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Grab Your Boards And Let's Go
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
July 27th, 2001


By Brent Holliday
Greenstone Venture Partners

"We're loading up our Woody
With our boards inside
And headin' out singing our song "
- Beach Boys, Surfin' Safari

This isn't summer! Summer is supposed to be a time when traffic is lighter, work is interspersed with golf and vacation and people are feeling better about their world. Instead, what we have is heavy traffic due to the knuckleheads in the transit business, work interspersed with pink slips and people in the technology business feeling that their world is crumbling all around them. I know that I sat here and told you that we were in for a long, crappy ride for the remainder of 2001 and into 2002. It's easy to predict what will happen. It's hard to actually deal with it.

Here's a partial list of the unhappy news of the summer so far in BC:
· 360 Networks is on it's last laboured breaths, causing many people to lose their jobs or fear for them in the coming months
· JDS Uniphase is about to cut the rest of the few hundred jobs in Victoria that it hasn't already
· The former darling of early stage technology, Abatis Systems, sold one year ago to the day for US$700M to Redback, has been decimated internally and all of the top people have evaporated
· PMC-Sierra is set to announce a dismal 2nd quarter, pointing to a continuing inventory glut in the telecom sector
· Sierra Wireless had its newest, biggest customer go Titanic on them (Metricom), and their 2nd quarter was miserable, leading to 30 immediate job cuts and scrambling for revenue from somewhere else

And that's just the public companies. In the private sector... well, just walk closer to the street edge of the sidewalk in Yaletown to avoid the falling bodies from the windows above. Have you asked a CEO of an early stage company how much fun it is raising money these days? There are a couple of very big deals, either just inked, or about to be inked in the private technology side here in BC which will appear to counter this trend. But ask the CEOs in private if they received the valuation that they wanted. Let's just say that most, if not all, of the CEOs closing financings this summer will tell you that they hope that this is the bottom of the downturn, because they couldn't get much lower in price without selling the company completely.

So, this must be good times for VCs then, right? We get to receive healthy portions of good opportunities when times are tough. So we should be happy. Never a better time to invest, right? Yes and no. For a new opportunity, yes. There is a new bushel of very interesting start-ups this summer. For an existing investment, no. We are facing the same excruciating pain in raising money for the companies that we already have investments in from years gone by. It is extremely difficult and every VC is feeling pain as they decide which companies warrant the most attention in their own portfolio.

Once again, I am not here to point out the crappy news and then offer no suggestions. I'd like to offer another important factor to consider for those of you in early stage technology companies. In order to help you raise the fuel you need and keep the boat pointing into the wind through this horrific storm, you need to constantly improve your company with any and all available resources. In case you have forgotten some of the other basics of survival, look at my March 30th (Cash-Strapped Start-up Odyssey), April 27th (If Not You, Then Who?) and May 25th (Rules of Engagement) columns for more tips.

VCs have told you over and over again that the number one, single, most important factor in the successful creation of a huge technology company is management skill. In the past I have talked specifically about what skills a management team needs at the various stages of a company's life. The fact is that BC is not overrun with serial technology entrepreneurs and most start-ups lack the experience at the helm as they raise their first or second rounds of money. Without under-emphasizing the fact that a search for more experienced talent at the top is critical, I want to talk about another area to shore up your company's management: the Board of Directors.

Your Board, like your management team, is scrutinized by the potential investors. Your Board should be experienced and value-added. First of all, a Board of Directors is absolutely necessary to have, according to the laws that govern our business practice. A Board is there to make the senior management accountable to shareholders and to make decisions in the best interest of the shareholders. In a public company, a Board is made up of all outsiders, save the CEO. This gives the Board some objectivity so that they act in the best interest of your grandmother holding shares in that company. Unless of course you are Book4golf.com, in which case you stack the board with analysts that report on your company and CEOs of companies that you order all of your services from… but I digress.

The Board needs the CEO on it, by law. The rest is up to the shareholder's agreement in the company. It is better to have fewer Board members early on in order to manage the process (five is a good number). In a private company the Board is very important as they make most of the very big decisions about the company (budget approval, fundraising, hiring and firing of senior management, whether and when to sell or buy companies, etc.). Board of Directors meetings are usually monthly in a start-up, meaning that they function as a proper governing body, approving resolutions, but also as a management assistance group, offering advice and thinking of strategies to move the company forward.

