Something
Ventured:
May 30th, 2003
By Brent
Holliday
Greenstone
Venture Partners
"In
the days of my youth,
I was told what it means to be a man.
Now I've reached that age,
I've tried to do all those things the best I can.
No matter how I try,
I find my way into the same old jam.
Good times, bad times, you know I had my share... "
- Led Zeppelin,
Good Times, Bad Times
It
is a sign of the times in technology that I am receiving
about as much support for a point of view as I am
receiving criticism. I have been roundly criticized for
being negative and telling tales of despair as much as I
have been criticized for being too optimistic for the
technology industry and its potential to grow in BC. A
wise investment maven once said that the true sign of
the top or the bottom of a cycle is lots of conflicting
messages. If you are scratching your head a lot at what
you are seeing, it's probably because trends are
disappearing and change is a-coming.
Fans
of conflict avoidance will appreciate what I will try in
this column. I will share the headlines from recent days
or weeks and then give the optimistic bullish analysis,
followed by the cynical bearish analysis. Therefore, I
have no chance of receiving negative mail on my point of
view. Of course, I have no chance of getting positive
responses either. See, it's working already.
Crystal
IPO Filed - The really, really big story of the week
is hometown, homegrown Crystal Decisions filing their
S-1 to go public on the NASDAQ. The company will raise
US$172M for its war chest and the early line has it
pricing in the US$750M market capitalization range on
US$217M trailing 12 month revenue and US$13M profit.
Half-full
glasses - The IPO gives a fantastic shot in the arm to
Vancouver's credibility as a place to grow technology
companies. It is being referred to as the 2nd most
anticipated IPO of the year in the US behind Google (who
will be watching Crystal's performance very closely). At
least 1,000 of our local technology employees are happy
with what will likely be a bouncy ride up for Crystal in
the first few months of trading in a starved market with
tons of liquidity on the sidelines. Sometime next
winter, we will all be invited to Greg Kerfoot's
personal ice rink in Whistler for an "end of lock
up" skating party. But seriously, the company will
likely continue to grow with its new money and build a
lasting legacy by becoming Vancouver's first billion
dollar software company.
Half-empty
shades - While the company is doing well, the IPO is
more of a guinea pig than a bellwhether. With no
meaningful technology IPOs since Netscreen 18 months
ago, it could fall flat on its face. The latest run up
in the NASDAQ is a dead cat bounce and not a real bull
rally. Because Crystal is 85% owned by private equity
firms (VCs) that spun it out of Seagate, the incredible
selling pressure at the end of the lock up will keep
institutional firms from taking positions, leaving the
company's public float open to day-trader's fickle
fingers. If Crystal stubs its toe, it could irreparably
harm Vancouver's software industry in the wake of
Pivotal's tremendous slide.
Chretien,
a.k.a. Flamethrower - Jean Chretien further fans the
flames of discontent south of the border with his
remarks: "Nyahh, Nyahh, Nyahh, Nyahh, Nyahh,
Nyaaaahhhh. My deficit is better than you-ors. My
unemployment is better than you-ors. You don't know how
to be prosperous. And your just a dumb Texan."
Actually, that's not a direct quote, but close enough. I
swear he had his hands at the side of his head flapping
his fingers at Bush while he said it, though.
Half-full
glasses - Sometimes the truth hurts, doesn't it? If they
are mad, hopefully they'll get over it by writing him
off as a lame duck leader anyway. And besides, the
constant bickering of the past few months and
"official rebukes" are politically driven and
do not represent the feelings of most Americans,
especially those doing business with us.
Half-empty
shades - Bob Hope had timing, Chretien has it bad. What
a nincompoop. No wait, he's an imbecile. It has never
been "Canadian" to stomp on your friends when
they are down. If the US rage had gone from boil to
simmer over the non-participation in the Iraq war, and
they were actually starting to feel a bit sorry for us
with SARS and mad cow, Chretien single-handedly ruined
it all over again. Being Canadian is now a threat to
many Americans and business, including our fragile
technology industry, is going to get it between the eyes
thanks to our official Chief Gloater.
Earnings
Are Up In Technology - For a full year, quarterly
earnings in large cap technology companies have risen
steadily according to a CNBC story this week. The cost
cuts and right-sizing have apparently created a new
level of profitability that appears to be growing. The
report was careful to note that IT spending has not
risen appreciably yet.
