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Money City Maniacs
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 30, 1999

By Brent Holliday
Greenstone Venture Partners

"Hey You!
You've been around for a while
If you'll admit that you were wrong, we'll admit that we're right
Hey You!
Come along for a ride. We'll hit the Money City if it takes all night. "
- Sloan - Money City Maniacs

I promise to get back to some more fundamental technology issues in the next column. But, due to the intense run up in the Internet related stocks, and the resulting hysteria in Canadian Net companies, I have to make a few more comments related to financing.

In venture capital, we have long term horizons for investing. More than anything, VCs have realized the cyclical nature of industry and the stock market. That's why you see funds that invest in both biotech and the Internet. While one's hot, the other may be very cold. But, overall the fund can continue to have opportunities to make money by selling companies or taking them public. Look at the history: In the early 80's, venture capital started in earnest with the boom of the PC and biotech. Apple and Genentech were the first venture backed firms that showed the world how lucrative early stage investing could be. Interesting aside: Did you know that Compaq was the fastest firm to reach $100 million in revenue from start-up? It accomplished that feat in 18 months. How many business plans even dare to say they would do $100 million in the first two years of operation?

Some pretty lean years for VC investing came in the late 80's early 90's. The IPO market disappeared after the '87 crash and the big successes of the early 80's were struggling. Software was the hot play during these years, because Oracle, Microsoft and Lotus were doing very well, despite the worldwide recession. Then in '94 the floodgates opened. Just as exciting as the birth of the personal computer, the Internet lifted all of us into an entirely new field ripe for start-up investment. This wave has yet to let up. Meanwhile, semiconductors have gone up, down and up again since '94. Biotech has stayed down. Enterprise software is very un-hot now due to Y2K. Even in this 5 year bull market, there have been many technology cycles.

We are always looking for the Next Big Thing. We always want to invest on the crest of that wave. We invest early and we stick around for the long term, trying to build companies that will be the next Oracle, Ballard or Intel. We are usually involved in these companies for 4-5 years. I've heard of VCs in companies for as long as 13 years. What kind of return do we get? Well, we hope to at least double the 10 yr return of a stock market. Only then is it worth taking the risks of investing before a company has revenue, let alone profits. We all get out of bed in the morning hoping that we invested in eBay, like Benchmark Capital did. Their $6 million investment became $3 billion in 3 years. Yes, that's billion, with a B.

Why the crash course in the philosophy of venture capital? Because there is a tremendous urge to throw it all out the window and join the herds making the fast buck today. Since November, 1998 we have seen the single most volatile and most stupendous gain in stock market value than any other period in time. The paper billionaires created in the past quarter are too numerous to count. Case in point: In 10 days in early April, I played the e*trade Canada stock market game. It's just like real life trading, only you get $500,000 fake money to play with. I made $68,000 or 13.6% in two weeks holding only Net related stocks. Not bad? The person in first place made $5,000,000 in the same period! I bet they wish the money was real.

It seems that the latest sure thing is to try and buy a Net related IPO at its first trading price and hold for a day or two. You can still make 20-30%, even though the actual increase from the IPO price is 100%. It hasn't let up. Razorfish, not that much bigger and certainly no cleverer than Vancouver's Columbus Group, just doubled their value in one day yesterday. I counted a grand total of one net related IPOs in September and October 1998 (eBay). In the past week I counted seven. And ten more filed to go public soon.

You've heard me say it on record. So has just about everyone else in the financing industry. This madness will end. Nothing goes up forever. There is an ebb and flow to every market cycle. When will Net stocks tumble? I give up trying to predict that. I'm thinking mid-summer, butÖ Is this mania a good thing? If getting rich is your bag, then yes it is. Personally, I have not played with real money in the Net stocks. But I know lots who have. If you know when to sell and stay out, you should end up on top. Sounds like a casino to me.

Let's revisit the VCs. Are they getting rich in this current mania? Yes. They backed many of these companies two or three years ago. Pop quiz: In October 1996, well after the Netscape IPO hysteria in August, 1995 was gone and a newly traded company called Yahoo was at $4 (split adjusted) and not moving, a man walks into your office. He says, "I will create the world's largest garage sale on line." You say, "I've seen these e-commerce web sites and they are not doing very well at all. The biggest is Amazon.com and I heard they are selling about $1 million worth of books a quarter. Big deal. A well placed Barnes and Noble does that in a single store." The Internet is not hot. Skeptics abound. Yahoo is a running joke in the analyst circles and the general public has heard of the Internet, but many have not tried it. Would you put $3 million behind this guy? Bull. You would not. You'd think he was crazy. Now he's worth $5 billion because he started eBay. The guys that did back him were VCs. They were positive that the Internet wave was going to go further than it appeared in 1996. And they were right.