It might be easier to describe what a Board should not have before offering suggestions and examples of how to create a great Board. Here are the no-nos:

1. Do not have more than 25% of the Board made up of founders. Remember, a Board needs to be objective and a board stacked with founders indicates to an investor that they are more interested in protecting their own interests than moving the company forward.
2. Do not have investors only on the board. Overweighting in investors skews the decisions towards the interests of the investors. Equally as bad as the one overweighted in founders.
3. No relatives of the senior management. A big red flag for investors is the father or mother or uncle of the CEO or CTO on the board. Even if they invested in the company, it is a recipe for disaster and the new investors will run away.
4. No lawyers. Unless they add some direct value to your situation, you do not put your company lawyer on your board.
5. No shady characters. Do your reference checking on the outsiders you are bringing to your board. Ask around town and see what people think of the person before offering them a seat. The last thing you want to find out is that your new board member was banned from the public markets or has a criminal record.

At a future date, I will tell you about how to manage a Board and run effective Board meetings in early stage technology companies. We have had the distinct pleasure of sitting on some incredible Boards that function well and meetings run efficiently. But, for now, I want to focus on who should be there in order to help you raise money and help your company succeed.

An ideal Board for an early stage technology company has 5 to 7 members and is populated by one CEO, one or two investor representatives and the rest being outsiders to the company. That means that three to five of your members should be "from industry". At least one of these members should be from your industry directly. But they should not be from a customer or a strategic partner (and obviously not from someone who could compete with you, duh!). You need objectivity on your Board, so a customer would be perceived as biased. Usually you can get recently retired people from your industry if you can't find someone directly in it. You want a CEO, if you can get them. You want the most impressive, most successful name that you can attract. This is the domain expert that will review your company, its business plan and its people and add incredible validation to your company by agreeing to join the Board.

The other outsiders should add incredible value in other ways. Ideally, you would get a person with years of operations experience in a rapidly growing company. This person may not know much about your specific industry, but they have been through the rigors of growth and can be a mentor to your CEO in terms of internal decision making. Again, shoot for the best possible name that adds the most validation to your company. You want the investors to point to the name and say, "Look who is on the Board of this company". Finally, try to add people to the Board that have different styles and different points of view. You should try to have a "hard-nosed" personality that will shake things up. You should try to have a person very familiar with numbers, like a CA, that can help the internal staff with high level accounting or budgeting issues. You should try to have a contrarian, or devil's advocate, that constantly questions the decisions and forces management and other Board members to really think through the justifications for decisions.

One local example of how a well-picked Board turned out very well for a company is Xantrex. I was on the Board for 18 months while at my previous venture capital employer. The Board was made up of 7 people, the CEO, the Founder, two investors and three outsiders. One of the outside Directors was Peter Van der Gracht, at the time a successful entrepreneur with Nexus that was working in senior management for Scientific Atlanta. While not directly in the same field as Xantrex (a power supply company in the test and measurement business at the time), he was an expert in operations and growing a company from zero to millions. His advice for Nazir Mulji, the CEO, and the rest of the senior management was always very salient with respect to manufacturing and operations internally. He knew by instinct how to drive costs lower and maximize profit. Another outside Director was Bob Cecil, former CEO of Plantronics, a California based multi-million dollar manufacturer of telephonic headsets, among other things. Before Bob's unfortunate death, he added incredible value and validation to Xantrex because of who he was. Bob was a "name". He was a big wheel and he had evaluated Xantrex and found it worthy of his time. Quite a coup for Nazir and Xantrex. Finally, the third member from the outside world was Mossadiq Umedaly, the CFO at Ballard Power at the time. Mossadiq was the industry guy. Ballard and Xantrex were not working directly together, but they were both in the electric power game. Mossadiq was the "numbers" guy, as the CFO, but is also a master at raising money, having cultivated relationships around the world with his work at Ballard. If you read the papers lately, you will know that Xantrex is now run by Mossadiq. Nazir is still there working hard on growing the company. But, back in 1998, when we started talking in the Board meetings about possible acquisitions to vault Xantrex to the big time, Mossadiq's eyes were twinkling. You could see it beginning to take shape in his mind. All in all a great Board, that lead to an even greater company in size, revenue and a bright future.