Half-full
glasses - If the technology industry has figured out how
to make money at lower levels of revenue than in 1999
and 2000, the future is very bright. Any small
incremental improvement in IT spending will drive
earnings higher and management teams are loathe to go on
big marketing binges because the "new, new
thing" isn't happening and they don't need
"first-mover advantage". Even if the spending
is flat in 2003, it's better than decreasing spending…
and a lot more predictable.
Half-empty
shades - The big cap technology companies represent the
gorillas in the industry. It is NOT indicative of the
50,000 other technology companies, private and public,
that are still getting their teeth knocked out trying to
sell into a stagnant market. Sure, the big guys are a
leading indicator of better times, but what is that lead
time? It could be years before the IT spending has
increased enough to have small companies be able to sell
effectively when facing larger incumbent competitors.
Alcatel
Shuts Its Doors in Vancouver - Alcatel (formerly
Newbridge which was formerly MPR Teltech's ATM Access)
layed off 20% of its staff last week and plans to shut
down completely by August 1st, putting 150 more
Vancouver technology people out of work.
Half-full
glasses - Yikes. Not much positive spin here. The cycle
of innovation in Vancouver appears to be based heavily
on the start-up as most of the branch offices of larger
companies are acquisitions made over the years.
Occasionally, we grow a company organically, locally
that becomes synonymous with Vancouver and not something
easily shut down when times are tough. In order to
absorb these people, the start-ups need to be growing
and be capitalized to accept the folks that are leaving.
But even the optimist will admit that it is hard to
absorb 150 Alcatel, 250 Motorola and gobs of Redback,
Scientific-Atlanta and Glenayre employees into a
start-up environment that is constrained by two fairly
lean years of investment and where the large incumbent
companies are cutting back, not hiring.
Half-empty
shades - Perhaps the real story here is that the big
multi-nationals are actually moving common jobs
off-shore to save money and that the larger trend is for
development in India and China. Maybe the trend of BC
innovation being bought by larger companies and, for the
most part, staying and growing in BC, is going to be
more like "buy and fly" like Microsoft does
it. Tack onto this argument the increasing CDN dollar
vs. the US buck and Canadian development isn't looking
as cost-effective as it used to.
I'm
sorry, I can't help it. I have to circle back on all
four stories above and give you what I truly believe is
the case. To make it simple, for those of you scoring at
home, I'll use 1 as being in full agreement with the
pessimistic, glasses half-empty and 5 as being in full
agreement with the optimistic glasses half-full
argument.
Crystal
Files IPO - 4.5 - This really is a great story for
Vancouver and I am really bullish on their IPO and the
ones that will follow shortly thereafter, like Google.
Hey, I'm a VC looking for exits! I have to be bullish
when I see a crack of light under the door.
Chretien,
a.k.a. Flamethrower - 3.5 - I'm in full agreement with
him being an imbecile, but I lean towards their being
less long term effects on business. I just don't think
that the harm is irreparable. The faster Martin gets in
and starts wearing a 10 gallon hat, the better for
business.
Earnings
Are Up In Technology - 2 - I'm taking the longer
pessimistic view here as I see the trouble that
early-stage and smaller companies without complete
solutions continue to have in the market. The earnings
will help overall market sentiment and hopefully start
to erase the losses in your RRSP, but it will still be
some time before an across the board recovery is
underway.
Alcatel
Shuts Its Doors in Vancouver - 5 - Look, I don't
actually believe for a second that the trend of
innovation being bought and staying won't continue. We
still have compelling reasons to build business here. We
are suffering from larger corporations trying to get
profitable and consolidating divisions. While I feel for
the employees and their families out of work, we still
have thousands of workers at Electronic Arts, 3M, IBM,
Broadcom and others that are still working here.
Hopefully, Alcatel is the last to do this. (knocking on
wood)
It's
a mixed bag of news out there, but my tea leaves are
telling me that things are slowly getting better. Feel
free to comment, as always.
Random
Thoughts -
Yaletown is Newest VC - On the heels of the
labour fund debacle with Altura netting less than $2M to
invest, it is good news for entrepreneurs out there that
a fresh $30M or so is available for investment over the
next couple of years in BC. I think it is safe to say on
behalf of all of my VC colleagues in town that we
welcome the new guys and look forward to the odd
co-investment. May all the most difficult times be
behind them.
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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