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Something Ventured: May June 1st

Insight For BC Technology Entrepreneurs

By Brent Holliday

Is Now The Right Time To Start a High Tech Company In BC?

"If starting a business was easy, everyone would do it and there
wouldnít be any money in it." - Unknown

We, in technology venture capital, are in the business of helping create and grow companies. Obviously, the bottom line is wealth creation, for us and those that give us their money to invest. But, we do gain a huge amount of satisfaction in helping companies cope with the utter chaos that defines a start-up.

In the process of finding ideas and entrepreneurs to commercialize those ideas, we have come to understand what it takes to make a new technology company successful. In fact, most of us in VC land have been there and done that ourselves (with varying degrees of success).

I'd like to make this week's column a discussion of the present environment in BC for starting a technology company. Next column, I want to take the discussion further towards funding issues and other solutions.

I think there are three general ingredients to the cocktail that becomes a start-up:

1) The Value Proposition
2) The Talent
3) The Economic Environment

The Value Proposition is the cornerstone of the whole process. What is it that you have that will sell to a lot of customers? Everyone in their life has at least one big idea. Ted Turner said, "Lucky for me, I've had a dozen."

We can all dream of the new invention or new service that will make us billions. Some are more mundane (Why don't I start a company that just puts the air mattress in the bottom of the tent already? Presto, instant bed and keeps you dry too.), while some are heady ("I think I really have cold fusion working in my lab.").

The practicality of the Big Idea must be assessed. With a little
research and a discussion or two with people in the industry, 99% of our ideas are written off. The trouble with ideas is that someone else probably thought of it already and they are doing it OR they figured that there was no money in it.

The Value Proposition needs to be much more than an idea. It needs to be a vision of the business model. Would-be entrepreneurs need to eloquently explain how their idea gets to market and why the customers will then pay for it. And donít forget competition. Who else can do it/ is doing it? And how can you protect your budding enterprise from being eaten alive?

BC is full of ideas and innovative value propositions. We get 30-40 well thought out Value Propositions a month at the Western Technology Seed Investment Fund (WTSIF), where true start-ups come to seek capital. At BDC and the other banks, there are Value Propositions arriving on the commercial lending desks daily. But I think there could be more. Iíll explain when we discuss ingredient #2, The Talent.

The Talent is a broad description of the entrepreneurs and the
supporting staff in marketing/sales, engineering and executive
management. You have heard this a million times, one more time can't hurt: The best idea in the world will never make a cent without experienced, smart management. Let me explain my adjectives.

Experienced means someone that has a knowledge base directly related to the Value Proposition and to early stage company dynamics. The harsh reality is, I'd take domain knowledge over credentials almost every time.

Smart is not intelligent. Smart is common sense, pragmatism and decisiveness. Smart is the ability to leverage hindsight with insight to create foresight. Mix smart with experience and a few intangibles and you have a valuable employee. I had a smarmy would-be-entrepreneur proudly tell me his IQ was measured at 170. I said, "Good, then you should have no difficulty analyzing why I think that is irrelevant."

BC is short on Talent in high technology. That is a sweeping
generalization. But, it's an unspoken truth. Why are we short?

1) Brain-drain. Our best and brightest are constantly lured south.

2) No critical mass of technology companies. The spin-out effects of a big, smart company are not as evident here.

3) Poor Economic Environment. Ah-ha! That must bring me to point three.

The Economic Environment is made up of i) access to capital (debt and equity) and ii) cost of doing business. The cost of doing business is enormous in BC. At risk of sounding like a broken record, our taxes (personal and corporate) are punitive, cost of living is too high and we live in an old economy resource based province. As for access to capital, it's almost non-existent. Remember, I'm talking about start-up or seed capital. Later stage capital, where the risk is less, is somewhat abundant.

At WTSIF, we are funding a few companies. For each of these start-ups we like enough to fund, there are 10 that we think are viable, just not potentially big enough to justify our risk (VC's aren't playing God. We have limited partners (the money sources) that want a certain risk profile. We convinced them to part with their money for 10 years or so, and we answer to them).

