Something
Ventured:
November 6, 1998
By Brent
Holliday
Greenstone
Venture Partners
"Sail
on,
On a distant highway.
I've got to keep on chasing a dream.
I've gotta be on my way; " - Boston, Long
Time
This
week, I have a shorter feature column and an expanded
Random Thoughts section. The Random Thoughts are
relevant for the BC Business Summit, which happens on
November 8th and 9th (and is probably over by the time
you read this). I just wanted to add my two cents...
But
first of all:
I
flew coast to coast last week in search of the
similarities and differences between Canadian and US
technology investing. After a week of digesting what I
saw, here is my report.
I
started the week in Boston, MA at the Red Herring's
Venture Market East forum. Like all "venture
forums", the format is investors sit and watch
entrepreneurs deliver their company's business plan in a
15 to 20 minute presentation. The pressure is intense
for the entrepreneurs as they try and calmly impress the
cynics in the crowd with their world-beating
opportunity. For the investors, the forum is a chance to
see if entrepreneurs can effectively communicate the
company vision and answer the seven key questions:
What
is the product(s)?
Who, exactly, is the customer?
Why do the customers want your product?
How big is the market for your product(s)?
How do you get the product to the customer?
What is your product/company competitive advantage?
Why will your management team win?
The
Red Herring forum was over two days with 40
companies presenting. The companies were IT or
communications related. After taking in this event, I
flew back to Vancouver for the Canada
IT Forum '98, with a similar format, but only 16
companies presenting. There were five Canadian companies
(all from Ottawa, Toronto or Montreal) at the Red
Herring event, while all of the Canada IT forum
companies were Canadian (8 from BC).
It
always amazes me that entrepreneurs can really screw up
at these forums by not answering some of the fundamental
questions. The only sign of a successful presentation is
when investors show up in the break out room afterwards
to ask more questions. There was no difference in the
relative percentage of presenters sitting by themselves
between events in Boston and Vancouver. Both forums had
their share of brutal presentations. Here's a tip. Don't
send a VP or CFO to do the presentation at an event like
this. The CEO needs to deliver the goods. If the CEO is
not the best presenter of the company vision, then there
is a problem.
There
seemed to be more companies in Boston in the
"hot" areas for early stage investment: smart
routing and switching of data, knowledge management
software and wireless anything. Of course, this might be
the tail wagging the dog a bit. After all, it is the Red
Herring that helps define what is "hot" in the
first place.
The
companies presenting in Boston were all fairly early
stage with typically less than two investment rounds.
The Vancouver companies were also early. The difference
was in the amount of money raised in early rounds.
Almost every Boston presenting company had raised more
money, even if you took the currency on a 1:1 basis.
This would seem to indicate more money available in the
U.S. But I think it is indicative of higher valuations.
Investors generally would like a significant share of
the company at an early stage (seed or 1st round). If
the valuation is higher, then they put more money in to
get that share.
Generally,
the Vancouver presenting companies lacked the polish and
domain knowledge of the Boston group. The CEO's, even at
similar stages, with similar revenue, seemed sharper and
eminently more bankable. Domain knowledge is the
absolutely fundamental insight into the market and
intimate knowledge of the customers. It just didn't ring
through in the Vancouver presentations, on the whole. I
should mention that this is a subjective feeling, not an
absolute. The Canadian companies presenting in Boston
were actually quite good. I'm at a loss to explain this
difference. Perhaps I had Boston-coloured glasses on
when I was back in Vancouver and was more critical of
the presentations here.
One
final point on this subject. It remains clear that East
coast or West, US investors think that Canadian
opportunities are second rate. They simply do not pay
attention to the credible deals and inherent advantages
that we have here. This was especially evident when I
heard jaws hitting the carpet as the Canadian company
from Montreal explained how the federal and provincial
government were giving his company 6 of every 10
thousand dollars he spends on R & D labour back to
the company as a refundable tax credit. We have a lot of
education to do if we want to get our companies noticed
by big time US investment.
Of
the eight BC companies presenting in Vancouver, 3 we had
already invested in and 2 we had recently turned down.
That left three immediate opportunities, which we are
pursuing. If you are a young company in IT or
communications, I highly suggest that you pay attention
to the Canada IT site and try and get into these forums.
They are held twice a year, with the next one being in
Toronto in June of 1999. There is no better quick
exposure to the investment community.
Expanded Random Thoughts
In
the spirit of the BC Business Summit and the increasing
media attention to BC's economic woes, I give you a
recent sampling of news articles:
Wall
Street Journal, October 26th: "Silicon
Forest" grapples with downturn in semiconductor
business. Seems that boom time is over in Oregon. Intel
delays completion of $2B fab and office complex. LSI,
Oki Photronics and Komatsu have all delayed further
construction indefinitely and most are laying off
workers. "Shocked by this abrupt about-face, state
and local planner here are discovering a frustrating
truth: High-tech's frantic growth can jack up a local
economy like steroids, but coming down can be quickÖ
and tough.
Time to update all of those media kits and power point
presentations that quote the growth rate of Oregon's
technology sector (widely quoted around these parts and
in the TIA Report last April as being 52%). A possible
lesson from this is to diversify your technology
community. Oregon relies far too much on the
semiconductor industry, which has been in a deep hole
and won't crawl out for another year.