Sitting on a Board requires the person to assume some risk, as the Board is ultimately liable for many aspects of a company. People do not join Boards lightly. That is why investors look at Boards carefully and see who has deemed the company worthy of the risk. The make-up of the Board is also critical because of the importance of the decisions that will be made in an early-stage technology company. So choose carefully and shoot for the best, just as you would with your management team.

Letters From Last Time:

Last time, I wrote a rant about the possibility of $4B being pumped into a Canadian broadband initiative. I received a lot of feedback, but chose the following letters for their opposing points of view on what I wrote on this divisive issue:

Hi Brent

I think you missed the driver for providing broadband into rural areas. It is not only a question of what they will download. It is also a question of what they will upload. Are there digital networking businesses that good emerge from these rural connections. I would suggest there are, especially in the area of distributed peer-to-peer technologies. Some very smart people live in rural areas and more would prefer to live there if they could do meaningful work and be vital members of society. If Canada is to win in the knowledge economy we need all of our best minds engaged. The economic benefits of this could justify the public investment without justifying a private sector commitment. Broadband access may also help to reduce the cost of health care (remote diagnostics) and education, as you indicated.

You are right that access and services provided through that access need to be kept balanced, and that to a far greater extent than is generally realized network configurations should be driven by evolving services rather than the "let's build big pipes" approach.

This said, my gut reaction to Minister Tobin's proposals was similar to your own, and I think we need a full and open public debate with good accountability in place if and when such a project goes forwards.

Enough said

Steven Forth

I did indeed miss the significance of the "upload" and I don't discount it at all. But I am sticking firm to my thesis that we need to spend a lot of the proposed money on building better services that make the pipe useful and necessary for all Canadians to have access to. Thanks for a great point.

Hi Brent:

With regard to your most recent article, although you have several good points, I don't think people from rural areas would appreciate your "hick" portrayal of their web-surfing or television viewing habits. Having grown up on a farm during the 70's and 80's I can tell you that even then I was craving broadband access. At the time a "grass-roots" information service was being demonstrated by MTS and I couldn't wait to get on-line with it - unfortunately it never materialized. The thing you seem to be missing is that rural people are just as sophisticated as urban people. I might even hazard to say in many cases they are more sophisticated. As a young man I was less distracted by all the goings on in the city (movie theatres, sporting events, concerts, etc..) and spent much of my time focused on learning (especially science and computers). I didn't miss the "excitement" of the city as the occasional visit was all that was required. The same holds true for many of my friends. Most of us have long since moved to the "big-cities" but I for one would move back to the rural areas in a heart-beat if the same kinds of opportunities were available in a small town (or on a farm) as I have in the city. The availability of broadband access throughout our nation will initiate services that may not be practical at this time. If and when telecommuting becomes a reality (for some people in the city it already is), lifestyle will be more of an issue when choosing a place to live then occupation! Government services may be deployed more rapidly if all Canadians had equal access to them. Not to mention educational services, "real" video conferencing, etc. I think the mandate to deploy broadband equally to all Canadians is the right decision now and especially for the future. The sooner the infrastructure is in place, the sooner it will evolve beyond what we can imagine today! Just my two-bits worth...

Regards,
Scott Evenson

Former "Jerry Springer" Farm-boy from Manitoba who does give a rat's ass...

Scott: I am indeed sorry if my generalizations offended anyone. My wife grew up in rural Ontario and she has never seen a Jerry Springer episode, either. My intent was to show that rural people are not demanding the service, which is counter to your argument that they are. I propose that all rural people will demand the service only when they can see great benefit, such as the ability to update driver's licenses and/or receive government payments or support by simply logging in as opposed to driving to the big city to get it done. Again, I am sticking to the plan that you can't build the pipe and then the service. If you are going to involve public money, then you should spend it equally on upgrading the service for government, health and education and smartly deploying bandwidth to serve those improved e-services.

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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