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