Something
Ventured:
March 7th, 2003
By Brent
Holliday
Greenstone
Venture Partners
"A
year has passed since I wrote my note
But I should have known this right from the start
Only hope can keep me together..." - The Police,
Message In A Bottle
Doom
and gloomers have had their day. Writing a column about
how crappy public markets and enterprise spending are
currently is about as popular as a live satellite debate
on what the US is doing in Iraq. We have been inundated
by bad news, which is exactly what happens when the
economy goes into a dive. You'd have to go to the
library and look it up on microfiche, but I do believe
that the same level of despondency was seen in the
1991/1992 time frame. I was in business school at the
time and I remember being sick of reading about the
recession and "Charlottetown Accords".
The
Intel announcement today about not meeting guidance for
this quarter has dealt more bad news to the markets. Of
specific interest to me was the lack of evidence of
corporate spending increases in January and February.
Well, duh. The world seems more pre-occupied with
uncertainty over war than over what purchasing to do. I
am a believer that things will improve a bit in three
months or so when this pre-occupation is behind us.
There
are silver linings to this economy for a technology
start-up, but there are also new challenges. Let's be
practical for a few minutes, ignore CNN, and look at
what our companies should be doing in mid-2003 to be
successful.
Last
week we saw three companies that think 2003 will be
their best year ever. The fact is that the economy is
still growing and the worst is behind us as far as the
technology industry goes. Some data points to make you
feel better:
- IT spending on software in the 4th quarter of 2002
saw the first year-over-year increase after 5
consecutive quarters of declines. It was only 1.9%
higher than Q4 2001, but it showed that software,
while not growing rapidly like the late 1990's, is
now back to a growth phase.
- PC shipments will grow 3-4% in volume this year,
and expectations of the entire semiconductor market
including communications components and wireless
components are for 11% revenue growth in 2003
(Clearly wireless is the front runner). From
1990-2002, the compound annual growth rate of this
industry is 10%. In other words, we are back on
track.
- The optical components business was a US$6B
business in 2000. It was a US$2B business in 2002.
It is still a US$2B a year business that will see
growth going forward. That's a lot of revenue
opportunities, when the largest company by far, JDS
Uniphase, only accounts for US$800M. There is room
to play here. This is true of just about every IT or
communications segment. Ignore the 2000-2002
downturn and focus on the market today.
- The US economy is one of the laggards in growth in
the OECD countries. Asia, without Japan, and Europe,
without Germany, are showing relatively strong GDP
growth numbers. While we focus a lot on our
neighbour (>75% of IT exports from Canada go to
the US), there are other economies looking for
technology improvements in a variety of sectors.
Clearly,
the number one challenge in 2003 is getting your
customers to a) pay attention and b) buy your product
over other choices in the market. If you read closely
last time, the three entrepreneurs were slavish about
their devotion to the niche. They were leaders in their
space and didn't promise too much to a customer. Your
choices of sales methodology (direct vs. channel) are
somewhat related to your product/service. Regardless,
your marketing and positioning need to arm your sales
people (or your channel) with a crystal clear value
proposition to the customer. As a sage local veteran
said to me this week, "Vitamins are simply not
selling in this market. You need to be applying a
bandage to an open neck wound."
Value
today is more than likely on the cost side of the
equation. Reduce costs and make customers more efficient
and productive. If your product/service is not number
one in the "must have today" category you need
to be very creative to get sales. If you are a
"nice to have" product/service than you need
to hitch your wagon to a "must have" partner
or find the few customers that feel that they are
efficient and productive and are looking for
enhancements. Spending marketing dollars profusely when
you are a "nice to have" and the market is
recovering is probably putting money down a rat hole.
Another
challenge for the Canadian technology company today is
the dramatic 8% reduction that you just took in your US
sales in the last two months. Due to our long bout of
sub-65 cent dollar, Canadians had become very good at
spending development in Canadian dollars and selling in
US dollars to maximize profit. Your operations need to
run leaner in order to squeeze much needed margin out of
your US sales. If you are buying a lot of raw materials
from the US, then this might be a wash. But many of us
are hurting a bit from this currency gain. Once again,
looking to other markets in Asia and Europe might be
timely given the weaker US dollar in the near term.
