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

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).

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