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

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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