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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