Back to the Future A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry. Something Ventured: May 31st, 2002 By Brent Holliday Greenstone Venture Partners   "What goes up, Must come down Spinning wheel Got to go around " - Blood, Sweat and Tears, Spinning Wheel This is a column in two parts, but the message is similar. Part I - Here are some interesting quotes from Business Week: "A larger number of companies in the portfolios of even the best venture capitalists are in deeper trouble than they've ever been before." Reid Dennis, Partner, IVP "We underestimated how much we'd need for later-stage deal", Thomas Perkins, Partner, Kleiner Perkins Caulfield Byers After three years of pouring seemingly endless resources into new companies, reaping huge gains…venture capitalists have been brought back down to earth. "It's like the morning after a huge binge". Sanford Robertson of Roberston Stephens Here is the date of the article that these quotes came from: September 24th, 1984 These quotes were presented by one of our limited partner investors in Greenstone Venture Partners at the Greenstone Forum two weeks ago. He used it to very effectively illustrate that the venture capital world is cyclical. What is old is new again. Those that survive the downturn will thrive in the next up cycle. It applied to us at Greenstone and to the seven CEOs in attendance from the companies that we have invested in. After the forum, a few of us retired to a long dinner and some great conversation. Among the attendees were Ken Levy and Larry Birenbaum, two of four individuals that helped launch Greenstone in late 1998 when we went out to raise our first fund. Ken talked about starting KLA Instruments in Santa Clara, CA in 1976. They were making equipment for a burgeoning business in making integrated circuits. Ken led the company from founding day until 2000 and is now the Chairman. The company merged with its largest rival in 1997 and today KLA-Tencor (KLAC: Nasdaq) is a US$15 Billion company with just over US$2 Billion in revenue. Ken started out with $50,000 from his own savings and another $100,000 from friends. His salary was lower than the first dozen engineers that he hired. He raised $1.2 M in two rounds from a new type of banker, called a venture capitalist, in 1978, after his company had already reached cash-flow break even. The company went public in 1980 in a huge technology frenzy in the newly christened "Silicon Valley". Ken talked at dinner about the old days. He scoffed at the amounts of money that companies raise today in the US (and increasingly in Canada) before proving their business. He wagged his finger at me, representing the entire venture capital community for the moment and said, "You guys are at fault for this. Give an entrepreneur money and he spends it. He'll rationalize the expenditures until the cows come home, but the reality is that they can do it with less." Larry Birenbaum piped up and added his two cents. Larry is currently the VP/General Manager of Cisco's Ethernet Access Group but he was also one of the first 10 people hired at 3Com in 1979. 3Com started on $400,000 from angel investors. Later, in the first version of the go-go days of venture capital, they raised the unheard of sum of $1.1 Million in a venture round in 1981 after shipping their first product and starting to generate meaningful revenue. They raised another $2.3M a year later. They didn't need all of that money, it turns out, as sales started to go through the roof and the company went public in March of 1984. He commented that every engineer at 3Com in the early days was there because they wanted to work for Bob Metcalfe, inventor of the Ethernet standard. They believed in his vision for networked computing and gave up higher salaries at other locations to work for stock in Bob's company. Larry said it was a wild, unpredictable ride, and he knew if it crashed that he could leave and make good money in another company. He just laughs at some of the excesses that start-ups have today. They had to borrow equipment from Stanford, where Metcalfe taught part-time, in the earliest days. No one thought that they should have the best, shiniest equipment. It was only after building and selling the first few things that they would have money to buy new gear. In the old days, people thought a start-up was hard work, low pay and crappy equipment. They thought the most important thing that they could get was a customer that wrote a cheque for their new product or service. They knew that if they got lots of customers and grew the company, that they would get better equipment, better pay and eventually, some value for their stock. If the entire food chain of venture capital and high tech start-ups is to resume growth and cycle back up again, some of the structural "fat" has to be trimmed significantly. It is already happening in the market, but certain notions persist. In particular, the feeling of entitlement to salaries, equipment and other resources as if the start-up is a large company must go. Part II - Last week, I attended the BC Innovation Summit to lend one point of view, among hundreds, to what will lead BC to the top of the pack in Canada and throughout the world. As you know, this is a particularly interesting topic for me. The summit is meant to kick off an important new round of action among business, government, academia and the public at large to get the economy moving. Innovation is meant to be the rallying point because we can actually do something about it as opposed to the external forces that we have little control over. It was a good start, but the follow-up actions will be the important part. During the discussions, I heard from a number of entrepreneurs, scholars, politicians and pundits from a variety of different industries. Innovation is certainly not limited to the technology field. While it was encouraging to hear of innovative new techniques and businesses in BC, it was discouraging to hear the pessimism. Beyond the current global slowdown and the particular effects of softwood lumber disputes, these leaders of BC's economy were worried about whether we really have it in us here to make significant cultural and structural changes needed to move the needle from status quo to "tiger". There were many stories and characterizations of our populace that don't give one a lot of confidence that we really can become a leading region of prosperity. The culture of entitlement was mentioned often. The perception of laziness was also brought up. The history of political polarization was flagged as a detriment. The lack of leadership was pointed out as being a fatal flaw. These are all cultural perceptions that, if true and if they continue to be true, make for a poor pool of entrepreneurs and failed efforts to kick start a moribund economy. Lots of other issues were mentioned, like taxation, red tape, low salaries and high housing costs, lack of venture capital, etc. All of those can be fixed. The will of the people has to be there to fix it. Where there is no will... In the 90's BC got fat on improved economics that were largely driven by outside forces, despite poor policy from our government. Structurally, except for certain pockets like technology, we did not improve our efficiency and productivity. In the downturn, we are paying dearly for that. It's back to basics for BC. We need to have a cultural change towards the start-up mentality. If the rewards are to be great then there will be change and there will be risk. We need leadership to emerge and drive the actions and get the results. Over the next few months there will be more talk around innovation. The end result is more prosperity for the entire province. The goals can and should be set very high and should be very simple and clear. The effort needed to get this BC innovation start-up off the ground will be huge. Are we ready? Are we willing? Letters From Last Time – Thanks for pointing out the merits of granting options constantly and not just on the way up. The reality, though, is that founders and senior management have typically suffered a major dilutive slash, early round investors are seriously underwater on cost base, venturists are only making protective disbursments on existing investments, board members are sweating their fiduciary roles which usually pits them against employees and no one is in any mood to grant options........ Ahhh perspective. John B. Durrant, C.A. Someone seems a little testy. But definitely accurate in some cases. As I talked about in the article above, we still have some structural pain left over from the last two years of declining valuations and a reset done to companies that survived. Going forward, this should not be as prevalent. Thanks for helping keep me honest. 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). Something Ventured Archive Online Venture Capital Guide Printable edition