Something Ventured:
June 22nd, 2001
By Brent
Holliday
Greenstone
Venture Partners
"Can
you picture what will be,
So limitless and free.
Desperately in need
Of some stranger's hand.
In a desperate land. "–
The Doors, The End
Do
you remember January 1st? Maybe things were clearer
around noon, depending on your activities the night
before. Let me refresh you: Bill Clinton was still
President, Premier Ujjal Dosanjh had 150 days until
annihilation (and he knew it) and the world had not yet
heard of something called Shrek. In the finance world,
the NASDAQ was at 2500 (20% higher than today), the TSE
at 8600 (11% higher than today) and not very many people
in finance had figured out what was about to happen in
the telecom industry even though the signs were
everywhere. In the technology world, Nortel was a US$100
Billion company with 30,000 more employees than today.
Yup, things were a bit different.
In
January, we were so sure that the late fall negative
announcements of Nortel and Cisco were a blip that we
bid the TSE and NASDAQ up in January by significant
amounts. The dotcom collapse was complete, but the
optical and wireless sectors were still red hot and
plenty of excitement was around the corner. Most pundits
in Canada saw us faring better than the US because we
did not gorge on dotcoms and the overall economy was
doing better. Ottawa was particularly hot with
significant financings in communications in January. The
party was really on there with an extremely tight labour
market, skyrocketing housing prices and Canada's richest
technology guy, Terry Matthews, announcing March
Networks, his new company and the acquisition of part of
his old company Mitel. Heck, they even the Senators were
in first place in the NHL. Somewhere, in the corner
offices of a couple of major public and private
communications companies in Ottawa, the awful reality
was beginning to dawn. Oh, and on January 19th I
published a column called Ottawa's
Lambda Gamble outlining the incredible success of
Ottawa but that its future seemed to be staked to one
industry sector, communications. I was warning of the
implications for all of Ottawa if the communications
industry got hit hard. What I failed to predict was when
that would happen. Pretty spooky how this is playing out
now.
In
late January, a funny thing happened. Here we all were,
seemingly improving from some late 2000 doldrums and the
Fed in the US dramatically cut interest rates by a full
point. Surely the signs of a recession were not that
prominent? In Canada, we scoffed at the US doomsayers
and kept pouring money into early stage technology
companies at an unprecedented rate through early
February. We were getting more confidence up here. Now
it was our turn to lead. Beware the mighty beaver!! Paul
Martin was getting in on the act and touting Canadian
technology everywhere. After all, we had Nortel, the
biggest company in the land and a global juggernaut,
leading us to new heights... Heck, I even bought a few
shares at $60. How low could it go?
Ummm,
then the wheels really fell off. February 2001 will go
down in Canadian technology history as the worst month
ever, bar none. How bad was it? Nortel lost 56% of its
value in one month. It was a hair-raising,
screaming-all-the-way ride down. Bad news filled every
inch of newspaper and we got especially creamed in
Canada because of Nortel. PMC-Sierra was first out with
the really bad news. They had a jaw-dropping quarter to
quarter revenue change from US $232M to US $120M. That's
down folks. They sold nearly twice as much in Q4 2000
than they did in Q1 2001. JDS Uniphase remained
relatively steadfast although they gave guidance that
their next quarter would be disappointing (and it was,
with revenue dropping sharply). Then Nortel dropped an
earnings bomb on February 15th and the party was really
over. Billions of Canadian personal investment went up
in smoke. Over 10,000 layoffs in Canada were announced
from Nortel. The impact sent reverberations through
every piece of the Canadian economy and the trickle down
effect in technology investing was dramatic. VCs went
into hibernation. Angels were wiped out and could not
invest in the earliest and riskiest stage of company
formation. February could not end fast enough.
March
was a month of cautious hope as many people thought that
the Nortel mea culpa really was the bottom. In fact,
April 4th was the low point for both the TSE and the
NASDAQ in the first half of 2001. March was a month
where the reality of the downturn really hit home for
every company, large or small. If they hadn't instituted
cost cutting plans and staff reductions already, most
tech companies bit the bullet in March. The early stage
companies began to take it in the teeth in Ottawa and
elsewhere in Canada. Sedona Networks in Ottawa went
bankrupt on March 31st and was a poster child for the
dramatic tech dive. In the fall of 2000, they were
hiring like mad and getting beta customers for their
voice over data gateway aimed at the CLECs. They were
the toast of Ottawa, the next biggest IPO possibility.
