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Revisiting Ballard

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

Something Ventured:
May 14th, 1999


Insight For BC Technology Entrepreneurs

By
Brent Holliday

Revisiting Ballard

"The sweet sound of patent approval,
coming down in a not quite fog
The cold eye of constant approval,
Comin' down to look real close
" - Tragically Hip, Butts Wigglin'

Believe it or not, this week is a .com-free zone.

A year ago, I opened my stint as T-Net columnist with an article about Ballard Power Systems and the immense economic opportunity that this company presents for BC. I argued that we needed to move quickly and decisively towards the establishment of "Hydrogen Valley" by working with universities, government and capital providers to encourage entrepreneurs to fill pieces of the coming value chain in fuel cell applications. Well, quick and decisive are two adjectives that don't spring to mind much around here...

Think about it. Ballard can't change the world all by itself. Firoz Rasul, President of Ballard, would be the first to tell you that they have a core competency in innovating and engineering fuel cell technologies. It is not their intent to figure out how to make money selling fuel cell cars, providing and distributing liquid fuel for the cells, flogging fuel cell "batteries" for low and high power applications, etc. If you have religion in fuel cells, then you should see the immense opportunities and by virtue of being here at hydrogen ground zero (that has an awful ring to it, actually), you should be able to find the people that know this stuff better than anyone in the world.

Free plug for Mike Volker, my fellow T-Net columnist: the next Vancouver Enterprise Forum on May 25th is all about fuel cells. If you want to hear from the experts, then you should be there.

The real title for this week's column is How Many P's In Ballard? In biz school, in order to understand marketing, you are taught the 4 P's (Price, Promotion, Positioning, Product and Distribution... yeah, yeah, I know). To understand the successful building of Ballard Power Systems, we have to look at 5 P's:
Patents
Perseverance
Patience
Partners
Publicity

There's a 6th P that is an interesting part of the story (Profits), but it is only noteworthy by its absence.

Patents: Very early in the history of Ballard, founders Geoffrey Ballard, Paul Howard and Keith Prater understood the power of intellectual property and its fundamental role in creating value and establishing competitive advantage. The basic science behind a hydrogen fuel cell is not patentable. It is over 150 years old. But designs and innovations to make it smaller, cheaper and easy to manufacture are patentable and Ballard owns hundreds of them. It became Keith Prater's job to scour the scientific journals and attend every obscure conference worldwide to secure many patents that Ballard did not invent themselves. I have this image of him swooping down on unsuspecting grad students like a Hollywood agent, "Hey Dimitri, loved the publication on carbon microfibers. Whaddayasay I give you 50 G's right now, you sign me the patent rights, we work out a royalty thing and you get yourself a nice spectrometer. Huh? Luv ya babe!"

Seriously, Keith became a master at finding and negotiating patent rights in order to help Ballard become the only fuel cell game in town. (He is now a freelancer for those of you that need an expert opinion on your patent strategy.) Ballard's strength is that it is the undisputed world leader in the engineering of fuel cell technology. Period.

Perseverance: Oh, how sweet it is for Geoffrey Ballard now. In 1974, he left the US Energy Department (he's Canadian, by the way) and started on his own project to create lithium batteries that would last 20 years. For those of you whose cell phones just died after a measly 45 minutes of talk time... well, let's just say it didn't work out the way he planned.

The founders changed course in 1983 to commercialize fuel cell technology. Now, I'm not an engineer, nor have I taken the time to design and build anything larger than a treehouse for my four year old. But when I see the real engineers from Ballard talk about the progress that has been made since the mid 80's, I begin to understand. It's like the makers of Swiss watches that will weep openly when they open the back of a Patek Phillipe. You understand their assessment of the beauty of the craftmanship and the toiling that has gone into creating it. It's been fifteen years for Ballard. And they still aren't there. But the perseverance and the unfailing focus to deliver the economical fuel cell is unwavering.

Patience: Ballard is a contradiction to today's tech companies in many ways, but this is probably the most contrarian key to their success. They have a 20 year development plan. For their first product. Version 1.0. Obviously, they don't serve coffee at Ballard. They all listen to Jurgen Gothe. For the skittish web marketer of today, this must be one level of Hell. With the perseverance of the engineers and management, comes the necessary patience to get everything done right. The reason they can keep relaxed is mostly due to their incredible patent protection. But the temptation to break from the development plan and commercialize something else related to fuel cells must have come. In fact, it has. And Ballard has created many subsidiaries over the years that run with new ideas. This is a sign of great management. They are keeping the main company's eye on the ball.

