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

Something Ventured:
November 9th, 2007

By Brent Holliday
Greenstone Venture Partners

Industry Health Check


“Look up - Look down
Look out - Look around
Look up - Look down
There's a crazy world outside
We're not about to lose our pride” – Yes, It Can Happen

Being on the wrong side of 40 now, I had to get that all-expenses paid physical exam recently.  Things are fine, thank you for your concern.  I see the exam as more of a baseline for future checkups.  It got me thinking a little about the health of BC’s technology industry and whether we could look back on the baseline from previous years, just to compare.

Anecdotally, things are rocking in BC.  The job wanted ads are a good indication of the tightness in the technology labour markets.  BC TIA is working with the provincial government in initiatives to attract US workers now that our loonie can pay for higher US dollar salaries.  I have heard of many searches for high level executives with CFO’s especially in demand now.  Everyone I talk to is either trimming weak staff to add more experienced folks (if they can find them) or adding bodies for growth.

Despite the financial mess in the US markets these days, the technology industry appears to be robust (except maybe for those technology companies selling critical IT infrastructure to the financial companies… thank you John Chambers for raining on our parade a bit!).  Wireless continues to boom.  Enterprise IT is fine in all non-financial sectors.  The consumer is still buying… for now. Against this macro backdrop, let’s see how the BC companies are faring:

In November 2003, the big tech companies locally were:

Ballard Power
Sierra Wireless
Crystal Decisions

And the big employers included Electronic Arts, Alcatel and Nokia who had purchased local companies and stayed.  Motorola was moving out.  T-Net has kept the score of total market capitalization for over a decade in its T-Net 20.  In November 2003, the CDN market cap of our top 20 was $14,036B.  It was the highest point since the bubble of 2000 and it would go higher.  Of that $14B, $750M was Creo, which was purchased a year later by Kodak.  This was a time of renewal and the very beginning of a surge in the stock markets that has no abated to date.

Fast forward to November 2005.  The list of companies does not change except that Kodak gets lumped in with the big employers and our T-Net 20 index no longer includes that $750M or so of market cap.  The score then?  $11.1B.  Down 20% overall, and down 16% if you add Creo back in to compare apples to apples.  In the same time period, the technology heavy NASDAQ went from 1865 to 2273, a gain of 22%.  So, even accounting for Creo taken out of the index in BC, we were far below the growth of the technology markets as a whole.  Hmmmm.  QLT was flying in 2003, but not in 2005.  Ballard had also wilted.  But MDA and Angiotech were flying.  Crystal was bought by Business Objects before it could really add to the public market capitalization.

Now let’s look at today.  The list is exactly the same (for the big technology companies) than it was in 2005.  Today, the total is $9.9B for the T-Net 20.  That is down a further 12% since 2005 and down 34% since 2003 (factoring out Creo).  For comparison, the NASDAQ is at 2630 today, a 16% gain over 2005 and an amazing 57% gain since 2003.  The BC list includes new players like Aspreva and Absolute that carry big market capitalizations today.  But high flyers Angiotech and QLT have taken a bath.  Collectively they don’t reach the size of Aspreva today.  Of course, Aspreva will disappear from the list soon after its $915M acquisition. By the way, MDA has slowly and steadily grown to be our number one technology company in BC.

So BC, as represented by its largest independent technology companies, has lost shareholder value over 4 years while the NASDAQ has grown almost 60%.  Relative to the rest of the industry, our big boys have not been winning.

Anchor companies are necessary to foment a critical mass of people and capital for the creation of new technology companies.  We have had billion dollar anchor companies for over a decade in BC.  Our bigger employers acquired (sometimes for a billion dollars) their way into this market and continue to grow their businesses (it is impossible to carve up their market capitalization to reflect what is done in BC, so you can’t add them into this discussion quantitatively). Going back to the anecdotal evidence I started this discussion with, things are actually quite rosy in the sector.  So what’s going on?

Acquisitions in BC continue to generate returns…  Here’s my short list from 2007:

Blast Radius
Club Penguin

Taking out the public companies acquisitions, where much of the value had been realized already prior to the event, the total value in BC might be $500M in private company acquisitions and $350M of it was Club Penguin leaving about $150M in private company wealth creation.  To compare, 2003 was only $50M in BC according to an exit study of Canadian technology companies and 2005 was $120M, again if you leave out the big public company acquisitions of ID Biomedical and Creo.

Is it all doom and gloom in the numbers? Not really. The VC dollars invested in BC are climbing although behind these numbers are fewer companies raising more dollars per investment round:

2003 - $108M
2005 - $219M
2007 so far - $170M

The region appears to be doing OK if you look at numbers other than the big company’s market value.  But our largest technology company. MDA, is a $1.7B company that employs less people here in BC than a couple of American companies that operates facilities here after acquiring private companies. Since 2003, we haven’t been making much headway in growing really big technology companies.  Will we be able to do it?  Clearly it can be done. Kitchener-Waterloo has a $62B behemoth in its backyard, Research In Motion.  Now that’s an anchor company… although I’d be happy with three or four $15B companies to diversify away from just one.

In summary, I don’t think there is reason to panic.  Our baseline checkup has revealed a small concern in the health of the industry.  If the biggest players here are not getting really, really big on the world stage, are we in trouble? Why is it important?  Our ability to make the technology industry a huge industry in BC will depend on many factors, but huge companies draw people, create buzz and spin out people and technologies into the start-up community.

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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