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A Good Place to be
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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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