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

Something Ventured:
July 25th, 2002

By Brent Holliday
Greenstone Venture Partners

"I'm gonna run to you,
Cause when the feelin's right,
I'm gonna run all night,
I'm gonna run to you" - Bryan Adams, Run To You

The summer is never slow for news. You'd think that people would just kick back, relax and wait for September. They do it in Europe, don't they? Apparently not. At least not in Paris, France near the Place Georges Pompidou. Home of Business Objects SA, a $500M a year business software maker. The new headquarters for Crystal Decisions, bought last week for US$300M in cash and roughly US$520M in stock.

What happened? Where did the bellwether IPO (initial public offering) go? Why isn't Crystal Decisions its own company with a fresh US$170M in its jeans ready to take on the world and make its new public shareholders happy? Why did our local success story, organically grown in Vancouver to 1,700 employees and over US$200M in revenue decide to become a branch office for its slightly larger competitor?

I want to answer those questions as well as explore a broader question for all of us in the early stage technology business: Is the IPO on NASDAQ the real goal? For years people like me have been telling people like you that the true measure of success for a really big idea and the culmination of years of value creation is the IPO where all shareholders benefit. They benefit through liquidity for their stock (options or actual shares) and the access to the cheapest available capital to grow the business further, public equity.

We have all heard the stories. Sequoia Capital owned 50% of Cisco after its first round of venture financing. On an "as if held" basis, their original stock, split adjusted, would be worth US$20B today. So they invested $5M and if they didn't sell their stock until now they would have made 4000 times their money. Wealth creation through equity ownership can be staggering (as can the losses as we saw too often in the past few years). And the public markets, the most efficient of which are the big US ones, can turn your paper gains into real cash.

So why did Crystal bail?

One of the more outlandish ideas was from Jim Cramer, founder of thestreet.com and host of CNBC's Kudlow & Cramer: Crystal Decisions executives found the idea of being public in the USA one year after Sarbanes-Oxley became law as nearly intolerable. He argued that the scrutiny by the SEC and the accounting oversight board is too much for a smallish company to bear. Sure it is tougher to be a public company on a US Exchange these days, but I'm pretty sure that Jim's reason is a very small part of the overall set of circumstances that led to the IPO punt.

Crystal Decisions shareholders simply took the bird in the hand. I don't think they were nervous about how the IPO would do. They were presented with an offer that gave them cash right now, which they would not have received for at least one year (the holding period for insiders on IPOs). The stock in Business Objects is freely trading already and because they are not insiders, they can sell that stock in 45 to 90 days. Also, the total price paid was at least $200M more than the pre-IPO price (before the shares are issued for the US$172M raised), so the premium was there. They probably debated it for all of five minutes.

What of the employees you ask? Their options are likely converted to Business Objects pricing and option plan and not vested. That's what I would do if I wanted to grow the company and take on the industry leaders.

Getting back to the IPO idea in general, is it really all its cracked up to be anymore? And even if it is still the ideal end game for a founder and early shareholders, is it a pipe dream for companies in BC to think they will follow QLT, Ballard, Creo, PMC-Sierra and others to the IPO holy land?

Let's look at Crystal again. It has been over 18 years since Terry Cunningham originally founded Crystal Services and grew it from a handful of people to a few million in sales. He was bought out by Seagate in 1994 and Seagate Software grew through the mid and late 90's. But it was an extremely long haul to US$200M in sales and an IPO. It's even a very long time to a US$820M purchase, the second largest private Canadian tech company acquisition ever. Compare that to the (now) third largest acquisition in July (see, the summer thing again) 2000, Abatis Systems. It was less than 800 days from zero to US$650M (here is their story). Certainly Abatis happened during the bubble and we should be careful in comparing all-stock deals (that ultimately became worth a lot less) to the Crystal deal, which included cash.

In today's market, an IPO candidate is a solid company with tens of millions in sales and at least 4 quarters of profit growing at a significant rate. That kind of growth requires years of hard work and excellent execution of a solid business plan. It requires technical superiority and equally superior marketing and sales skill. It also takes luck and luck involves good timing. If all that falls into place for a company over a period of years, an IPO can happen and a few from Canada will do so. But if a company is doing well in its early years, then it is more likely that an acquisition offer comes along before they reach the size and strength of an IPO candidate.

