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What Colour Are Your Glasses?
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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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