bi-weekly column with timely,
relevant and possibly irreverent
insight into the BC technology
May 30th, 2008
Greenstone Venture Partners
A Tale Of Two Companies
“We'll take the best,
Forget the rest
And someday we'll find
These are the best of times...
The headlines read 'these are the worst of times'
I do believe it's true
I feel so helpless
Like a boat against the tide
I wish the summer winds could bring back Paradise”
– Styx, The Best Of Times
With apologies to Charles Dickens, “it
was the best of times, it was the worst of times” aptly
describes the fate of two BC technology companies that
made news in May. Gemcom Software sold to JMI Equity
and Carlyle Group for $180M after successive years of
100% and then 50% revenue growth. Meanwhile, an army of
creditors are picking the bones clean on Ascalade
Communications (fka Arkon Networks), a company that went
from $12M to $111M in revenue in less than four years...
and then spectacularly returned to earth, leaving a
large smoking crater.
As always, I like to learn the lessons of
the successes and failures in BC’s technology
community. Interestingly, I have been somewhat
handcuffed in getting all the details at this time
because Gemcom is a public company and the deal closes
in July. So there is a quiet period to honour. As for
Ascalade, one always has trouble getting people to speak
of their failures, especially “on the record”. And I am
not out to wag my finger at Ascalade... not at all.
They made some tremendous bets that just did not turn
out. We should respect their cojones for trying. If
you get anything out of this, understand that failure is
an option and it isn’t shameful.
In late 1998, I went with Frank Pho to
see Gemcom when I was at BDC Venture Capital. They had
a wonderful sophisticated mining industry software
application that helped mining companies predict and
model their deposits so they could design the mines more
efficiently. It was truly a niche product. Remember
that in 1998, mining was not sexy. Dotcom was all the
rage. Mining stocks were in the dumps as gold was at
its lowest levels in a decade. Frank made the
investment, his first in BC I believe.
Revenue growth was slow. The company
seemed stuck in the $12-15M a year range for 6 years
from 1999 to 2005. Rick Moignard joined in 2002 after
running Chancery Software for years. Rick is truly one
of the “good guys” in BC’s technology sector and I am
extremely happy for him with this result. He guided the
company in a promising direction and it worked. Two
things started to happen in 2005: Commodity prices
started to rise (which, despite all of his capabilities,
Rick was not responsible for) causing the mining
industry to revive and Rick and his team thought of
expansion of their product offering to mining
companies. The company acquired a competitor from
Australia and built out a mining production management
tool. This allowed a mining company to progress from
exploration and mine planning (the first product) to
extraction and mine management for the life of the
mine. It was a big gamble for a company that did not
have expertise in management software and it paid off.
The production management software was worth hundreds of
thousands of dollars in revenue for each mine they
installed, which drove big leaps in sales.
The company exploded in late 2005 growing
from $18M to $36M to $53M. Profit exploded as well,
coming in at close to $7M in the latest fiscal year.
The purchase offer is rich at 25 times trailing
earnings, but no one is complaining in Vancouver.
I look forward to a conversation with
Rick about the key strategic manoeuvres that made Gemcom
a great success story for the shareholders and for BC.
Perhaps after the acquisition closes and the dust
settles a bit.
Out in south Richmond, about the time I
was seeing the original Gemcom product in late 1998, a
company called Arkon was trucking along with a few dozen
employees working as a contract design house for major
phone manufacturer OEMs. They saw an opportunity to
extend their expertise in a wireless standard called
DECT that was the future of all cordless phones in
Europe. They would begin developing wireless digital
products (handsets, baby monitors, etc.) with new lower
cost chips and utilize a cross-Pacific
design/manufacturing partnership. Ascalade was born
from Arkon in 2002 and they built and shipped under
global distributor labels, but not to the US or Canada.
As a result, very few people in the technology community
were aware of it.
Sales exploded. $12M in 2002. $63M in
2003. $84M in 2004. $111M in 2005. They branched into
VoIP phones that worked through your wireless router to
make Skype calls to PCs. They developed a wireless
conference phone that could be dropped in any meeting
room. They went public on the TSX in 2005 with $40M
raise and a valuation of $100M. Life was good.
Today, there is nothing but a massive
receivership and sale of assets. All of the employees
were let go May 15th. What happened?
In a word (actually 3), they went for
it. They used proceeds of the IPO to fund their own
China plant as opposed to the leased facility that had
used. They had designs on the US and Asian markets
after building success in Europe. They essentially
broadened their product line by a factor of two to go
after these new markets. They were a low margin
business because they sold to distributors. For
example, they shipped 3.1M units to their customers (the
phone distributors and brands you know) in 2004 when
their revenue was $84M. That’s a broad average of $27 a
unit. Of that $27, they reported $22.70 in costs.
That’s a 16% gross margin. Without improvements in that
number, the company would be un-sustainable.
Some say their growth outstripped their
ability to fund it. It takes a lot of capital to expand
to meet forecasts and then you can be left holding the
bag if sales turn. And in September of 2006, the wheels
came off the revenue express. They announced that
revenue would be below the previous year’s $111M and
that they would lose money for the first time since
2001. Their stock dropped by 60% immediately. And that
was the beginning of the end.
Turns out that they had a big OEM deal
that had driven their decision to build the China
plant. They thought they would be growing sales
dramatically based on this new customer. Then something
happened. I have not been able to find the details, but
the deal went away and, well, they never recovered.
It is too bad for the shareholders and
the employees. It is too bad for the sector here
because a successful design in BC and build in Asia
company could be a model for more cross-Pacific
partnerships or companies. They have little to be
ashamed of. They went for it! They tried to be a huge
global player! Over time we may find out the details of
what specifically went wrong and what decisions ended up
being ill-advised. But hindsight is 20-20.
So May is a bittersweet month for the
tech industry here. A great outcome and a terrible
one. But we should celebrate the efforts of both
companies. We should all get to the incredible growth
that they both enjoyed. And we should all have the guts
to go for big wins.
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
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