Then all of the CLECs got into financial trouble and the
beta trials evaporated. No new investors came and the
existing big US East Coast VCs didn't bail them out.
There will be more like them.
April,
May and June felt more like the winter months in 2001,
because the layoffs piled up even higher as the bigger
tech companies restructured to try and stay profitable.
The VC money went golfing. The bad news and ripple
effects continued. The Canadian technology confidence of
January was gone. Canadians, be they financiers or
executives or pundits, came back to the Canadian
self-deprecation and inferiority complex. Ever so
briefly, we had a swagger in our technology step. We
were the cream of the crop. Now we're in it as deep as
anyone else.
Here
we are at the end of June, with Nortel at US$25B, one
quarter of its January 1 value and Royal Bank knocking
on the door to become Canada's largest company by value.
Oh, the shame! We have been kicked enough to know that
the kicking ain't over. It will be well into 2002 before
the real recovery begins. In the meantime, everyone has
reflected on what it means to be in technology and what
it takes to grow a real business. If you are under 35
years of age you have never seen a recession in your
career. You thought that you could go from zero to a
billion in eighteen months. Now you realize that zero to
a hundred million in eight years would be incredible. We
have re-set our expectations and that is a very good
thing.
The
big question is whether the 2nd half of 2001 will be an
improvement. Will we see a recovery? Will Nortel return
to profitability? Will growth become a term used in
technology again? Intel's Craig Barrett and Cisco's John
Chambers weighed in this week with their
prognostication. They believe that the recovery will
begin in the second half. Perhaps the big companies will
have restructured and retrenched their products to start
the growth phase again by the end of the year. As for
the little companies and the start-ups, I think that
2002 will be the year of hope. For now, financing will
still be difficult and customers hard to close in 2001.
If you are close to the end of your cash, you had better
find some way to make it to 2002. It will be that long
before the VCs start to get really active again. Sorry
to be a downer, but I'm trying to help you be realistic
in 2001. Good luck.
Random
Thoughts –
Another
Take On the Pulse Of BC's Technology Industry - The
Vancouver Sun reported on the
state of the industry this week. I sent the reporter
an e-mail and pointed out that we have eight tech
companies in Vancouver at $500M in value or higher today
and that Toronto also had eight. Ottawa has five. This
bodes well for Vancouver's tech scene in comparison to
other hot areas in Canada. What's even more impressive
is that these companies succeeded despite the NDP and
BC's poor economic performance compared to these other
centers. I'm telling you, we are very near the explosion
of success in BC. Inside two years, I hope.
Liberal
Public Works Projects - Brian Tobin needs to give
his head a shake. The Minister for Industry Canada is
too busy getting his photo in the papers to sit and
think about what he is proposing with the
"broadband everywhere in Canada" project. He
and his ministry are doing some very positive things,
like the Brand Canada initiative to get Canada's
businesses (especially technology) promoted to the rest
of the world. You have heard me harp on that before and
I am glad that they are spending the time and the money.
But the broadband to every nook and cranny of Canada
initiative needs to be honestly portrayed to the
taxpayers for what it is: A giant bailout of Nortel. Who
do you think will get the lion's share of the projected
$6B in equipment and services cost to build this new
highway? Ummmm, not Cisco. Why not just give Nortel the
money directly like they are doing for Bombardier and
then scrap the idea of broadband to Alert, NWT. Why is
it a bad idea? 1) By the time we build this optical
infrastructure, the network will be obsolete because it
will take too long. 2) Private market forces will
dictate how best to efficiently deliver broadband to the
rural areas of Canada (satellite? Telesat has a 2MB up
and down technology in trial today) 3) We don't need the
government to act like a CLEC and focus on bandwidth as
much as we need them to focus on reasons to use the
bandwidth, like more government services delivered
on-line. 4) Are you buying everyone a PC too? Otherwise
the buildout is a bit premature. My guess is that the
$6B can be spent a lot better on education or paying
nurses...
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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