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

Something Ventured:
June 13th, 2008

By Brent Holliday
Greenstone Venture Partners

Exit Signs


“What goes up,
Must come down,
Spinnin’ wheel
Got to go round...


Drop all your troubles
By the river side,
Ride a painted pony
Let the spinning wheel fly.”

– Blood, Sweat and Tears, Spinning Wheel


It’s Friday the 13th when this column gets published.  Not that I’m superstitious.  Given the tumultuous capital markets, $1.50 a litre gasoline, softer housing market (here, in the US it’s downright flaccid) and the unbelievably crappy weather we had all spring, what’s not to like about our luck?  It’s going to turn soon, right?

This seemed like a good day to talk about making money.  Specifically, I wanted to focus on your company’s big IPO or the 9 figure M&A exit that you are working so hard to accomplish.  Why today?  Well, there is some luck needed to get the big win... and you usually win by being a bit of a contrarian to conventional wisdom.  So, put the two together and I am happy to talk about your good fortune on Friday the 13th.

Here are some current facts:

  • The number of technology IPOs on the NASDAQ or NYSE last year was 68.  So far in 2008, five.  BC’s only technology IPO of 2007 was Day4 Energy. 

  • Information technology and communication M&A in the US to the end of May included 590 deals, compared to 680 for the same period in 2007.

IPOs have clearly slowed after a decent 2007 and M&A is not quite where it used to be (the picture is somewhat worse when you do the comparison to last year by dollar value).  What drives these swings?  When is the timing right to go out and seek a buyer or an IPO?

IPOs are driven by the economy and the notion of supply and demand.  The economy sometimes trumps a market with a good supply of strong companies attacking big markets.  The appetite for growth companies affects demand as does performance of recent issues.  When you are in a market with no recent issues, market instability and macro economic uncertainty shrinks demand.  That’s where we are right now.  Even though everyone I talk to thinks we have a pipeline of IPO worthy companies in technology in the US and Canada.

What is IPO worthy?  Depends on where you are going public...  For the big boards, TSE, NYSE and NASDAQ, you likely need a quarterly revenue run rate of $8-10M or more, projecting above $30-40M in the next 12 months.  If you are a revenue generating company (life science and clean tech are different, they are speculative plays) you probably need strong earnings or the start of strong earnings.  The longer we have this drought of IPOs, the more companies will have grown and these numbers will be higher for a time...

The biggest issue facing IPOs is that the NASDAQ (proxy for technology) has had no net gain since the beginning of 2006. It has been up and down and all over the place giving no confidence to buyers of new issues.  This translates into net fund outflows from public markets.  To wit, net 2007 flow was -$40B (and that was a good year for IPOs) while the first quarter of 2008 was massively negative (-$64B).  While this looks bad for public equity funding, it pales in comparison to $350B in market capitalization removed from the market since the end of 2006 by M&A and take private transactions!  So people trading are taking money out and the consolidation of the technology industry is taking 7-10x that value out of the market. At some point the money will flow back in, but when?

If you are targeting an IPO for the early 2009, you might be OK.  After the presidential election and six more months with little or no IPOs, the door will open and next year might be a very good year.

So, you want to be acquired instead.  Well, 90% of venture backed companies that exited successfully in 2007 were through the M&A route.  Here’s what drives demand for M&A:

  • Buyer’s near term outlook

  • The economic outlook

  • Buyer concentration in the market

  • Availability of financing

  • Major technology or architecture shifts

  • The age old dilemma: Build vs Buy, which is really about capability

Technology companies didn’t benefit as much from the bull run in private equity take-outs fuelled by cheap debt.  The vast majority of buyers of private technology companies are public technology companies and the reason for buying is usually strategic, not financial.  Of the factors mentioned above, the economy and the individual public company’s ability to drive good news in this economy, are the biggest determining factors in M&A at the moment.  But the biggest issue in my mind (that will not go away any time soon) is buyer concentration.

In March 2000, there were 5,181 companies on the NASDAQ.  Today, there are 3,135.  That is a 34% decline in the number of potential buyers for you. It is worse in software: There are 48% less enterprise software companies now than in 2000.  For example, BEA Systems bought 7 companies in 2006 and 2007.  Oracle bought BEA, taking out a fairly active buyer.  Will private equity firms step in and fill the gap?  They may because you young private companies are growing and getting impressive earnings.  If the IPO market won’t take you and the public technology companies are less active, PE may step in.  They have gobs of capital and may try consolidating certain technology sectors or buy and hold waiting for an IPO market to return.  But, PE buyers are going to pay less than public technology companies.  They want to make their return, remember.

As always in technology, the wheels of innovation keep turning. Major technology shifts force companies to acquire or get left behind in a new technology.  Mobile continues to drive innovation and web 2.0 has yet to have a Youtube like follow up acquisition.  Virtualization is hot, as is SOA.  There are many others.  Big companies don’t have the expertise in house and will acquire that expertise because technology markets shift so quickly.  Generally, they don’t have time to build it.  To me this is the biggest driver in a concentrating buyer market.

The window for M&A is not closed at all.  It may have slowed in 2008 because of the overall economy, but lately it is picking up again.

It may be Friday the 13th, but the news is not gloomy.

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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