One
final anecdote to keep you going:
A Western Canadian technology firm recently landed a
>$10M purchase agreement for their solution in a very
depressed industry segment. Of 1,000 industry experts
who would have analyzed their probability of success of
getting the contract 6 months ago, 999 of them would
have said that they did not stand a chance. Here is the
litany of reasons not to believe in them: the market is
extremely slow with little cap ex expenditure, the size
of the customer (>$5B in revenue) means that they
only buy from Tier 1 suppliers, the company has no track
record (<2 years old), the company has a lousy
balance sheet, the management is relatively
inexperienced, etc.
Well,
they did it. And they did it because of two things: 1)
they sat with their customer day and night through the
trial and got to know everything about the customers
needs and 2) they had an extremely compelling value
proposition (open neck wound) that the customer could
not solve with competitive offerings.
Random
Thoughts –
- We Should Have Seen This Coming - It
appears that the new legislation to increase competition
in the labour sponsored venture funds in the province
didn't do much. While the official announcements are not
yet out, the rumour is that far less than the $80M
allotted to be raised, actually got into the coffers.
The new labour fund faced a brutal market climate to
raise retail money and it appears that they will not
have enough funds this year to actually make an impact
in the early stage market. Growthworks will have done
just fine, but they were capped at an amount less than
what they raised each of the last four years. The
changes to the Small Business Venture Capital Act will
make it easier for smaller pools to be put together ($5M
here, $3M there) giving the very early stage a boost
over the next few years, but it won't help this year.
Letters
From Last Time –
Thanks for an interesting article. I'm sure that by now
you are hearing from many self financed businesses and I
want be one of them. The self financed model has
received very little press and I take my hat off to you
for giving this business model some attention. It is not
for everyone, but it is a very real alternative. I
started a business 14 years ago with partner Len
Dueckman (both of us came from MPR). We now employ 79
people in Port Coquitlam designing and manufacturing
wireless products for indusrtrial applications (www.omnexcontrols.com).
OMNEX is company with steady and moderate (~ 30% a year)
growth - but if we can keep that up we will be at $ 100
million by 2010.
This is not a plea for publicity, but a thanks for
bringing the cash flow financing option "out of the
closet".
Åke Severinson
President
OMNEX Control Systems, Inc.
Thank
you for bringing your company "out of the
closet", Ake. Yours was one of three e-mails about
Omnex that I received, which should give you comfort
that others know about you in the market. After writing
about 120 columns in this space over the past 5 years, I
finally gave some recognition to a group of technology
companies that had been off most people's radar. Call me
a slow learner...
Dear
Mr. Holliday:
I thought you might be interested to know that Argus
Technologies was not acquired by Alpha, but rather was a
spin-off of internally developed technology (DC vs AC
power converters - very similar). Fred Kaiser launched
it as a separate company in the late 1980's when they
were at around $8 million in sales per annum.
best regards,
Rike Wedding
Oops.
My apologies to Argus and yet another reminder that I am
not a professional journalist with a team of fact
checkers at my disposal. Thanks for the correction.
Hi
Brent;
It's refreshing to see articles being written about
technology companies that have actual substance,
performance and results. These stories lend much needed
credibility to the tireless efforts of people in
technology that are trying to make a difference and
build viable companies.
Like most others I am sure, I have tired of reading
about the next "great big idea" in technology.
The only gem of knowledge I get from those articles is
that the companies profiled likely are going to be out
of business in short order.
Regards;
Jason McIntyre
Thank
you Jason. Your sentiment is exactly why I thought it
was timely to talk about these success stories. It is
nice to dream about the future once in a while, but the
reality is that the future is not bright if we can't get
results today.
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).
Something Ventured Archive
Online Venture Capital Guide
Printable
edition
© 2013 T-Net. All Rights Reserved. |