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

Something Ventured:
November 7th, 2003


By Brent Holliday
Greenstone Venture Partners

“I can see clearly now

The rain is gone…

It’s gonna be a bright, bright

Bright sun shiny day.” – Jimmy Cliff, I Can See Clearly Now

 

You may have heard about the blowout economic numbers from the US recently.  You may have picked up a thing or two in the news about improving conditions.  Maybe you are seeing real pick up in your sales and customer sentiments.  For those of us that have been achingly looking for positive real signs of a turnaround, specifically in the information technology world… what was a trickle has become a flood.

Here are the facts, all in the past few weeks, that show increasing confidence that 2004 will be the year of the recovery in technology:

  • Cisco, among others, reported increasing revenue, far beyond any analyst’s predictions in Q3.  Being $250M in sales ahead of predictions shows that we may be moving from the increased profitability focus of 2003 (layoffs, cost reductions) to increased sales focus of 2004.  Q4 will be even better, according to revised expectations.  Increased sales? Customers must be buying significantly more as last year’s sales were likely more about replacement and channel stuffing.  Digging deeper, Cisco’s enterprise business was steady, but the real surprise was telecom spending.  Gosh, increased capital spending in telcos?  There is a Santa Claus!

  • An October survey of 30,000 corporate IT buyers worldwide (Wendover-Global Insight) showed a Q3 10% increase in spending over Q2.  That’s the largest Q over Q move in years.  Digging further into the numbers, enterprise software showed the most strength (CRM, ERP, security, data warehousing) while networking gear showed the least strength (which jibes with Cisco’s numbers above that showed no great improvements in enterprise networking gear (802.11, Gigabit Ethernet, Hubs, etc.)

  • Sun Microsystems said that for the first time in nearly 3 years, the two hottest sectors of their business were the perennial leaders in IT spending, telecom and financial services.  That’s Sun, the company that is getting kicked around on all sides of its business, saying positive things.  Desperation by a floundering giant or great sighs of relief that the market is back… Hmmmm.

  • The TSE IT index is up 56% this year and the NASDAQ is up 65% since its low in October 2002.  As we all know, the market usually judges a recovery or growth spurt about 2 to 3 quarters ahead of the actual tangible reports from companies.  That’s why you don’t see huge moves as all of these announcements come out today.  But the evidence of IT buying and increased revenues coming out now spurs the financing side of the public markets into action.  In Canada, Sierra Wireless filed for an equity offering to raise money in the market.  And the venture capitalist’s best friend, the tech IPO, is coming back.  Workbrain in Toronto just filed for a $40M CDN IPO in the TSX.  In the US, Google and others are canvassing the investment bankers and will be announcing their intentions soon.  Now if Crystal Decisions had only waited and not gone to Business Objects…

  • Finally (the weary VC says) the technology M&A market is not all about fire sales and schadenfreude.  We saw the nice deal by Active State here in BC, but look at just the past week:

    Novell bought SuSE for $210M cash
    Network Appliance bought Spinnaker Networks for $300M
    Quovadx bought Rogue Wave for $71M
    Symantec bought ON Technology for $100M
    CIBER bought SCB Technology for $90M

    What is especially interesting, and indicative of confidence in future growth, is that the multiples of sales paid for these companies is relatively high compared to market.  While not quite frothy, it shows that larger companies are seeing growth in these companies’ products or they wouldn’t pay these prices.

  • Venture capital investment has climbed in North America from Q2 to Q3, specifically in the category of new company financing (as opposed to follow-on financings of existing venture backed companies which has dominated the landscape over the past two years).  In Canada, VC investment was up 52% from Q2 to Q3 to $368M CDN.  New company financings were up dramatically to $142M from $83M in Q2.  But here in Vancouver, specifically in the broader IT segment, new financings have been extremely sparse in 2003.  Exactly three companies received new money and none since March.  Are we on vacation?  Are we scared to invest?  Au contraire, mes amis.  There are at least ten term sheets that I know of out to companies that have not had VC financing before in the province and many of these will receive their money by the end of the year.  We, as a group of VCs in BC, have not been this busy in years.  It is very exciting and the optimism is finally creeping into the VC world where dark cynicism has ruled the day for at least 2 years.

  • Ventures West closed on its new fund with a fresh $158M CDN and will probably have at least 50% more by the middle of next year.  While all of this money is not earmarked for BC in their pan-Canadian fund, it is still a shot in the arm for the community here which has enough good opportunities to keep new money busy for the foreseeable future.  Hopefully, 2004 will see more new VC money as well.  This is definitely the time to be investing at the early stage.

So with this flood of good news, why do I think that the early stage technology companies in BC (and elsewhere) will continue to under perform and not expand rapidly over the next three to four quarters?  I believe that this recovery in IT spending will look like a speed bump with a big rush in the next 6 months to spend old budgets and upgrade old technology (PCs, etc that are 4-5 years old).  During this bump, which will be great for the big names in the business, the vast majority of spending will be on basic IT needs.  The leading edge products from smaller companies will wait until the core spending on upgrades is over. 

Look at the small and medium sized business markets (SMBs) as an example.  The small company spends money on Microsoft, Dell, 3Com and Cisco that they see at the retailer or buy from a catalogue or a VAR (value added reseller).  The SMB market is a huge component of the increased sales by the big IT company names (remember that Bush gave the SMBs a tax free purchase of capital goods this year in the United States).  This stimulus and rush to upgrade will not trickle down to very many start-ups, unfortunately.  The SMB market is very difficult to reach unless you partner or OEM to the big names who can afford the marketing costs.

Here is how the start-ups can capitalize on the optimism going forward, even if sales will continue to be difficult… raise money.  Even if you have money in the bank for the next two years, the next 12 months will be a very good time to find eager VCs and possibly, maybe, even an angel or two.  The party in the public markets and the parade of increased sales and earnings will boost everyone’s confidence for now.  There will likely be a lull in a year as we all remember what a bubble looks like and ease off. 

It’s hard not to feel good again after years of gut-punching bad news.  But temper your enthusiasm with the reality that the IT buying from start-ups will not roar back, but steadily increase.  We are well-positioned here in BC with a good crop of young companies and a lot of recent success stories to attract needed capital.  The future is brighter than it has been for years.  I think I’ll go bask in the glow of that thought for a minute or two and then get back to work.  All of this hard work might pay off soon.

Random Thoughts –

- Speaking of Raising Money – The IT (& now Biotech) Fundraising Forum is in Vancouver November 24th and 25th (www.financingforum.com)  It is the best place to network with VCs from all across Canada and the US.  I will be part of the exhibition jury this year, picking the best opportunities from the exhibit floor with 5 of my colleagues.  That should be fun.  I have seen the crop of companies presenting and there are some good ones.  Even if you are too late to present, or not quite ready, you should consider taking the time to come down.

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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