Something Ventured:
February 20th, 2004
By Brent
Holliday
Greenstone
Venture Partners
"Let
the good times roll
Let them knock you around" - The Cars, Good Times
Roll
It's
getting fun again, isn't it? I didn't say easy… I said
fun. Easy was when a chimp could pick a dotcom IPO and
make 2-3x their money in a few hours, then kick back and
watch Who Wants To Be A Millionaire? Fun is a lot of
uncertainty, more good news mixed with some bad, the
feeling that hard work is getting you somewhere and,
when you have a minute, kicking back and watching The
Apprentice.
Uncertainty
abounds at the moment. Political uncertainty in Ottawa
because cronies of Chretien kited cheques, suddenly
making a fourth term majority unlikely for the Liberals.
Here at home, the moribund NDP is almost even in the
polls with the strong medicine Liberals (Yikes!). The
stock markets have paused so far in 2004, giving voice
to at least a couple of bears. And, as I talked about
last time, a rising tide of protectionism for jobs is
sweeping across America, possibly affecting us here.
Which way is the dollar going? When will interest rates
rise? Can the Canucks win without Naslund? Uncertainty,
I tell you!
Canadian
venture capital investment dropped substantially in
2003, down 41% compared to 2002. Almost as many
companies received financing, though, but the amounts
were obviously substantially lower. This lower amount of
financing can be directly mapped to the 39% drop in
fund-raising by the VC community in 2003. This is a
worrisome trend. If we have less money, you aren't going
to get more money. The truth is that there is still a
substantial amount of capital stockpiled from previous
years, so I don't get too worried about the decline
until it happens two or three years in a row.
But
tracking how much money VCs raise is a lagging
indicator. As companies start to turn around, exceed
targets and become attractive IPO candidates or high
value acquisition targets, entrepreneurs and employees
get rewarded, VCs returns improve and the money will
start to flow again. To wit, just today Catena Networks
in Ottawa was bought for US$486M by Ciena (based on
market close Feb 19th). My sources tell me that the
price is over 5x trailing 12 month revenue. That is a
good price and a great win for BCE Capital in Ontario
who was among the investors.
IPOs
anyone? The appetite for the public to buy into growing
technology companies in Canada has clearly improved.
After Guest-tek and Workbrain became the first
technology IPOs on the TSX in three years, our own
Xantrex filed for their IPO just last week. Xantrex has
a special place in my heart as I was director on the
company's board in 1997 and 1998 while at BDC's venture
arm. Current directors David Levi of Growthworks, Peter
Van Der Gracht and Mossadiq Umedaly were all on the
board back then and the acquisition string that made the
company a US$136M revenue (2003) juggernaut was just
being formulated as an idea. I spoke earnestly before
of this board as an example of how a great board can
make a company (Mossadiq, current chairman, was CEO for
nearly four years before handing off to the current
CEO).
Speaking
of Xantrex, this is yet another of those 21 year
overnight successes. The company was founded in 1983 by
Ken Robarts, Nick Liens and Badru Gallani to make
variable power supplies for the laboratory work bench.
It was a small electronics designer that grew
organically for a dozen years before the company sought
and found private VC money to help it grow. When I was
there as part of that first VC investment and follow-on
round, Nazir Mulji was running the company (Currently
the VP, Engineering). Nazir was a true "mail room
to CEO" story as Ken had brought him into the
company as a co-op student in 1984. He established the
company's DNA as an innovator in power supply design.
This has held them in good stead as they acquired the
critical mass through acquisition and lead with their
technical edge in many markets.
If
you will allow me to indulge for a minute, watching
Xantrex's IPO will be interesting. A very similar
company to Xantrex is Cherokee, supplier of power
inverters and power supplies to OEM manufacturers. They
are pricing this week on the NASDAQ at about US$13 a
share for a US$250M market capitalization. While not
directly competitive to Xantrex, it is interesting that
a fellow named Anthony Bloom sits on both company's
Boards. Lucky guy. Two IPOs within a month of each
other. Cherokee has a US$4.6M EBITDA (Earnings Before
Interest, Depreciation and Taxes, which is a long way of
saying that this is the cash the company generates from
operations) and Xantrex has US$6.3M in the same period.
Xantrex has 21% higher revenue and 3x as much current
cash on hand. And, most importantly, Xantrex has a
better growth story. So, discounting the fact that
Xantrex is going on the lower liquidity TSX, I came up
with roughly US$350M market value or nearly half a
billion CDN dineros. That would put them instantly in
the top 25 in Canada's largest technology companies by
market capitalization.
South
of the border, IPO season got a whole lot warmer when
Wi-fi chip company, Atheros, priced last week and leapt
to a value of US$880M. This company had sales of US$2.1
M in 2001, US$21M in 2002 and US$83M in 2003. That is a
serious hockey stick! While they clearly cannot sustain
that rate of growth, the 10x trailing twelve month
revenue multiple is holding, for now. This is the most
realistic type of home run a VC can hope for in this
market. A real growth story that people can touch. Not
some cockamamie story without actual customers that gets
valued in the billions, as it was in the bubble. You
have to be real to go public today. Xantrex is very real
with 21 years of operating experience (although the VCs
did not have to wait that long for their returns having
invested in late 1996 for the first time). Atheros is
the shoot the moon story for VCs as they invested in
1999 and 5 years later have very valuable stock.
After
years of horror stories, the story of the comeback is de
rigeur for 2004. I see a few of those around town. Can
Fincentric re-emerge as a hot company after its
management and board shake-up last year and a nuclear
winter in financial services IT budgets? Will MDSI come
back to glory days and start to print money? We saw
Sierra Wireless come back with a vengeance in late 2003.
There will be others this year. But no story warmed my
heart more than Radical Entertainment. Radical just
announced a blockbuster deal with Vivendi Entertainment
that will see it develop six games over the next three
years after the monstrous success of the Hulk and the
Simpson's "Hit N Run" and "Road
Rage", all million sellers. The deal also includes
an option to buy the company. Hmmm... Vivendi Worldwide
studios versus EA Worldwide studios right here in
Vancouver.
Ian
Wilkinson is the epitome of survivor. He should run for
Prime Minister if being able to take repeated body blows
and stay standing is part of the job description…
which it appears it is. I first wrote about Ian in may
of 1998, which was the first wave of good times for
Radical. They rocked E3 that year in Atlanta with their
amazing talent. Then the proverbial kaka hit the fan
that fall because of vast over-spending in the US. And
US$15M of investment, including some of BDC's money
invested by yours truly, went bu-bye along with some 100
employees and, seemingly Ian's life's work was gone. As
he is lying there, bloodied, his co-founder and friend,
Rory Armes, goes to the arch enemy, Electronic Arts.
Then, inconceivably, his own brother, Kevin, slides over
to EA as well. Talk about salt in the wound. Then, the
company saving sale of a snowboarding game to EA for
cash, emergence from bankruptcy and the chance to build
again for another day. By the way, that snowboarding
game became SSX, SSX Tricky and SSX3 and about 10
million sold for EA. A good deal all around as they say.
So,
amid some uncertainty in our world, most people are
having fun. The technology business is fun once again.
It still requires hard work and excellence as well as
good timing to win. But the journey itself now seems to
be worth it.
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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