sun article this week on the plight of the new school.
It appears that the Liberals have their heads down and
scissors out everywhere. For the most part they are
cutting excessive spending. My guess is that they looked
at a number of $59,000 public funding per full time
student at TechBC and the $12,500 equivalent at other
universities and colleges and said "kill it".
A very interesting story has emerged about that
full-loaded number of $59,000. First of all, in your
third year of operation, you only have 440 students
(plans to be 2,000 in two more years). Anyone knows that
a start-up has more expenses per employee than a company
20 years old. Secondly, they are loading in a cost of
your temporary lease at the current site (while your
permanent facility is being finished) and the capital
costs of creating your new site. I'm sure that the
$12,500 number for other institutions does not include
the sunk cost of their buildings and land. Thirdly, they
are failing to recognize the most important cost factor
of a technology university that is using technology
itself to deliver education. Up front costs are higher
than traditional education (computers, servers, software
licenses) but down the road it will be 1/3 the cost as
distance and time-shifted learning cost savings start to
take hold.
I will not argue the merits of the skills being taught
at TechBC over any other institution because they are
all important. The new approach to learning and the
importance of your facility to Surrey and the Fraser
Valley should be considerations, however. But when the
cost-cutting government is not comparing apples to
apples on cost, I get two possible conclusions: 1) They
are making a mistake and need to be corrected or 2)
There is another hidden agenda and the cost argument is
a smokescreen. Either way, the loss of TechBC before it
gets a chance to fully implement its program would be a
tragedy.
Brent,
For
your info, check out the online petition that has been
started on behalf of TechBC: www.petitiononline.com/techbc/petition.html
Last I checked, there had been 1,000 unique signatures.
And it only started a couple of days ago.
Would be great if you could make your readers aware of
it.
Cheers,
Bob De Wit
Thanks
Bob. I signed on. I realize that the government is
proposing to put the existing students and their
programs into other institutions, but the fact is that
the teaching methodology is a bit radical for the ivory
towers and the educational experience will be altered
dramatically. By the way, all of this controversy is a
self-fulfilling prophecy for the government: The
uncertainty will force down your enrollment numbers for
next year and then they will say, "Aha! You don't
have the students to justify your future." Aaaaargh.
Dear
Brent,
Here are some thoughts from an entrepreneur who has yet
to launch and unlikely to do so in this current economy.
1) Provide tax incentives to Law firms to reduce costs
for Incorporation, annual filings etc for start-ups that
need to incorporate provincially and federally. Amazing
how those fees add up! (Lawyers have no idea that legal
issues can eat up a huge chunk of Love/Angel money)
2) Assist with reducing accounting costs and required
paperwork for year end accounting and tax filings
3) Assist with access to information on how to set up
various BC and Federal tax accounts i.e. GST and other
numbers.
4) Ensure that pertinent information is automatically
sent to a company when it incorporates. (Our company did
not realise that we couldn't claim GST inputs from the
time of incorporation but only when one had had obtained
a GST number.
5) Same thing for required employee filings for UI etc.
Took us several weeks, with many false starts with the
Federal tax department sending us the incorrect
documents. Then, when we were late in filing and
submitting the appropriate taxes they charged a fine and
no amount of explanation would change their position!
I recognise that some of these are Federal matters but
do hope that you can be a strong conduit and advocate to
the appropriate folks.
Even with the knowledge gained through running an
existing company for 24 years some of the above points
proved very frustrating in setting up a new company.
As we in Vancouver are somewhat removed from the centre
of things, our team knew that we offered a different
business model from some of our New York based
competition who focused solely on the US or their small
area of the universe. We offer cost cutting and
efficiency benefits especially to companies outside the
main centers using the capabilities of the Internet.
The biggest regret I have is that it slowly became
apparent that I was wasting time trying to raise money
in BC. An ecommerce company with a business model and
not a software application, not a piece of hardware nor
a new technology developed from an engineering base, is
unlikely to be successful in this BC venture capital
market even in the best of times. Lessons learned the
hard way! (It took a supportive senior analyst with one
of the forward-looking venture capital groups to admit
to it.)
It will wait for another day to see if we can launch our
company, if not, I trust the above might save money,
frustration and time for some other entrepreneur thanks
to your contacts within the various governments.
Keep up the great columns. They are always so
stimulating and refreshing!
Virginia A Richards
Virginia:
I like the overall sentiment of greasing the wheels to
get a company started quicker. As for giving lawyers
more money... ummm. Actually all service providers and
expertise needed for a start-up tend to avoid the
nascent companies because they don't have money.
Incubators have tried (and largely failed) to package a
facility and set of partners that set companies up
painlessly, letting the entrepreneurs focus on their
technology. Perhaps the cost and time of incorporating
and setting up a company structure is a bit of a
"bozo" filter that keeps people that really
aren't committed to starting a real business from doing
so. If it was too easy and cheap, then we might have a
lot of companies with less than fully committed founders
just gumming up the system for an entrepreneur like
yourself that is committed.