Partners: Well, duh. This is obvious. Ballard is where it is today, largely because it has forged world class partnerships with automotive and industrial power players. These partnerships are financial in nature, but have really been about R&D. If you are going to aim high and try to fossilize the internal combustion engine then you will need more cash than is available in private and public equity markets in Canada. But you also need smart partners that can share resources in the form of people and technology. Firoz Rasul is widely seen as the genius in Ballard's business development. He has forged many of these incredible deals (half a billion dollars and counting) that have kept Ballard from giving away the farm. Here's a tip you didn't hear from me: If you are going to spend $10 million on R&D, try getting the money from industrial partners in exchange for "first look" at the technology and time limited exclusives to its commercialization. Don't raise it all in equity from funding sources. Ballard has leveraged small initial equity investments from local VCs into millions in non-dilutive corporate money.

Partners also bring credibility. Any start-up knows that. In Ballard's case, they legitimized their concept when Daimler-Chrysler and Ford joined the party.

Publicity: Certainly since Ballard has been public, they have figured out the publicity game. The golden rule of PR is to make sure that there is some news every month or so, such that the company is perceived to be always in the news, yet is not being overplayed like a Z95.3 song. Ballard and their PR department, led by Debby Roman, have got this down to a T. Public companies rely on two main conduits to investors: analysts and press releases. Ballard was suffering the Canadian zero analyst coverage problem until mid-1997, when Morgan Stanley picked them up in New York. Now they have great coverage for a company that is not in a "sexy" business segment. Mark Anderson of Strategic News Service devoted his entire issue to Ballard last week. He is read by all of the top IT and communications executives and financiers in the US. But the real forte of Ballard is getting their story out in a variety of different ways and at well-timed intervals. Wired magazine did a feature in late 1997. Fortune covered them last year. And now Time has made Geoffrey Ballard a Hero Of The Planet (who has the rights to the action figure?). These articles neatly filled in the spaces in time where there were no partnership announcements or other corporate news.

I think that BC companies need to focus on getting the publicity game right before they go public. I can't stress this enough: Perception is everything. Getting your message out is vital.

It's safe to say that Ballard's technology will change the world. I think we all need to heed their success and what it took for them to be successful and change BC too.

P.S. I can't contain myself: Hey Glen! If you're going to put $60 million of our dollars in to Western Star Trucks, please put another $60 million or so into a facility that incubates all of the Ballard spin-outs and commercialization of related fuel cell technology. I guarantee you we would make 100 X the return on invested capital and 10 X the number of jobs.


Random Thoughts

- The Canadian Venture Capital Association Annual Meeting was here in Vancouver this week. I know it's hard to imagine or stomach the thought of 300 VCs in one room. One entrepreneur quoted me the Bruce Cockburn song "If I Had A Rocket Launcher", alluding to the fact that one well placed projectile would solve a lot of his headaches. It got me thinking this must be why lawyers don't have conferences, but I digress. The good news for entrepreneurs is that there is $8 billion of venture capital under management in Canada (roughly $1.75 billion available to invest, the rest being tied up in existing companies), up from $300 million only 9 years ago. The bad news is that 1998 saw a small decline in invested dollars ($1.65 billion) from 1997 ($1.82 billion) after 6 years of impressive growth. Why? That's a whole other column, my friends.

- Dan Gelbart of CREO Products spoke to the crowd of VCs about the CREO story. He had a very salient observation. BC's successful technology companies are largely R&D firms and that's all. Ballard: We covered that. No product, yet Creo: does some manufacturing, but has 400 people doing R&D only. Electronic Arts: More D than R, but I guess you have to say they don't make the final product. MDA: heavy in R&D Dan's point was that we need to realize that BC is the best place in the world to do R&D because of the cost. He can't figure out why major companies in the US haven't figured this out...

- There may be dancing in the streets soon as three prominent local tech companies do IPOs in the near term. Sierra Wireless is listing May 17th on the TSE. It is trading above its IPO price in the grey market and was oversubscribed. Creo's on again, off again IPO is apparently on for real this time. They are going to the NASDAQ. Pivotal Software is rumoured to be ready to float their red herring in the U.S. Keep checking the SEDAR and EDGAR sites for the filings.


Response From Last Week's Column:

Hello,

I enjoy your "Something Ventured" column and read it on a regular basis. It
would be great if you could address non-technical education and career paths
for high tech professionals. BC's tech industry certainly needs more
qualified technical professionals. But BC also lacks qualified managers with
a solid understanding of how to make technology companies strong and
successful. I'm not talking about engineers with MBAs. I'm talking about
high tech marketing managers, human resources directors, sales people, art
directors and other non-technical professionals.

