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Software Everywhere
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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


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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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