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Three That You Might Want To Be
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
February 21st, 2003


By Brent Holliday
Greenstone Venture Partners

 

“In this proud land we grew up strong,

We were wanted all along,

I was taught to fight, taught to win,

I never thought I could fail.” – Peter Gabriel, Don’t Give Up

 

You heard me speak of the “thin” middle of the technology industry in BC in my last column.  I also told you that it was largely anecdotal evidence that lead me to the conclusion as the data on this industry is tough to track down.  In fact, the only good data was on financing and those companies financed by venture capital.  So, I went in search of companies that make up the middle of the industry, the survivors of early stage… the growth companies.  But I added a twist: I wanted companies that would have been missed completely by the VC data I referred to last time.  I wanted to find the success stories that didn’t raise a nickel of VC and didn’t go public.  Why? Well, they would have a meaningful story to tell that today’s entrepreneurs need to hear and they also don’t get featured in a VC-centric world of early stage companies.

 

The feel good story of early 2003 is that I found some and they are doing exceptionally well.  In a T-Net exclusive, I interviewed three founder/CEOs of growing, profitable companies that never dealt with the likes of me.  They all built their business on cash flow from their customers.  They are all doing very well through the downturn and each expects 2003 to be their best year, ever.

 

The three companies are Incognito Software (www.incognito.com), ACL Services (www.acl.com) and Class Software Solutions (www.classinfo.com).  {A fourth company that should get mentioned, simply because it grew without VC or going public, is Alpha Industries (www.alpha.com).  It is in the top of the heap as a technology company, with over 1,000 employees and hundreds of millions in revenue, making it bigger than most of the well-known publicly-traded success stories around Vancouver.  Its founder/CEO is a bit of an enigma around town and is extremely private.  Alpha makes power products for a variety of industries and it and its acquired brands (Argus, etc.) are world leaders in their sector.}

 

I asked each CEO about the beginnings of their business and the decisions that made their business a success.  I also asked about financing and why they chose to go it alone.  But probably most relevant to the early stage entrepreneurs in our community today, I asked how they got to cash flow positive in the first place.

Patricia Steadman is an American running a Vancouver-based software company (Incognito) with her co-founder from Quebec, Stephane Bourque.  Incognito started when the two worked as sales engineers for Banyan, a networking software company, in the early 90’s.  As they were implementing networking operating system solutions, they saw a clear need for a new product.  They ran the idea by the sales people at Banyan and they were told, “If you have that product, we’ll sell it with our stuff.”  That’s all Patricia and Stephane needed to hear.

 

Six months and $60,000 of their own money later, they finished the product took it to the bi-annual conference that Banyan put on and walked out with customers.  They were profitable from the very beginning.  When asked what key decisions made Incognito what it is today with about 50 employees and millions in revenue, she said that the decision to sell through channel partners was one factor.  “The most expensive part of building a company is building a sales organization”, she says.

 

The other key determinant of their success was staying focused on a niche market that had little or no competition.  While the product line has morphed since they started in 1992, they have not strayed far from selling specific functionality and not being too broad and competing with network OSS vendors.  Now they sell to government, telcos/ISPs and “tier one enterprise customers” around the world with customers like British Telecom and General Dynamics.  She re-affirms her success in two simple truths: 1) Your product must meet a specific need and 2) You must know precisely how to sell it.

 

When asked about financing, Patricia at first was hesitant to let loose because, after all, she was talking to a VC.  I assured her that I was not of the mind that a company cannot succeed without VC and encouraged her to tell her point of view. So, she made the point that great effort is required in both tasks of raising money and gaining and retaining customers.  If a VC is going to base their decision on customer traction, then first and foremost “a CEO should focus their time on the single most important thing required in running a successful, self-sustaining business - the customer”.

 

ACL is probably only known to you if you are a controller, work for a big 4 accounting firm or if you live on Alberni near Denman and see their sign every day.  To be honest, you have to read ACL’s material and listen to them explain it a few times before the light goes on if you are not an auditor/CFO/controller.  But their software and service solution is the most widely deployed business assurance product in the world.  At its core, the product is about data integrity as it will make sure that enterprise systems, and those folks that enter data into them, are accurately monitored for potential mistakes and fraud.  The company essentially sells a solution that verifies trust.

 

The history of ACL is fascinating.  The CEO, Harald Will, is the son of the founder, a former UBC professor, Hart Will.  The senior Will started the company in 1972 as a research project.  Remember, this is software and the year is 1972. I was in high school in 1979 and we were still using punch cards in computer class...  This analytical tool was refined over the years and adapted to the new PC in the early 80s.  Then in 1987, with “customers” on five continents, but little or no revenue, Harald took charge and literally built the company by listening to and learning from the first few customers.  Oh, and he got them to pay.

 

The key to ACL’s initial success was paying, patient early customers that saw the value in the product.  As in the case of Incognito, ACL had a niche, solved a distinct need and stuck to its focus.  While the initial software product is used by 89 of the Fortune 500 and 49 of 50 state governments in the U.S., it was only a few licenses in each location.  This was good enough business to make a company with tens of millions in revenue and over 100 employees, but the most recent step by the company is its boldest.  In an era of heightened awareness by the CEOs and Boards of Directors, a business assurance solution aimed at real-time fraud and inaccuracy reporting is certainly needed.  Harald is confident that 2003 will be ACL’s biggest year to date.

