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Something Ventured:
Mar 19th

Insight For BC Technology Entrepreneurs

By Brent Holliday

Keeping Your Company IQ

"I guess this is our last goodbye
And you don't care, so I won't cry "
Police - Can't Stand Losing You

A high profile legal battle is happening right now in Seattle. No, not Microsoft v. the DOJ. I'm talking about Amazon.com and Drugstore.com being sued by Wal-Mart for stealing proprietary business methods that have made Wal-Mart the clear world leader in retail (Before you run and hire old people to welcome your customers, it's not that particular method). How did Amazon.com do this? Was it a stealth attack on Wal-Mart headquarters in order to steal their policy manuals? Did they hack the Wal-Mart intranet? Did they leave a microphone in a briefcase under the board room table? No, the source of all of this know-how was people. The ex-CIO of Wal-Mart joined Amazon.com last October after an offer too good to refuse (some timely options helped). He then managed to round up 12 more IT executives from Wal-Mart. The case will revolve around whether the ex-Wal-Mart employees have duplicated Wal-Mart's "proprietary" data warehousing and merchandising management software and practices.

Intel is being sued as well. Once again, not in the highly publicized trial with the FTC, but with Motorola. You see, Intel wants to be big in communications chips (Yo, PMC-Sierra, is that a gorilla in your backyard?) and they haven't been able to buy their way into the market completely. Plan B was to set up a shiny new lab about a pitching wedge away from Motorola's Somerset facility. After 1st hiring the top executive at Motorola's lab, Intel has since seduced 15 more to the dark side. Understandably, Motorola is miffed. They might have watched the future innovation in communications chips walk out the door. It may cost them millions and millions in revenue.

How about a BC example: This link will take you to the press release by Totally Hip software last August. In it, the company recognizes the settlement of a lawsuit brought by the company against co-founder Rajiv Aggrawal for "alleged breaches of agreements and other issues regarding the Company's intellectual property and copyrights." While we lack the details of this case, it's quite obvious that the Company wanted to protect its knowledge. If Rajiv had gone into the origami business, perhaps their would have been no lawsuit. But, my guess is that Rajiv, being a talented software architect, really wanted to stay in the business he was in and perhaps it was just a bit too close to what he was doing at Totally Hip.

I have been on both sides of this issue myself. At Multiactive, I tried to keep the talent I spent a lot of time hiring and training from going to where the grass may have been greener. More recently, two others and myself left BDC Venture Capital to start our own thing (much more on this later). BDC is a big organization and will quickly get over three people leaving a six person department. What could BDC have done to prevent us from taking our training and experience and move into a new gig in a similar field?

As a technology company, you look to protect your value through patents and confidentiality agreements with customers and with non-compete agreements for employees. These are the legal barriers to having your innovations and ideas become commoditized or taken advantage of by a competitor. Any lawyer will strongly advise you to have a strategy to protect those intangible assets. In fact, most venture capitalists and other investors require it. But despite everyone's intentions, the reality is that the most damage done to your company is when the people walk. Even if they don't go to a competitor or set up a competitive venture, losing key employees in an early stage company is a real kick in the head. It affects morale, innovation and may enhance your competition. Non-compete arguments are rarely enforced in court because there are fundamental freedoms that humans have and telling them what to do when they aren't on your payroll contravenes those rights.

Is it just a fact of business that people leave? Do you just throw them a good-bye lunch and get on with it?

I'm staring at the Pricewaterhousecoopers BC techmap positioned like a proud flag above my computer. There's a bunch of lines connecting new, old and defunct companies in a complex web of spin-outs, subsidiaries, joint ventures and original ventures. There's a lot of dotted lines, too. The dotted lines represent movement of people. Ah yes, the ecology of a technology industry is defined by the Darwinian movements of people and capital over time. In order for the industry to grow (mutate) and be vibrant, people have to leave one company and join or start another.

Let me throw a dart. There. Motorola Wireless Data Group is where the dart stuck. Let's see. Hmmm. Lots of dotted lines leaving here. Gosh, management couldn't have been too happy with people leaving and creating or joining competitive ventures like Sierra Wireless, InStep, Soft Tracks and a dozen others. I guess the point (pun intended) is, this movement of people is inevitable and in a macro sense, it's desirable.

As an investor, I love the movement of people when it creates a new entity with tons of promise. It makes me feel better that the management of this new company has experience and knowledge. But, after I invest I want those people to stay, as long as they continue to be valuable contributors to the success of the venture. I'll be damned if they leave and join a competitor. Hypocritical? Yes. I want everything to work out for me. The dollars I invest are not to train the next startup's CEO.

So where does that leave the struggling new company that desperately wants to hold onto its key people as it grows? My short answer is that it comes down to leadership and success. Actually, through leadership and creation of a desirable company culture comes motivated people and great products or services (i.e. success). Sound like fluff? I'll prove it to you.

I saw a great presentation last week where part of the emphasis was on leading through shared values. An analogy was made comparing a company to a flock of birds. The birds know that there are 4 basic intentions that will lead them to their goal of getting through the migration. 1) follow the bird in front of you 2) don't run into the other birds 3) don't stray too far from the center 4) avoid objects like telephone poles and jet engines. If your employees know the basic rules, the fundamental laws of being your employee then you can let them go to be creative. It's pretty simple really. A local software company had two rules: no drugs and no sex on premises. Pretty much anything else was OK.

