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Lies, Damn Lies and Industry Data
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
February 7th, 2003


By Brent Holliday
Greenstone Venture Partners

 

"When everything is goin' wrong
Don't worry, it won't last for long
Yeah, it's all gonna come around...
Up, up, up
Can only go up from here" - Shania Twain, Up!

How healthy is our early stage technology industry in BC? Hey, the overall technology market stinks, has stunk for two years and will stink for at least one more year. The evidence of a seemingly un-healthy industry is piled around us in laid off tech workers, dirt cheap technology space in Yaletown, Burnaby and Richmond, depressed stock prices and lack of profits and positive cash flow. Stock prices aren't the only things in need of Prozac in our industry.

A few years ago, I argued in this column that our local industry was in some danger. A healthy industry would look like a pyramid with a few big successful companies at the top and a few more companies just reaching profitability and success in the middle and a whole lot of early stage companies at the bottom freshly funded and looking to grow. Over time the pyramid doesn't lose its shape because many early stage companies don't make it and some of the nearly successful ones go off the road. What I argued back then was that we had our successful companies and a lot of early stage funded companies but that the middle was rather thin. So, we weren't a pyramid as much as a pole with a really wide base. This, I argued, would not bode well for a downturn in the economy (killing the little guys) and for the near future as there would be fewer new successes to a) promote and b) harvest returns from for the investors. I also said that without the thicker middle section of cash generating tech companies of more than 25 - 50 people, the services that augment the tech sector locally would not mature because the early stage guys don't pay well and the big successful ones use service from around the world.

I confess that my comments and conclusions back then were based on observations and anecdotal evidence. In thinking about the state of health of our industry today, I started to search for data to see how we are doing. We have overall employment data, CEO surveys and financing data. We have pieces of data from more general economic overviews of the region. We don't have a consistent, living database of the industry that can tell us how we are doing. Think of a set of financial statements and other metrics that are constantly updated to see where we are. Wouldn't that be nice? The BCTIA has tried to address this void with its report cards, but it is probably too expensive and onerous to keep it up to date. Not to mention the fact that an organization promoting the industry would be biased in its data interpretation. Does anyone know how many technology companies there are, what size they are, how many they employ and is this all tracked year to year to see the trends? The answer is "yes…but" because we have such varied definitions of what technology is that the data is not helpful other than to make generalizations. For instance, can anyone tell us how many new e-commerce companies were created in 1997-2000 and how many are still in business today? Same for life sciences? How many technology companies used the public capital pools or RTOs to raise money in 1999? Have they been tracked through today to see how they are doing? How many fuel cell companies are there in BC? Why isn't this easy to find out?

One of the best ways to count companies in a sector is to see who signed up for an industry group, but you won't catch everyone in every sector if they choose not to pay their membership dues. WinBC has the best list and description of the wireless industry, but it is tough to keep it up to date. Ask the PwC folks putting out the updated BC TechMap in a few weeks just how much fun it was getting the data and how many people they had to talk to in order to complete the project. My guess is that they will have missed 5-10% of technology companies past and present. The really good news is that new companies pop up all the time. A pain for PwC, but good for our industry.

So how can we see how well we are doing if the data is not readily available? Well, instead of further whining about it, I did my own number crunching.

Capital invested in early stage companies has two direct benefits if the system is working: 1) building companies that grow over time (and employ people with all the spin-off benefits to the economy) and 2) reward the investors who take the risk with compensation that matches the risk. The data that I can amass has to do with this one-dimensional look at the health of our industry. Hey, it's a start.