The truth is that many of you out there will work or are working for companies that will never be candidates for the big IPO. I agree that this is not a bad thing. There are many good reasons to stay private, not the least of which is the increased scrutiny that public companies undergo in today's post-Enron/Worldcom world. A nice profitable private company can kick off bonuses and dividends that make you a wealthy and happy employee or owner. It ain't easy to reach that level, but it is probably more likely than the big IPO.

Is the IPO a pipe dream even for those companies that dare to be large players in big industries, like venture capitalists want? I think you can look around and say that the technology world has changed in 30 years and the massive gorillas in certain sectors are defining the "exit" opportunity for early stage technology companies. Take the video game business, for instance. Who can deny that Electronic Arts dominates and rather than go head to head with their products and distribution strength, it would be better to set yourself up to be acquired? Many sub-sectors of the technology industry are defined by the gorillas who will try and eat the up and comers who might eat them if allowed to grow past the IPO stage. In an area like business intelligence, with no dominant gorilla yet, Crystal Decisions gets together with Business Objects to try and create one.

Ten years ago, being acquired was a last resort for liquidity for an early stage technology company. Now it is the most likely successful return for investors and shareholders. It is just getting too hard and too unlikely for the company to grow to the IPO. We just saw the most glaring evidence of that right here in our own backyard.

Setting your sights on $100M or $1B in sales probably defines your goal as a "big" one. That defines a big company that an early investor, shareholder or employee could make a handsome return on over time. The issue of that return being in the form of IPO shares is increasingly unlikely as the technology industry matures and we don't appear to be in for an IPO frenzy like 1999 and 2000 for many, many years to come.

So, the decision for Crystal was no to the IPO. I believe it will be some time before we see another get that close here in BC. But we will see a lot of acquisitions that make shareholders very happy and continue to grow our industry. And that's not a bad thing.

Random Thoughts –

- It's Raining Acquisitions - Congratulations to the folks at West Bay Semiconductor and Wavemakers, two companies that started around the same time (1999ish) that worked hard for a few years and made a return for their investors. No small feat at all given the market that they both grew through. It is another indication of things picking up in the market in general and in BC in particular.

Letters From Last Time –

Wow Brent! That was a pretty uplifting article. Can you tell that Telecom exec that I too would like to live in BC? The only thing holding me back has been my utter inability to find a job!

What exactly is the provincial government doing to jumpstart investment in the BC hi-tech sector? I pick up magazines here and see ads for different regions trying to promote themselves as hi-tech hubs (North Carolina, Idaho, Ohio, even Ontario) I have yet to see a single print ad or otherwise promoting BC as the place to relocate your business or investment dollars. I also note the lack of any follow-up about the Premier's Hi-tech council. What are those people doing?

While I am as excited as the next person about the 2010 Olympics, I fail to see any link between that and the tech industry. Unless I am printing t-shirts, postcards, running a restaurant etc.. I really see no co-relation between a sporting event and technology growth. As for this making Vancouver a "World-Class" city - I thought Expo 86 was supposed to put us on the map? When did our little push-pin fall off? Oh by the way - getting the Olympics was news in the US but mainly because it was felt that it might have an impact on NY's bid for the 2012 games. No one is devoting entire travel sections in the paper to Vancouver.

I don't mean to be a whiner and I am certainly in support of the Olympics. Let's just not get carried away with our expectations for what this will do.

Bim Parmar

Bim - What, you whine? Never. Getting the Olympics does not instantly transform our economy. It takes time. But the lift that the city gets on economic, social and promotional levels from an event of this size and scope is enormous… over time. So, no, your job is not waiting here. But there will be more activity and excitement going forward. If you can't find a job, maybe you can make money on your real estate holdings here?

As for your points about the lack of promotion by BC and specifically BC's tech sector, THAT'S EXACTLY WHAT I HAVE BEEN SAYING FOR SIX YEARS IN THIS SPACE. We have a tough time overcoming some stereotypes and misinformation about BC, which is a subject for a new column. Stay tuned.

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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