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

Something Ventured:
January 12th, 2007

By Brent Holliday
Greenstone Venture Partners

The Year of Tech

“The clock keeps turning,
Why hesitate
You silly fool,
You can't change your fate…
Good times, these are the good times.” – Chic, Good Times

This is that magical time of year where you are inundated with reviews of last year and predictions for this year.  January also starts with CES and MacWorld, giving geeks and gadget freaks all sorts of things to talk about.  If you peruse technology web sites, receive technology newsletters or use RSS feeds daily, you have seen tons of verbage already about what to expect in 2007.  I’d like to say that I’ll be different and write some inspiring new look at the data or give you some new and relevant analysis that will lead you to tons of profits this year… or not.  Well, I’ll give it the old college try.

If you are really busy and don’t want to read the fun and exciting analysis that follows, just take this to the bank and go back to work: It will be a very good year to be a small technology company scratching for new customers and launching new product.  Technology markets in general will sizzle.

For those of you still with me, let’s look at my favourite subject area first: capital. I have written here recently that Canada and BC are heading for a cash crunch for venture capital at the early stage.  I have seen nothing to indicate differently, except that the angel market seems to be very robust.  It seems that for capital raises of less than $2M, you might want to avoid the institutional guys altogether.  If you are a cash flow positive company looking for growth or acquisitions, the private equity market remains sizzling, especially in the US.  There is so much money out there for deal sizes of $10M and up for businesses that are profitable, it’s frankly quite stunning.  Private equity managers are scouring for more and more good companies due to this huge over supply of capital, but they still won’t invest in companies where their financial modeling won’t compute (i.e. negative cash flow).  So in summary, 2007 prediction for capital is relatively plentiful angel supply, gargantuan late stage supply and very tight supply for the $2M to $10M capital raise…

What about exiting investments and making shareholders rich?  2007 will be like 2006 in that M&A will dominate for technology companies versus the problematic IPO (Sarbanes-Oxley continues to be a thorn in the US public markets).  To wit, in 2006, $107 billion of technology M&A value was realized compared to $24 billion in IPO value.  Part of the dollar value surge was the increase in billion dollar deals from 16 in 2005 to 23 in 2006.  The majority of deals (55%) continued to lie between $20 million and $100 million.   The forecast for 2007 is many more deals in the $20 to $100 million range as markets consolidate and big players with fat stock prices and even fatter cash positions buy versus make the next iteration.  Also, for the first time in this writer’s career the value of M&A was higher than at IPO (3.2x LTM (last twelve month) revenue for M&A to 2.3x LTM revenue for IPO).  As a comparative, Ironport was just bought by Cisco for 7.9x LTM revenue…

In the markets, wireless broadband will be one of the main stories of 2007 as 3G networks are challenged by WiMAX for user preference.  WiMAX is also the award winner for most hyped technology as it was supposed to roll out now and is likely not to be seen widely until the end of the year.  But the 3G networks (EvDO, HDSPA etc.) uptake will be driven by appropriate content that takes advantage of their speed.  Remember, mobile TV is not coming over the data networks, so what are we doing that will command a premium price for broadband?  With a billion phones shipped this year, the consumer will look for ease of use and interesting content… I think of user-generated content (success of MySpace and YouTube) and social applications (beyond SMS) as being the reasons we consume valuable broadband.  Local companies like AirQ and Sierra Wireless should benefit from these trends.

An unavoidable story in technology this year will be Vista.  Microsoft’s marketing machine will make sure of it.  Adoption will be slow, but the operating system will drive PC upgrades, new application development and security upgrades.  A week will not go by without a hack of the new system.  But software will be the IT story of the year as web application development hits critical mass.  Standards are in place, bandwidth is in place and the compelling value proposition is apparent for companies to live with their valuable, mission critical applications to be run off of remote servers.  It has been a decade since Larry Ellison of Oracle launched the “network computer” claiming that thin client computing would take over the world.  Well, it did, but it took a long time to deploy… not unlike any Oracle project come to think of it. AJAX was the final piece of the puzzle for massive adoption of web based computing as it gives the desktop experience that was missing from basic HTML.  2007 is the year of enterprise AJAX as the front end to all web apps. Google has figured this out and they are hoping that AJAX helps make the operating system of your device less relevant so you can use your web applications from any PC or any smartphone.

Notice I didn’t say web 2.0 yet?  Lest I get bombarded by my “ahead of the curve” friends locally, I guess I will say that 2007 is the year that we forget about Web 2.0 because its fundamental tenets are finally understood by everyone.  All new applications will adopt pieces of what makes Web 2.0 cool (AJAX, user generated content, ability to tap the “long tail” of the user base, etc.).  And therefore, as soon as it hits mainstream, it will not be cool anymore. That should happen this year.  Congratulations to all of the “ahead of the curve” guys for dragging the rest of us along towards the future.  Where would we be without you?

The consumer markets are headed for very exciting times.  The Windows Home Server and announcements of terabyte hard drives (for $500!!!) from Hitachi and Seagate will make the home network and media integration much simpler.  This year I will buy a machine that sits somewhere dusty in my house that will be my home hard drive, fastidious backup device, PVR, music jukebox and home movie repository.  All computers, smart phones, game consoles, set top boxes and (with a little Zigbee) home appliances that I allow into my network will attach to this machine seamlessly.  It is nerdvana…

The iPhone launch has every tongue wagging and I will not get into predictions about its success like every other writer out there.  The best description I heard about the iPhone is that it is the true Mini-mac.  Think about it.  Apple quietly announced last week that the “computer” will be dropped from its name, now just Apple Inc.  The IPhone runs Mac OS X.  It can have 8G in storage.  It won’t run Adobe Illustrator, but for all main computing tasks… with a Bluetooth keyboard and widescreen when turned horizontally, don’t you have a laptop? 

So 2007 looks very promising for technology.  I wish your company great success this year and many, many successful exits for BC technology companies.  Finally, I thought a really good look at old predictions would be appropriate.  I found this gem from Internet World making predictions about the web and giving us the best and worst on the Internet… FROM 1994!  It’s a hoot.

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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