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Still Crazy After All This Fear
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
March 2nd, 2001

By Brent Holliday
Greenstone Venture Partners

"Crazy, I just cannot bear,
I'm living with something that just isn't fair...
I'm goin' off the rails on a crazy train."
Ozzy Osbourne, Crazy Train

Thinking of subject matter for a column (or any media for that matter) these days is difficult. There seems to be only one story worth discussing: When will the bad times end? It's on everyone's lips. Brave faces are put on the loss of wealth. Nervous laughter follows a comment about when one bought Nortel or PMC-Sierra thinking they had bought bottom. So far, and I would include myself in this camp, most people feel that this is a short (less than one year) phenomenon. But an annoying thought is creeping in to everyone's thoughts... what if this is going to be much longer? Paul Kedrosky wrote in the National Post a week ago that, before mid-February, most people expect a "V" where the market will bounce back sharply and the graph will be the shape of that letter. Now, most people are thinking the shape is more of a "U" with a slower return to where we have been. Appealing to my tendency to pop culture references, Paul stated that more and more, 2001-2002 might be "brought to us by the letter "L"". That would suck.

In the 25+ years of venture capital in technology, the worst years were 1988 to 1993. After the market crash in October, 1987, the idea of investing in a technology company was as popular as Glen Clark. Keeping in mind that the 25 year average aggregate returns of the US venture capital industry between 1976 and 1999 (Venture Economics measured these years only) was 27% annually, the returns between 1988 and 1993 were dismal. The top quartile of funds in the US returned around 9% in that time frame. Bonds were doing 12% through the same period. Imagine what the bottom 75% of VC funds were returning. Those returns help explain why there was more money raised for VC funds in the 1st quarter of 2000 than was raised in the 6 year period before 1993. It was awful. The only VC in Canada, still in operation today, that had to raise external money in those years is Ventures West. In Seattle, there is only one as well, Olympic Venture Partners. Big time VC is a new deal and most VCs working today have never been through the really bad times.

A sage VC that I have the benefit of working with closely is Peter Wolken, an investor in Greenstone Venture Partners when it was just three of us thinking about creating a VC fund. Peter started in VC in 1979 after a career in electronics that included founding and building Cobilt, a semiconductor equipment firm that he sold to Computervision. His first VC partner was a fellow named Bob Noyce. For those of you that have not yet whistled at your computer screen, he was the founder of Intel with Gordon Moore. Page Mill Partners, as they were called, invested in about 10 startups over a period of 3 years. That was the pace in the Silicon Valley back then. Remember, this is pre-PC. The PC didn't really take off until 1981 when IBM validated the industry by entering in a big way. Page Mill had moderate success, putting a little money into Apple after it had already been funded by Arthur Rock and already launched it's first computer. A few other successful seed investments (ASK Systems, Software Publishing and 3Com) made it possible for Peter to strike out on his own in 1982 with a new partner.

He created Associated Venture Investors (AVI) during the first boom of VC. It was very hot in the early 80's, the new, new thing and the Silicon Valley was now becoming a household term. Over 13 years, and through the toughest years, he raised two funds and invested in successful companies like Microchip Technologies, Network Peripherals and Radius (all NASDAQ IPOs) and others that sold for big returns like Qualix, Accel Graphics and Grand Junction Networks. During those ridiculously tough years (88-93) Peter said it was dismal in the Valley. The place almost self-combusted in 1991, when all the major defense contractors were folding or moving. We have all heard the stories of HP, Intel and Apple creating the Silicon Valley, but it was TRW, Rockwell, Raytheon, Lockheed and Grumman (who all had major R&D and manufacturing facilities there) that provided the leading edge engineers because of their fat US military contracts. The Valley actually had a brain drain for a while, Peter was telling me, because the downturn happened after the price of living had shot up and people just couldn't afford to be there. Yes, ten short years ago, the Valley was slowly becoming a ghost town.