 

Harald has set a company culture that most HR people dream of.  The company has low turnover, a great new deck on the roof and ways of getting all levels of the company to interact socially, breaking down the stereotypical layers of a large company.  When asked about the decisions that lead to ACL’s success, he stresses customer service and support.  He has been amazed by what customers have given back to ACL when treated well.  “Above all, execute on service to your customers and they will love you”, he says. 

 

Harald never asked for financing, although he considered it.  He has always been able to throttle expenditures according to demand, which sounds easy to say, but is harder to actually do.  He doesn’t regret the way the company grew, but wonders if financing would have made it happen faster.  But then again, ACL is in the right spot at the right time and faster may not have been better.

 

Class Software Solutions began in 1976 as a computer re-selling firm run by founder/CEO Ralph Turfus.  On the back of that successful business, built on sheer hard work and service, Ralph decided to create a software product business.  He ran the “cash cow” re-selling business while at the same time, hiring software developers to make PC-DOS solutions for vertical business opportunities in the late 80’s.  This is where Ralph’s strategy as a start-up differs from the previous two.  He made vertical software for four or five industries, all at once.  His theory was that he would invest in all of them, see how they did and then double down on the winner.  Call it the portfolio approach to a start-up, made possible by his surplus of cash from the original service business.

 

He killed his projects in transportation, manufacturing and banking and focused on municipality software that morphed into parks and recreation administration software.  Over the past 10 years, Class has grown to 550 municipal customers in North America and over $20M in revenue.  Now, Ralph is using cash from his new “cash cow” and plowing it into the next step in Class’ evolution; Class CityServe, a City Hall administration product.  Having learned from what he called his “oil well theory” approach in the early 90’s, Ralph realized that getting critical mass in unrelated verticals was next to impossible.  This time, he is not straying too far from the cash cow herd and implementing a new solution that can springboard from his 550 municipal customers.

 

Back in 1986, Ralph’s decision to get into vertical market software was his best, he feels.  However, his “oil well” approach was probably his biggest mistake, he admits.  He would not recommend doing the “dead lift” of building for and selling to a new vertical.  The single biggest problem is that you start each vertical with a lack of management expertise.  If you succeed in the “dead lift” of one vertical, the management talent developed will sustain you, so Ralph says, stay focused on that vertical and be dominant in your niche.

 

As for financing, he admits that the late 1990’s offered great temptation for the public markets and VCs.  But Ralph had witnessed the real estate bubble in Vancouver and Toronto in the 1980’s and didn’t fall for the tech bubble.  In the end, he stayed with the dance partner that brought him to the dance, cash flow.

 

I have to admit that talking to these three exceptional entrepreneurs and seeing their success peaking at the worst point in the overall technology markets was very inspiring.  My hat goes off to the determination, foresight and sheer hard work that Patricia, Harald and Ralph have applied to their ventures.  The payoff will certainly come for them and their employees in the coming years. 

 

While the three successes contradict my theory that there is a lack of growth stage technology companies in our market, that’s not the real reason I did this column.  I felt that their stories of perseverance and success might help those of you out there seeking a way to get their companies past the cash flow positive point.  All three of these founder/CEOs agreed with that premise and were willing to help.  I think that they gave me enough material to do five more columns on building successful technology enterprises in Vancouver.  If you hadn’t heard of these companies before today, then I did my job for Incognito, ACL and Class.  Keep an eye on them.

 

Letters From Last Time -

 

Brent,

 

Nice February Something Ventured article...I like your pyramid theory. But is it possible to achieve a pyramid shape ever?

 

In my opinion (observation and anecdotal only), the shape has changed today from pole with really wide base to a fat lady with little feet (sorry, politically incorrect analogy!).

 

What you have now are few successful companies at the top with lots of companies in the middle (rather fat) and very few early stage companies. At present, the thicker middle section is not generating enough cash to move up to the top and a lot of them may disappear by the time economy downturn reverses. With investor cold shoulders toward early stage companies, not enough early stage companies are being funded to be ready to replace the outgoing companies from middle section when economy reverses.

 

Obviously, what is happening that we are swinging between a pole with really wide base during good economic time and a fat lady with little feet during bad economic time. In my opinion, it is unlikely we can achieve a pyramid shape considering swings in investor emotions and human psychology. What best we can do is to control and manage the wide swings of pendulum across “center” position (pyramid shape).

 

By the way, I believe your data analysis is skewed toward middle portions of pyramid because you included Series B and potentially companies already generating revenues or with products in the marketplace as early stage investment. You may have a different picture if you exclude companies that have already introduced the products and generating some revenues from it. In my opinion, they should be part of middle portion not part of bottom.

 

Keep up your good articles...keeps me going in survival fight for my venture.

 

Best regards,

 

Anil Gupta

Ottawa, ON

 

Anil:

 

You raise some good points that bolster my thesis last time: We need good consistent data and data points.  It may be impossible given the fluctuating definitions of, for instance, a Series B round.  It use to be that a Series B was done 6 months after the Series A when the company was no where near revenue generating.  Now a Series B may be a re-start.

 

As for the pyramid theory, if it is based simply on the number of companies at each stage in growth, then it may be getting thinner at the bottom, but not just from lack of funding.  Overall, less new companies are starting up period.  We are paying for the exuberance of the late 90’s and the “rightsizing” of the industry will take a few more years, leading to distortions in the shape of the pyramid. As you can see in the column today, things may not be as bad as they appear.

 

Thanks for reading and writing all the way from Ontario.

 

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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