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High Tech Self Loathing
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
May 7th, 2004

By Brent Holliday
Greenstone Venture Partners

"I've had enough,
I'm getting out
To the city,
The big big city
I'll be a big noise
With all the big boys
There's so much stuff I will own" - Peter Gabriel, Big Time

I am Canadian. It's not a beer slogan. It's the truth. My gene pool goes back nearly 400 years on our soil. I take immense pride in the accomplishments of our country. I am a student of our history and aghast at how little most of us understand about the struggles Canadians went through to get us to where we are today. I get angry when Canada or Canadians, past or present, don't get their due. I have traveled enough to know that this is the most desirable place on the planet to live. But my pride in my country does not interfere with common sense when it comes to business. We live in a global market. So, don't look at me to be an apologist for what Denzil Doyle calls the "hollowing out" of Canada: Foreign takeovers of early stage technology companies.

Denzil just wrote a paper for ITAC called Building World Class Canadian High Technology Companies. I don't for a microsecond disagree with the notion that we should try and build huge companies here. But I do strongly object to the sentiment expressed in the paper about the apparent willingness of weak Canadians to roll over and let big, bad US companies take them over. Dan Friedmann, CEO of MDA, took the opportunity in Business in Vancouver this week to echo Denzil's comments on building big companies in Canada as his very big and very successful company made an acquisition of its own. Many before Dan and Denzil have asked the rest of us, rather accusingly, why we can't just be big and successful and hold off attempts at takeover.

Wait a minute? Who made it a moral indignation to sell a company and make money for shareholders? And is this really a "problem" at all? Or just a symptom of the fact that our technology industry is a pubescent teenager compared to the grown-up US industry.

The "problem" as Denzil sees it is that we make plenty of $10 to $20M dollar a year revenue companies, but very few $100M a year revenue companies in technology. He may be right, but compared to 10 years ago, we are doing a lot better at creating $100M companies. Besides, what is the difference to our economy between five $20M a year companies and one $100M a year company? Same number of jobs, taxes and probably a little market diversity is all. Denzil argues that big companies develop the "challenge of worldwide decision making" in their managers and incubate spin-off companies better. He has absolutely no data to support this and many other facets of his thesis. But, even after acknowledging he doesn't have the data, he makes the conclusions anyway because it's "common perception". My perception is that the CEO of a $1M a year technology company has the "challenge of worldwide decision making" in today's economy as he/she tries to get reps in Asia, sell through a partner in the US and hire a direct sales guy in Europe. Somehow I think Denzil pictures all technology companies as potentially becoming Newbridge Networks, a company he is very familiar with in Ottawa. All of those brown buildings in a farmer's field in Kanata that spurned an industry in Ottawa now have the Alcatel label on them probably has him mourning.

Let's look at the really big company for a second. Besides the obvious potshots at Nortel, a really stinking big company where management believed they were Masters of the Universe, you have to see that any size company faces massive and continuous threats in high technology. The evidence is everywhere. Let's look at telecom equipment market: Top 10 makers of gear in 1994 vs. 2004. Three are still there. And all 10 of those companies in 1994 were really big companies. Some are gone, swallowed by bigger companies or simply out of business. Look locally at Creo, our really biggest of the big companies. It is struggling right now and is ripe for takeover, trading below its asset values. And MDA is really firing now, but it was not always so. Doesn't Mr. Friedmann recall that his company once sold to Orbital Sciences before being bought back and going public? I'm sure he does and is proud of the fact that he un-did that transaction and now has a roaring Canadian company. But getting BIG is HARD and staying BIG is even HARDER!

Being BIG does not guarantee longevity and does not mean your CEO is smarter than the smaller growing company. Ask JDS Uniphase about their 15 minutes of fame as one of the world's largest technology companies. BIG can be fleeting. But most importantly to this argument, getting BIG is not a design, but a series of events and good fortune, usually because of good people executing very well on a daily basis. And once you are BIG, it's hard to stay there. Pivotal is an excellent example of everything I just said. They started as a company in a very different software market with a different name. They re-grouped when that market turned sour. They built a timely and superbly engineered product. They marketed and sold it very well. They went public. They became BIG. They stayed mostly in Canada. Then sh*t happened. Now their software is out of favour and the next wave of technology swamped them. Now, had they sold in 1999 before their IPO, one wonders how many Canadian jobs and how many copies of the software would be out there today. But they wouldn't have been a BIG Canadian company. Oh well, now they are neither BIG, nor Canadian.

Here's an especially important point: You really can never be a BIG company without a product line or an entire solution to sell. Start-ups rarely start with a line of products. It evolves through time and dynamics in the market. A smart group of managers sees new opportunities and builds the product to suit. But with limited resources, start-ups are often based around point products or part of a bigger solution. The inflection point between sale of the company and going to be BIG is usually at the point where resources are needed to expand a product line or acquire an entire solution. So, selling a technology company to another strategic buyer at this point is a way of removing risk from the equation, not to mention giving shareholders some liquidity.

I do have to strenuously agree with one point that the Doyle paper makes and that is this: One of the reasons we don't have companies that can compete effectively on the larger technology stage with the US is the lack of a similar pool of growth capital available. We can start 'em up (and we do at a far greater rate than in the US), but we can't get 'em through (far smaller rounds of financing than the US). The choices to go BIG are not as evident when you lack resources to even try. Some might say that our entrepreneurs lack the choice to even go BIG based on this constraint.

Locally we have a recent example of a company that seemed to not have the cash constraint, Octiga Bay. Raising $22M from the word go, this company was said to be a huge story, a billion dollar opportunity. I believe John Seminerio was quoted as saying that they would have a huge building with their name on it (sounds like a Newbridge kind of ambition). Assuming they had the choice to grow with cash from their existing investors (all >$150M in fund size), why did they choose to punt early? What did management and the Board see in their roadmap that caused them to ease their ambition? Here's my prediction: The Vancouver arm of Cray Computer will soon be larger than the US headquarters. In a few years, the majority of revenue will come from the Octiga Bay product line. And, yes, John will have a big building with a name on it… a US company name. Why is this bad?

Other than a few regions in the US (the Silicon Valley, Boston and Austin), many regions lack the resources and therefore, lack BIG companies in technology. But one or two break through and set themselves as anchors in the community. My view is that Canada and its few technology centers are no different than, say Raleigh, North Carolina or Denver, Colorado when it comes to creating BIG companies. It's just that we, here in Canada, call it some huge mistake and wring our hands and start suggesting policies that might make it different. It's not wrong to sell. It is an unavoidable circumstance of the market. For God's sake, don't let the government try and "make it right". Our early stage engine is fragile enough.

We live and grow our companies very close to the biggest, most dynamic (some say, Schumpeterian) economy in the world. To have that massive sucking sound constantly hoovering up innovative and valuable technology is not a bad thing. It isn't a good thing either. It just happens. Get over it. Denzil, you're being too Canadian.

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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