I focused on just IT companies (in the broadest definition of IT, including software, semiconductor, networking, etc.) excluding electronics (Xantrex, NxtPhase), energy (Ballard, Questair) and biotech (QLT, Angiotech). I got a headache when I looked at the entire industry, but we can run the numbers on the other sectors some other time. And Greenstone invests in the IT sector, so, truth be told, I had other motives… Remember as you look at the data that it's only IT and only early stage investment (seed, series A/B) (data from McDonald & Associates, press releases, company web sites, etc.):

All of Canada:
1996 - 1998 $ 400M in 3 years
1999 - 2000 $2,263M in 2 years
2001 - 2002 $2,503M in 2 years

Western Canada (MB, SK, AB, BC):
1996 - 1998 $77M in 3 years in 26 companies
1999 - 2000 $276M in 2 years in 47 companies
2001 - 2002 $311M in 2 years in 55 companies

The first thing that jumps out is that the investment in the last two years (I thought you just said it was horrible in technology in the last two years!) is higher than the previous two year period, across Canada and in Western Canada. Just in case you think there are some outliers (large financings in the later two years skewing the numbers), look at the number of companies financed. It's an average of $5.8M per company in the 99/00 period and $5.6M per company in the latest two years.

Another thing that jumps out is that there was very, very little money going into IT deals in the 1996 to 1998 time frame. This might explain, partially, that thin pyramid thingie I was talking about. Companies started in 1995, 1996 and 1997 were few and far between and/or had very little capital to grease their skids. Four IT deals done in BC in the past 14 months alone raised $15M more than the entire 26 companies in the three year period of '96 to '98 (Octiga Bay, Jalaam, Convedia and Fusepoint = $93M).

Investment in IT did slow dramatically from 2001 to 2002. How dramatically depends on what month you think Octiga Bay was financed in. The data I was looking at called it a 2002 deal, making 2002 Western Canada financings reach $129M ($105M without OB). 2001 was a much larger year with $180M invested in IT companies. So yes, 2002 was a down year, but still more than 1999 or any year before it.

So how are these companies doing? This is where science really meets art as I was forced to look up every company financed since 1996 (now you see where the headache comes in and why I stopped at just IT and just Western Canada) and see if it was a) a successful exit (IPO or purchased) b) still in business as a private company employing more than a few people or c) no longer a going concern. Let's call this part the "Hollidata" just to make sure that only I can duplicate it.

Of the 55 companies financed in the past two years, I count 42 still alive and thriving and 13 dead. Not bad, but any VC will tell you, two years is not long enough to tell.

Of the 47 companies financed in the two year time frame (99/00) in IT, I count 26 alive and 21 dead. A couple of the "alive" ones are successful exits (Audesi, Hot Haus, but not Abatis which, curiously, showed up as a 1998 financing). So if you were a VC and this was all your money ($276M invested in two years), you now have 21 less chances to get a return. But after 4 years, especially these amazing 4 years in IT, 55% of your companies still alive is OK. So, we stepped on the gas in 1999 and poured lots of money into IT companies in the West and 55% are still around today employing people and hopefully growing into the next successful company of tomorrow. Our success rate (26 alive) for the increased investment is exactly the number of companies financed in total in the 1996 to 1998 period. But of those 26, I count only 11 that either exited (Abatis, Pivotal, Hyprotech) or are still in business (Fincentric, Epic Data).

While all of this is interesting and points towards the need more research (the living database that has a BC focus) and better data, it doesn't take into account the many companies financed by the public markets here and elsewhere and the even more companies that never raised capital from either public or private institutions and still went on to create successful companies. We owe it to ourselves, our policy makers and our promotions for the outside world to better understand our company creation success. This type of data can only help us make good decisions in moving forward or at least benchmark existing decisions for the future.

I haven't even begun to compare our investment numbers and results to other regions for comparative analysis. But one small data point is that WA and OR with roughly the same population as Western Canada (~9M) invested $365M CDN in early stage IT in 2001 alone (compared to $180M in Western Canada). They are still doubling us…

All I have managed to point out is that we have invested a lot more in IT at the early stage in the past 4 years. The returns on that investment in terms of impacting our BC economy will not be completely known for another decade. But I do think we have set the table nicely for a healthy industry sector as the market recovers over time. What really needs to be monitored is the drop from 2001 to 2002 to see if it plateaus in 2003. If investment declines again as precipitously, then we may be shortchanging ourselves and jeopardizing what we are creating today. Can we draw the conclusions like that from only one slice of the data? Not really, but in the vacuum of information, I think it is a reasonable hunch.

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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