One more very important ingredient to instill in your flock is a sense of what the goal actually is. The vision of the company has to be big if the company itself is to ever become big. I have talked before on the amazingly low sights that Canadians seem to set. The company that wants to take on the world will either be a spectacular flame-out or a huge success. The employees have to believe that they are changing the world in order to follow such high aspirations. Apple is probably the best example of a company that created religion in its customers and its employees. Steve Jobs was (is) mesmerizing. His "insanely great" mantra helped Apple become a huge success and allowed him to attract and keep the proprietary knowledge of Apple at Apple.

Another important factor in employee loyalty is a comfortable workplace. Some local companies have clearly gotten the message about a fantastic place to work. Seagate Software created funky new offices in Yaletown. Electronic Arts has an unbelievable new building in Burnaby. Even if you don't have millions for a new building, you can have great space in an appropriate location (Paradata Systems in Whistler, for example). An un-named character in my work history consistently brushed off the "soft stuff" and said that feeding people with ideas of a better place to work was tantamount to mutiny. I felt like Norma Rae. Clearly, he did not get it (and still doesn't). Any investment in improving the workspace pays off in keeping employees in the long run. So listen to them and involve them in the decision.

You can't keep employees at your company by only erecting legal barriers against them leaving. Nor, is it advisable to build a great place to work with a revolutionary vision but not have your employees sign anything legal. The right solution to keeping your people is to provide both.

Random Thoughts

- One of the more intriguing developments in the somewhat mind-numbing world of technology patent law is a recent US Supreme Court ruling on software patents. Now, like you, I was always told that it was difficult and usually not strategic to patent your software. After all, the rapid pace of development in the software world meant that by the time your lawyer and the patent office had finished their expensive marathon of paper shuffling, you were on version 3.0. But check this out:

"The US Supreme Court gave its blessing to a US appeals court decision in State Street Bank & Trust Co. v. Signature Financial Group Inc. in favour of Signature, which sued State Street for allegedly replicating its patented investment application. Signature's patent covers not only its application, but also its unique "hub and spoke" method of centrally calculating investments for several mutual funds - a method built into its software." - Information Week, Feb 22nd 1999

The importance of this is that you can, in fact, patent business methods. It used to be that business methods were too abstract and could not be patented. Not any more. Think about that for a minute. You can protect a novel business model. With the new ruling, the US Supreme Court has recognized the inherent value of the marketing department of high tech companies. Now you can create legal barriers to entry from more than your technology patents.

- Highly recommended reading: Bulldog, by Ellie Rubin. It's a high-tech entrepreneurial tell-all that is a) from a woman CEO and b) from a Canadian. Finally, much needed perspectives. The book is full of great anecdotes and truisms of starting and growing a high tech company in the 90's.

- I have recently mentioned the lack of Canadian and BC e-commerce companies. It's a visibility thing I guess. I went looking and found a few. Seems we are big in BC in games and gambling (taking advantage of the fact that the U.S. banned on-line gambling, but we haven't). Here's a smattering: http://www.casinogrande.com ; http://www.bingo.com ; http://www.worldgaming.net Glen Clark has really fostered a new industry here hasn't he? I checked, none of the operators of these sites has ever built a deck for him. All kidding aside, Starnet Communications, the purveyor of the World Gaming site is on a real roll (again, pun intended) with its NASDAQ OTC stock (SNMM). Market cap is now about $400 million CDN on about $12M annual revenue. You can place a bet on their site and on their stock at the same time!

Response From Last Week's Column:

Hi, Brent,

Thank you for your article of March 5, 1999 suggesting that the federal government provide more support Canada's high technology industry. Being in the investment business like yourself, I agree that more needs to be done to nurture the growth of our domestic high tech industry.

You mentioned that the capital gains tax should be dismantled for any gains made from investing in early-stage, private technology companies, employee stock options or foreign investment, or, at the least, reduced. This is exactly what was prescribed recently at the Alliance BC forum by Larry Lopez of the Silicon Valley Bank (who knows a thing or two about the high tech industry in general and budding young tech companies).

Another option that has been suggested, by a speaker at the B.C. High Technology Industry Conference last fall (Harry Jaako), was the introduction of a tax-incentive driven flow-through share program for investments in the shares of high tech companies. Such a program would be akin to the existing tax-favourable treatment of investments in flow-through shares of mining exploration and oil and gas companies, and would likely spur a greater infusion of capital into the high tech industry. If the government is willing to give out tax breaks for these industries, surely it can consider doing the same for Canada's promising high tech industry.

David Ing
Pacific International Securities

- Mike Volker, Harry Jaako and many others have suggested an improvement to the exisiting VCC (venture capital corporation) structure that would make it easier for these investment vehicles to be set up. Put simply, it should be changed to allow your friends and family to get a tax credit if they back you in the early stages. I think it would greatly increase the capital flow into very young BC technology companies. The few diamonds that would appear from that rough would more than offset the tax credits given to all of the busts. It's overdue, David.

I thought the recent stat about Lucent's and Microsoft's tax contributions having already covered every high tech development dollar the US government has ever spent to be a particularly compelling lesson in returns on high tech.

The CDN government's defacto investment in high tech by lowering tax in this area makes them, in a sense, an investor, and they will yield the enviable returns of funds such as La Caisse, Working Ventures and even the BDC through the tax dollars of successful startups. It is a good business to be in, they should try it. Funding losers is exceedingly expensive, which is in part why not many institutional investors actively seek losers out. Bad management, check: old product that is being phased out, check: no access to capital from the public markets or institutional investors, check: shrinking global market, check. Perfect, lets get some money into that baby and retire early.

Joe Timlin

- I received no official responses from my suggestions to Sheila, John and Paul. But your was by far the funniest of the ones I receives from my column readers. It's so funny I started crying. Actually, I haven't stopped crying thinking about the stupidity...

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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