What sort of education and career paths should these people take? For
example, is an MBA the key? If so, should it be a general MBA or one that
specializes in IT? Or should these people explore a technical diploma, such
as those $10,000 to $30,000 graduate programs offered by UVic, UBC, SFU and
ITI? And what should non-technical professionals make of TechBC's new
Masters of Applied Science in Management and Technology? And, beyond
education, what life-long learning should non-technical professionals strive
to find? How can we find mentors in a province that, until recently, has not
had a high tech past? What local companies provide the best learning
environments for people just starting out at the assistant and coordinator
levels? Is it worth heading down to Austin, Palo Alto, Boston or the
Research Triangle to find out how US high tech companies do business?

BC needs to build a strong high tech sector in order to succeed in the
competitive global marketplace. To do so, we need competent technical
professionals, outstanding educational institutions and a climate that
supports the high tech industry. As companies grow, the engineers and
programmers who have founded high tech ventures will need to be supported by
outstanding professionals who understand business, sales, marketing,
financing and human resources. The technology will not sell itself.

Thanks.

> Andréa Coutu
> Marketing Coordinator
> InterLogic Engineering Ltd.

- Andrea, I completely agree with your sentiment about non-technical people and I will address related topics in the future. I also agree with your statement about the lack of management ability. For some reason there is unanimity about this problem here, but no real solution. Cutting taxes would help, but there's more to the story. So, in the meantime, how do we effectively grow our own managerial talent? I believe that is the summary question to all of your specific questions.

I'm a big fan of learning by doing. I would like to see industry and all of the educational programs you mentioned above developing co-ops. Real experience in real tech companies will help people learn better than in any classroom. But you need the fundamentals, otherwise you are of no use to the company. There are strong educational anecdotes on "best practices" in periodicals like Fast Company or by speaking to people at conferences and trade shows. Reading more always helps. There are a few hundred books that are insightful. In terms of lifelong learning, you need to force yourself to spend a few hours a week away from direct work and bettering yourself. New on-line learning resources are starting to show up, like Digital Think.

As for local companies with great learning environments, you should look to the larger firms first. Get the experience in a firm that has tasted success so that you might know what success is when you join a start-up.

Brent,

I usually agree and enjoy your columns. I even enjoyed your latest one on
April 30th. However, I get this impression that you are beating the drum
louder about INternet stocks because you missed it and, yes, eventually you
will be right - how could you not be (the market will correct). They will
drop. But even if they drop by 50% or 67%, there is still incredible value
that has been created in Internet plays since last fall. Don't invest in the
over-valued companies!! Duhhh.. However, there is still incredible room for
new players to play. I believe what will happen is that some of the value
will be shifted or spread out to the small and new players. The multiples
won't be as high but there will be value. THis is still a nascent Internet
world and it is the future. There will be setbacks but the trend is there. I
have this feeling that you are going to miss it again. I missed it the first
time (I shorted Internet stocks like Amazon) but I can tell you that I now
think that it is a long term trend, not a flash in the pan. I have been
selling our Internet related wares for the last 3 months and I can tell you that this
has been the EASIEST job that I have ever done. All of my major target
clients are buying Internet services and they can't get enough of them or
get them quickly enough. I might have agreed with you sentiment before,
however I have changed my mind.

Sincerely,
Not Easily COnvinced.

- It's OK to enjoy the column and disagree. I might not have separated my personal investment history and my professional investment philosophy well enough in the article. Personally, I tried the self-deprecation route and admitted to all of you that I didn't participate in this great Net stock run up. Couldn't pull the trigger. Professionally I was trying to point out that to be enjoying the spoils of the IPO market over the past 3 months, we would have had to invest in these companies 2 to 3 years ago. So to pull the trigger on an investment today means that we need to factor in the very distinct possibility that this market may not be hot in 2 to 3 years time. Then, I went on to say that there are those financiers that want to do the quick flip and the majority of these deals will be flimsy "me-too" companies that have not got a compelling competitive advantage. Stupid us, we will not get those quick returns. Have you read the Gorilla Game by Geoffrey Moore? Huge returns are offered by investing in companies that can dominate a global niche. That's what we are looking at investing in, partnering with, mentoring and otherwise help to grow. I have Internet religion. I just want to see what you can do for me in the long term.


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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