Other sources of start-up capital are angels. Let me explain why angels are not as effective in BC. Angels are rich people looking to make a big hit by investing early. They can afford to lose all of this money. But money alone does not make a successful venture. You need connections. Angels in BC are not rich from technology companies that they have built and sold. They are not connected. In the Silicon Valley and even in Seattle, the angel network is much bigger, but also much more technology oriented.

The Talent and Economic Environment ingredients of our start-up cocktail are very intertwined. If there is more Talent, capital sources would surely improve. If the Economic Environment was more conducive to new enterprises, talent would surely move to BC. In the current environment, with a shortage of Talent in the overall technology market, people are finding it much more attractive to take the job at the larger company, get paid a better salary with benefits and forgo the new venture for a few years.

Are there less technology start-ups in BC these days? No, but the rate at which start-ups have been growing has slowed. How can the situation improve? I want to go into detail on a couple of ideas in the next two or three columns. In the mean time, send me your suggestions.

Random Thoughts - I said it last week, I'll say it again: The video game business in BC is ready to take off. I was blown away this week by the volume of products coming from our back yard. Iím at E3 in Atlanta and I have seen first hand, just how big a business this is. The EA Sports and Radical booths were extremely busy.

And ETI, formerly part of Motion Works, is the Vancouver developer of a very hot line of products based on the first hit, Cosmopolitan Virtual Makeover! Yes, 200,000 units have been sold of a product that lets you scan in a picture of your head and change your hair style, make-up, accessories and more.

Response From Last Week's Column:

Brent, two points:

I agree that Electronic Arts Canada (EAC) and Radical have created a strong base of talent and this has led to a number of spin-off companies like ourselves. Because most of these "extreme" employees are rebellious, strong-willed and opinionated, they easily make the jump to entrepreneurs and strike out on their own. I can think of a number of small firms that have spun off to service EAC and Radical alone in various niche markets.

The problem of creating a strong base for the interactive entertainment industry is people. Since all of our product comes from the brains of our talent pool, our industry heavily relies on attracting the best designers, artists, and programmers to Vancouver.

Although we do have a substantive base with EAC and Radical, there are many environmental factors that dissuade talent from locating here. Notably, as Haig Farris has trumpeted in his "brain drain" mantra, we lose people due to tax issues, low wages relative to the US market (both in value, i.e. $ conversion, and quantity), and regulatory issues.

I will take exception with your second point about how Radical
developed. If we use EAC as the example, we get a different set of results. Way back when Don Mattrick and Jeff Sember (sp?) put DSI together they had built their first product Evolution which was a great hit.

Afterwards, they began to develop more products for others on contract. This began a cycle of cost overruns, development delays, moving funds from one project to complete another, etc. As they became more desperate, they bid lower on contracts to get work or offered better royalty terms. Eventually, they were put into a position where Don needed to sell the firm to Electronic Arts.

I do not believe this is due to problems with management or the
development team. Rather, it is the function of the publisher who has the financial and distribution clout to dictate strong terms to the developer. If you look at the current industry, there are very few independent developers as most are acquired by the publishers.

As for Radical, I do not know what percentage interest Ian and Rory still have. If they still have a strong position, they have made an excellent strategic match with Disney. If they have given up that position, they effectively work for Disney with control only of day to day operations.

Ultimately, the question is what you want to achieve. I cannot imagine Bill Gates or Steve Jobs following that model and we have seen their successes. Of course, a VC has seen all of the "almost Bill Gates and Steve Jobs" who failed due to their boldness. And with it, the VC's funds.

Laurie Baggio

-- On your first point, nice timing. My sentiments exactly. On your second, I think that Don is pretty happy now. Itís not easy managing growth, especially when the distribution and marketing partners have all of the clout. This is not a symptom of the software game industry alone, by the way. But, if you have good product, you get the thing developed on time and on budget and grow your reputation accordingly, you can be successful, even without the hit. Case in point: Radical again. They have never had a huge smash hit. Of course, now's the time!

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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