November 7th, 2003
can see clearly now
rain is gone…
gonna be a bright, bright
sun shiny day.” – Jimmy Cliff, I Can See Clearly Now
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
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:
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
increased capital spending in telcos?
There is a Santa Claus!
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.)
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
Desperation by a floundering giant or great
sighs of relief that the market is back… Hmmmm.
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
(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
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.
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
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.
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
Hopefully, 2004 will see more new VC money as
is definitely the time to be investing at the early
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
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
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
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
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