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

Something Ventured:
November 23rd, 2007


By Brent Holliday
Greenstone Venture Partners

Vancouver Giants?

 

“And I'll grow a little bigger

Maybe that can be my goal,

I was told a million times

Of all the people in my way,
How I had to keep on trying
And get better every day”

– Queen, Keep Yourself Alive

Last time, I wrote about a worrisome trend that our biggest BC technology companies were not getting bigger… They certainly are not getting bigger in aggregate since 2003 in terms of market capitalization.  Some companies have done well, others have sputtered.  Many of you asked me or offered your own reasons why this was happening.  Some of you pointed out that overall technology employment and GDP from technology was up in that same five year period. Clearly the emerging companies and the “bought” companies working under a foreign company banner are growing here.  But I wanted to tackle a more specific issue: Why can’t we grow a RIM, a Microsoft or a Google in our backyard?

I offer two reasons we don’t yet have a mega-company in technology: Product Extension and Platforms.  Product Extension is the process whereby a company expands its product offerings to increase its revenue and profit.  Platforms are the fundamental technologies that others build on, generating better pricing and/or license revenue, because the platform is dominant in terms of market share (>66%).

Look at the mega companies in technology and lump them in to these two options:

Microsoft – platform (Windows) and product extension (Office, Xbox)
Google – platform (search)
RIM – platform (Blackberry)
Cisco – product extension (network to enterprise to home and small office)
Intel – platform (CPU)
Apple – product extension (computers to consumer electronics)

Let’s look at product extension first.  As a start-up, you are strongly encouraged to be laser-like in your focus on your one product.  Getting it to market and establishing your company is the only option due to constraints on capital and good people. You may be acquired along the way if you make a splash with your innovation and get significant customer pull through.  You may emerge with a hit product, raise more capital and extend your product line up.  You have to reach more markets by adding new products in related market segments or extending your product up or down the price curve in your existing segment.  You can do this through internal development or you can acquire your way into related markets.  When you are a larger company, product extension is absolutely critical to growing your company’s revenue and profit.  Let’s look at a successful company or two that have done that.

Microsoft “embraces and extends” as a core strategy.  They moved into the browser market against Netscape.  They dominated the productivity software category with Office (stomping the single product companies, Lotus, Wordperfect and Harvard Graphics along the way).  They came into the game market and now are one of three dominant players with Xbox.  They innovated and they acquired their way into huge markets extending their Windows platform dominance and creating huge amounts of revenue and growth potential.  Growth for Microsoft in the future will be related to adding more and more products, not just succession of existing products, but extension into new markets.

Apple is as big as it is today because its core competence is design innovation… which means it makes incredible products in almost any market it chooses to enter.  Unlike Microsoft and Cisco (which almost always acquires its way into product extension), Apple always enters with its own innovation.  So it expends a ton of capital in development.  Cisco, on the other hand, expends a ton of capital in acquiring product and streamlining it into its gargantuan distribution channels.

The other way to be a monster technology company is to own a platform technology and milk it over many years because competitors find it hard to copy the product or enter the market.  The platform is something that has a large enough market that it starts to feed upon itself (others build on top of it and make money because it is so huge or the market share is so dominant, no one can enter, creating huge price advantages).  One trick ponies are very rare… but they do exist.  Becoming gargantuan this way is almost by accident: Microsoft and Intel got lucky with the PC explosion and IBM’s stupidity to create their initial dominance.  But in other cases, it is well thought out: Google and RIM are examples of planning to be market dominant from the outset.

RIM is gargantuan because they made the Blackberry actually work.  Its reliability in delivering e-mail, initially over pager networks and now any wireless data protocol, separates it from the competition and made its platform dominant.  Google set out to change search and its initial technology dominance led to market share dominance.  But it was its fortunate purchase of AdSense that gave them the ridiculous revenue on top of their dominant platform.

So let’s look at the local companies and pick their plan and see if it worked, if it did not work or if it is a plan in process… will any of them be gargantuan?

QLT and Angiotech, like many biotech companies, start out life as a one-trick pony (like all start-ups do). Unless they have a solid “pipeline” of new drugs or devices (product extension), their success is meteoric.  The successful drug/device enjoys some period of incredible success only to be caught by competition.  The challenge to creating biotech monster companies like Genentech or Amgen is to acquire or grow a plethora of new products.  Kudos to Angiotech for trying that recently.  QLT seems to be struggling to do the product extension thing.  Neither of these companies had a platform technology that enjoyed massive, sustainable market share, but both made their earliest investors very happy along the way.

Aspreva was just acquired which is good for the acquirer, looking to extend the products in its portfolio.

Creo was interesting.  It had the potential to be gargantuan because it changed the game in the printing industry.  It looked for a while like a platform company, a la RIM.  But Fuji and others caught up on the innovation curve and as much larger companies, could afford to kill Creo on price and make it up selling the printing plates (which Creo did not do until too late).  Meanwhile, it had product extension capability.  It was creating products in its skunk works that could have taken it into related markets.  Before it could successfully become huge by building and launching its own innovations, Kodak acquired it to extend its own line.

Ballard had a platform play… it just hasn’t materialized… now their survival depends on product extension.

Sierra Wireless, PMC-Sierra and MDA are all active examples of how to build through product extension.  They all do this via acquisition and innovation.  Sierra Wireless had a product family that started to really sell in 2000 but had to extend to survive the downturn.  They almost cratered when one of the extensions into the smartphone business flopped.  But they have been on a roll of late.  PMC-Sierra grew out of MPR Teltech and shot to the moon on one product family as well (like I said, you have to get big on one thing and then stay big by extending).  Recently they have acquired and innovated their way into many new but related markets.  The storage market is starting to bear substantial fruit and they are picking up steadily.

A few years ago, everyone in the analyst community questioned what the heck Dan Friedmann was doing with all of these seemingly unrelated ventures under the MDA banner.  What had been a satellite and geomatics company was now buying land databases, looking at e-commerce and doing big software implementation services for government.  What looked like disjointed efforts is now growing feverishly and looks very smart planning.  Can MDA continue to acquire and innovate into a giant?  Among our local companies, this one looks the most capable of becoming gargantuan…  They have a wide enough market opportunity (Information products and information systems seems very broad) that their extension story is very promising.

To the extent that we can have a massive company in BC, is to the extent that our biggest players can successfully spread into new markets before they themselves get bought up. Much easier said than done!  Meanwhile, lurking out there might be the platform company that gets gargantuan on its start-up innovation. 

I guess we’ll see…  Your comments are always welcome.

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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