Why did the VCs back the founder of eBay? Because they looked long term. They said that eventually e-commerce will take off. I'm pretty sure they did not see it taking off quite so fast. In order to keep the company afloat as the market developed, the VCs and the company had a long-term financial plan. The original plan in late 1996 probably called for 3 or 4 rounds of financing towards an IPO in 2000 or 2001. At the time, that is when the pundits were saying that the Internet users would be on the Net and buying products en masse.

Fast forward to today. An entrepreneur walks into my office and says, "I have a plan to make an auction site on the Internet." They then point to the wild success of all of the existing auction sites. In my books, this is the opportunistic laggard entrepreneur. Here's a tip. If the business you are planning to make has been mentioned in the Vancouver Sun or the BCTV News Hour, you are probably a bit behind the curve and most VCs will have been there, done that already. Unless you have a completely new spin or interesting niche application, you are far too late to the party. The last thing I want to hear is that you will be the "next eBay".

Here's where I get a little controversial. Remember, this is my opinion and mine only. I see far too many of these laggards making public offerings on the OTC or CDN or even VSE or ASE. I'm not being snooty and looking down my nose at these companies because they listed on these exchanges. Not at all. It's just that I have to shake my head at the hysteria for Internet related companies and the short term buck. I was at the Technology Investor Conference last week and an un-named broker handed out a list of "hot" Internet stock plays that his firm was following on the junior exchanges (and a couple on the TSE). He basically said that if you want to make money, you better get in now. He's probably right... but... I went through that list. I checked out these companies. Many of them, not all, but many of them are laggards. They are following other much larger and established companies with the exact same business model.

I've met with a few of these companies. I've listened to their pitches. I see the entrepreneurs thinking short term. Very short term. They get in, create some hype, run up the stock and get out. Sound familiar Vancouver? Used to be mines, now it's Internet.

As an investor in these shark-infested waters, be aware that your money is in a fleeting market. These ain't long term plays. As long as you are comfortable with that, good luck. Beware the shuckster that promises years of incredible growth.

I'd be the first to admit that I have not made a fortune in these Net stock run-ups. Am I stupid? To some, I am. But I didn't invest in Bre-X either. My philosophy is different. I'm interested in creating companies that can last. That can fight it out in the market with innovative products and smart marketing. Mike Volker writes about those companies that are public already. Read what he has to say carefully about companies like Burnt Sand, Infowave and many others.

One more thing. I will be wrong about some of these Net plays. Some actually make money and lots of it. But I'd be willing to benchmark that list of Net related companies and re-visit it three years from now. Just a hunch that some of them will not make it, especially when they are starting three years after the successes in the market today.

Please, young, smart entrepreneur, please develop and implement a business plan that stays focused on growth in an innovative new industry that isn't today's hot topic. Make it tomorrow's. Don't build a plan for the quick buck. The quick buck plan usually ends up making only lawyers rich.

Random Thoughts

- Nortel's CEO, John Roth, is on a mission to make personal income tax his cause celebre. He has taken every opportunity to threaten that Nortel may move to the US, not to avoid corporate tax, but more to keep his engineers, who are all taxed in the top bracket at a mere $60,000 a year. This is no idle threat by Mr. Roth. He could care less about how Nortel got to where it is. He only cares about where its going. If he cannot keep his best people in Canada, he will go join them. That would remove one of the four "billion dollar" technology companies that we have fertilizing our early stage companies and growing our technology industry. Do we need to go there before we call for some tax sensibility?

- It appears that we have hit the bottom of the commodity price curve and now BC is in store for a modest recovery based on resource companies actually making money again. For us in tech land, this is bad news. Now the NDP can ignore us completely. The resource sector affects more votes in more regions (read more seats) and will be trumpeted by the government. When things were really bad in resources, tech became very hot. For a year there, we had lots of promises and lots of press. Then the new budget came out and our intense lobby to ease the capital gains tax on employee options resulted in nothing. Nada. No support. I believe we can create the next economy for BC, despite the government. It won't be easy, but it will be nice to ignore them for a change.

- A lesson for BC TIA and the City of Vancouver or Victoria: A six page glossy colour piece advertising Ottawa high tech companies in a short profile format was in this month's Red Herring. Both public and private companies were featured. It makes Ottawa look like a real player to the audience of venture capitalists, investment bankers and technology executives that read the publication religiously. It was extremely impressive. It was sponsored by the Ottawa Economic Development Council.


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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