One company that Peter invested in was Sierra Semiconductor. During the lean years, Sierra, and its founder Jim Diller grew its business in the modem chipset business. Peter has told me that the company changed its business plan once in the early 90's to get into modems and that is what made the company a success, having an IPO on the NASDAQ. Peter and AVI made a good return in their investment and moved on to other start-ups. Meanwhile, Sierra was buying a little R&D outfit out of MPR Teltech here in Burnaby. That unit was called PMC. The rest of the story is now legend here in Vancouver as Sierra announced late in 1996 that it was exiting the modem chipset game after huge losses in a competitive environment. The company focused on growing its new networking IC business, which all came from PMC. The company officially changed its name to PMC-Sierra in 1997 and changed its NASDAQ symbol from SERA to PMCS. To this day, Peter is somewhat disappointed that he didn't hold his Sierra shares for 3 more years...

Don't cry for Peter. During the amazing run of the late 90's and the renaissance of the Valley, Peter's 3rd fund, raised in 1995, invested in a company in 1997 called Extreme Networks in its first VC round (US$9M post-money valuation). He later brought in Kleiner Perkins and Norwest Venture Partners as co-investors. By mid-2000, the value of the shares purchased in the first round had gone up 1000x!!! The 25 companies that AVI invested in from 1995 to 1999 have collectively returned, in real dollars, to its investors over 15x the value of the entire fund and there are still a couple of promising companies yet to "exit" (be sold or go public).

At a time like this, when you are thinking of the letter "L" and worried that it will be 3 to 5 years before big gains in the market again (not one year), you listen to people like Peter. Two weeks ago in San Francisco I spent an evening with him and he waxed on the early 90's. Again, to put this in perspective, February 2000 was the 3rd worst month in NASDAQ history, the other two being October 1987 and January 1988. Back then, he said that he and his partners looked for a long view. They just ignored the public market, put their heads down and looked for value. They looked for opportunities to fund companies that would require less investment capital because they could get customers sooner. In those days, VC was very different and entrepreneurs would usually consider only one round of VC investment. Imagine that. You told a VC that this amount of money being raised would get you to profitability and, unless milestones were missed, you would not need to dip into the well again. As for his fund and their performance, he knew that the absolute amount of money they made was not as important as the fact that they were outperforming others doing the same business. It was the relative measure, regardless of market conditions, that they strove to achieve in order to raise money and live another day.

Today, Peter is officially a senior citizen and is slowing down, a bit. He is still involved in helping Greenstone and two other funds. He thinks that, while the game has changed and the players are many, venture investing and growing companies still requires patience and prudence in tough times. If we are headed for an "L" in the market, then everyone needs to realize that the companies that will survive out the other side will have to have an extraordinary value proposition to their customers to get them to pay for products and/or services during tight economic times. More than that, Peter says, the experience of the management teams is the number one predictor of success in tougher times. If they have been through tough times, rejection, even failure, then they will be aware of what is a priority and what is irrelevant. They will know where to trim costs and where to find extra cash. You want to back those that get mad at a bad market and fight back, not those that throw up their hands and use it as an excuse for poor performance.

Is Peter suggesting that we slow down as investors? Hell no. He said the best successes he had before Extreme Networks were investments he made during the 88-93 period. The best entrepreneurs, he said, want to build companies, not get rich overnight. Those entrepreneurs are the ones that step up now. So, listen to guy that has been through it. I have. It only undid a few knots in my stomach, but I am listening.

Random Thoughts –
- BC ESTI - BC Early Stage Technology Index - 3.5 out of 10 - Being realistic, it's tougher than ever to get funding from angels and seed investors right now. If you are already running, it's tough to get follow-on funding. The high tech industry is suffering a demand problem meaning customers are harder to find. The only bright light in this is that an "L" means that people that have done well financially at larger high tech companies will be thinking about doing something else. Innovation has not slowed down. Ideas that can be built now and go to market later are very attractive. Until we get some good news in the economy or through an election, we are still under a cloud.

- The Earth Moved - One of the lighter stories comes from a CEO of one of our Seattle companies that was pitching a VC on Wednesday morning on the 50th floor of a downtown Seattle building. The VC actually said, "so what's the valuation?", at the exact moment the earthquake started. The CEO dove under the table with the VC and told him, as the quake continued, "God thinks it's low too." True story.

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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