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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