In terms of the government making it easier and more
accessible to file GST and EI etc., that is exactly what
Brian Tobin's group should be funding instead of the
fiber to everyone's home idea that is about to get
killed anyway. Government should be automating these
services through the web and make it easier for
everyone.
I
liked your article. I think that this committee needs to
include companies that have conquered your
"tenets" on their own so that the government
can facilitate something more natural - a team building
approach with 20 or so companies that fit this profile.
I know another issue for technologies is getting
Measurement Canada approval - which forces us to look
outside of Canada to sell (a good thing), but does make
selling difficult and requires a lot of resources to
overcome this barrier.
My company in particular would be a good resource. As a
small Van. based company, NxtPhase acquired a division
of Honeywell, has secured over $35m in USD for
financing, acquired another Cdn company, is dealing with
Measurement Canada to get approval (ultimately making it
possible for other technologies to succeed in Canada).
And is recognized in North America as a technology
leader in high voltage optical digital technology.
NxtPhase has been incredible in its ability to secure
world-wide experts in the development of our technology
without government support.
My only concern about the technology sector is the
culture that is being created, and who it caters to. For
me, the underlying drive for technology advancement
comes in the theme that fosters "union",
"collaboration", "cooperation", and
I would even go so far as to say that this theme is more
productive, efficient and successful than competition.
Consider Sept 11...although this awful tragedy was
awesome, the collaborative support far exceeds that of
any competition. The ability to respect and understand
differences mobilize and power companies on their
strengths, ultimately making companies more efficient,
productive, happier, etc. A sixth tenet should include
collaboration by businesses and government to support
this endeavor - and draw on the expertise we have here
in Vancouver. Build the team, and they will come!
Thanks,
Tara Kowalski
Tara:
Thanks for the letter. I am familiar with NxtPhase,
having been in the room when David Green and Richard
McKellar pitched the Western Seed Investment Fund on the
original plan and received funding. As for taking a
group of the successful companies and giving them
resources and attention to make them the cornerstone of
BC's tech community (which is what I think you were
suggesting), I agree. Any policies developed need to
help the largest of our companies get even larger, but
at the same time equal billing needs to be given to the
process of fostering the next 20 biggest companies, some
of which have not even started yet.
Brent
Holliday
Your e-column on what's needed to bolster high tech in
BC was spot on. Its good to hear that your message was
at least stated to some of the powers that be. A
suggestion - submit the column to the Sun's op-ed page
editor, a little marketing helps out when selling ideas
as well as software, as you are obviously aware with
your e-column and Business in Vancouver musings.
Derek De Biasio
Derek:
Thanks for the idea. When I get a microsecond these
days, I might do just that.
Brent:
Thanks for the plug for ASI contained in your column. It
is nice to know that at least one person was listening
when I gave my pitch!
Just points of clarification that differentiates us from
Science Council which you might want to include this in
a future article.
1) ASI is not a government agency like the Science
Council which allows us leeway that they may not have.
2) Funding for our early stage investment program comes
from ASI moneys resulting from divestment not the
Government (SC receives their Tech BC $ from the
Government)
3) All ASI early stage investments are repayable unlike
SC who provides their $ as grants. ASI repayment $ are
reinvested in more startups (see 2).
4) ASI is actively looking for private and public sector
for our Germination Funds to support/enlarge our invest
program.
Brent J. Sauder
Executive Director
BC Advanced Systems Institute
Brent:
Thanks for the clarifications. I'm not sure that the
government will increase spending anywhere. My points
were more to the continued support of Science Council
and groups like ASI. If the support of SC is money at
current levels, then keep it going. If support for ASI
is in other forms, like promotion and recognition, then
any bit helps.
Hi
Brent:
Since I was the creator of the UBC UILO and one of the
founding fathers of the BC Technology Industry I was
most impressed with your very original, entrepreneurial
ideas published in the above article. I clearly would
like to respond to some of your excellent ideas and tell
how, we at WestLink, are doing our part to address at
least a couple of the issues you have so ably put on the
table.
For a start, I will ask Sandra Volume, the WestLink
Communications person to forward you a summary of
Westlink's activity and in particular details about of
Technology Internship Program. This program places 20
Interns across Western Canada for three-eight month
placements each in a technology company, a technology
transfer office and a VC company. WestLink pays 50 % of
salary and benfits and out partners pay the other 50 %.
We are just coming up to the end of the first eight
month placement the end of December. This program is our
attempt to help deal with the technology managers issue.
Sincerely, Jim Murray
Jim:
Thank you for having Sandra forward the information on
Westlink. I include the URL here for others reading this
to learn more about the program: http://www.westlink.ca/internship
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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