Editorial
to National Post, October 30th: Sherry Cooper,
Nesbitt-Burns highly quoted economist, wrote that
Canadian tax rates are too high (Duh.). But she backed
up her argument with facts and figures to support
widespread federal tax cuts. "Mr. Martin should
take a look around the world. Those industrial countries
with the largest budgetary surpluses are those with the
lowest tax rates." When looked at proportionately
to the size of the economy, Ireland, the U.K., Finland
and, yes, the US have the biggest surpluses. What do
they have in common? Corporate tax rates at least 10%
lower than Canada and falling personal tax rates, as
well.
Ireland is the most striking example of change. After
decades of "prodigious government spending fueled
by sky-high taxes, Ireland slashed its tax rates and the
economy took off." Ireland charges 12.5% corporate
tax for manufacturing. The profits earned by the newly
unburdened companies (many subs of foreign companies),
have helped corporate tax revenue increase 45% in total
over 1992. Wow, what a concept! Drastically reduce taxes
and watch government revenue actually increase.
Editorial
to National Post October 31st and Nov 2nd: Two
transposing views of brain drain. One, which we are all
familiar with, from Diane Francis. She quoted a Nortel
study about higher education in Canada. This report
extrapolated a shortage of 50,000 engineers in two years
simply by looking at the size of the graduating classes
of Canada's universities and the plans for technology
firm hiring. In 1997, there were 3,816 applicants for
780 spaces at Waterloo's engineering school. Therefore,
the marks needed to get in were in the low 90's. Where
do the other competent future engineers go? To the U.S.
she argues. Once there, they stay there for employment
opportunities that can't be matched here. Even worse,
the top Waterloo grads are getting offers from US
companies. The solution? More funding to education, but
no ideas on where that money comes from...
Linda McQuaig, authour of Shooting the Hippo, argued
that the recent CD Howe Institute report on "brain
drain" is being highly mis-quoted. She said that
selective interpretation of the facts has distorted what
they actually found: That the number of people going to
the US for employment is actually quite low, especially
in the technology sector. The highest rate of defection
is among the nursing community. Why? Big US dollars?
Lower taxes? No. There simply aren't enough jobs here in
Canada. Linda is trying to point out that we really
aren't losing the best and brightest because they
actually want to stay in Canada, despite the fiscal
misery (ummm, I can think of a few smart people still
here, too). What is not being reported is the inflow of
talent from other regions of the world more than making
up for the loss of Canadians to the US. Would we have
Creo's 1000+ employees in BC without Dan Gelbart and
Amos Michaelson from Israel? Doubt it.
BCTV
and Global
news, every night this week at 6pm: Head to head feature
reporting on the economy and what to do about it.
Monday: Tale of two forestry mills, one in Alberta, the
other in BC. Can't blame the unions on this one. The
wages are the same. The reason that the Alberta mill is
profitable and the BC one isn't can be traced to BC's
tax regime. Stumpage fees float with economic reality in
Alberta. In BC, fixed at $21. Gee, the Asian market
tanks and the stumpage fees don't. Gosh that Joy McPhail
and her staff in Finance are bright, eh? Bet they all
used to run businesses themselvesÖ Not.
Tuesday: Brain drain in technology. Global does a
promising little start-up called Catouzer (which we, the
local VCs, are taking a good look at. Note to Catouzer
management: The line given on TV about US VCs wanting to
move the company south in order to invest is a euphemism
for "not interested". Do you think Kleiner,
Perkins and Oak Investments asked Norm Francis and
Pivotal to move south?).
BCTV does EA. Don Mattrick explains the lure of the
Valley for his staff members. Don actually has an
interesting predicament. On one hand, the head office in
San Mateo absolutely loves the EA Sports division in
Burnaby because the labour costs are 1/2 of what they
are in the Valley and the workers here are as good or
better than the talent there. On the other hand, Don has
to placate his workers who know damn well that the
dokers at other EA studios in the US are making twice
their wage at 2/3 the personal tax. Pretty soon the
palace revolt starts to happen and the worker bees need
a good reason to stay here. Tough one.
Response
From Last Week's Column:
I
received a couple of griping e-mails, not directed at me
but at PWC, regarding their conference on the 14th.
Rather than reprint those, I'd just like to respond.
Sure PWC uses an event like "The Pillars of
Growth" to get customers for their services. But, I
really must say that I appreciated their efforts to
unite the technology community. I don't care if it was
they, Ernst & Young or KPMG organizing the event.
The point is that they did it. Now, what I would really
like to see is the resulting summary document and see if
there is a plan going forward.
On
another note, I asked a while back for sources for PR
techniques in technology. Steve Campbell, a local PR
agent with his own company responded with a list of
articles from the PRSA Professional Practice Center in
the US. Luckily for you and me, you can order these
reprints on-line at http://www.prsa.org/ppc
Sample
titles include:
"No-Tell" Intel Learns Silence Isn't Golden
Technology May Hold Key to Winning Back America's Trust
The Worm Inside of Apple
High-Tech Launches in a High-Tech World
PR Do's & Don'ts For The Software Industry
Thanks Steve. I hope this helps some people.
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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