Something
Ventured:
October 12th, 2001
By Brent
Holliday
Greenstone
Venture Partners
"Here
we are, now where are we?
It's like nothing I've ever seen "
- The Tragically
Hip, On The Verge
Does
anyone doubt that we are entering a prolonged slump?
Sure, we are having a rally in the stock markets this
week, but don't bet the farm on the NASDAQ getting above
2000 anytime soon. Technology markets have been routed.
The lions ate the Christians. Last one out, turn off the
lights.
Very
soon, we will have made the big adjustments and the
layoff headlines will stop. In the meantime, since we
are still in pink slip season, I worry for the Motorola
crew locally as that company has reduced their worldwide
staff by 35,000 people. Canada has been a great place
for large foreign technology companies to perform
R&D. But when cost-cutting becomes priority one,
money losing units (i.e. not revenue generating) get the
axe. Let's hope that they don't axe the talented bunch
doing cutting edge wireless data development in
Richmond.
Some
wise person once said, "That which does not kill
us, makes us stronger".
If you want to rationalize your company's survival,
whether you are big or small, public or private, this
might be a place to hang your hat. In the last prolonged
slump of 1987 to 1993, technology companies that were
born or suffered through that time learned incredibly
valuable lessons about what really makes a business.
From the other end emerged the stronger companies that
caught the market updraft and were the leaders when
everyone else started soaring.
The
big eight public companies in technology locally are
still: PMC-Sierra, CreoScitex, MDA, Pivotal, Ballard
Power, QLT, Angiotech and Sierra Wireless. With the
exception of Angiotech (1994), all of them started
before or during the last recession for technology. They
all suffered during those lean years. Some had to draw
up completely new business plans and many had senior
management changes during those tumultuous years. All of
them, except MDA which started in the 70's, were small
struggling companies… start-ups. All of them raised
money in those difficult times. Most of them will tell
you stories about being rejected over and over and over
again for funding. All of them faced near death
experiences with respect to cash.
Truth
is, some good opportunities never made it during that
time period. Just as some good companies have been
caught in this downturn and, despite all best efforts,
will not make it through the other side. Let me assure
you, that those that should never make it because of
poor strategy, inferior product or mediocre management
will definitely be extinguished. Seems obvious to say,
but on the other end, in the 1997-2000 timeframe, a
whole bunch of turkeys got funded. And in a hurricane,
even turkeys fly.
Rather
than take potshots at the "turkeys" that were
plucked (which would be fun, but probably get me a libel
suit), I'd like to explore a broader issue that is of
much more concern to us all during the coming slump. A
couple of years ago, during the hurricane, I talked of a
phenomenon in Vancouver called the infrastructure gap. I
posited that due to our geographic location (2 hrs drive
to Seattle and 2 hrs flight to the Bay Area) and due to
the dynamics of our local industry (a few big successful
tech companies, tons of little tech companies, but few
30 to 300 employee tech companies), we were not creating
the necessary critical mass in the support industries of
finance, accounting, legal, PR, HR etc. The theory went
that the vendors of these services (and sources of
money) would starve to death if they focused only on
tech because the very small companies could not afford
to pay and the largest firms had in-house and US based
help. I'd like to update the theory as to why we haven't
hit critical mass and orient it more towards the current
situation.
What
the downturn will expose (it has already started) is the
high level of "friction" that we have in
creating the next generation of technology successes
here in BC. This is a relative term that describes the
ease of growing a world-class technology company in a
given environment. It has less to do with the usual
metrics of number of technology workers, R&D dollars
spent, cost of living etc., and more to do with whether
or not the people "get it". So a region has
friction. But friction can also be applied to individual
companies and the relative experience of its
stakeholders. Do the founders, management, employees,
investors and services people have the experience and
understanding of what it takes to create a world-class
company? Are they familiar with the nuances and tactics
to accelerate growth? Do they know processes and best
practices by instinct because they have seen what works
and what doesn't? Do they know what to expect from an
investor at every stage of development? Do they even
recognize that the friction is there? Or are the victims
of the classic company-killing syndrome: they don't know
what they don't know?
Clearly
there is more friction here in Vancouver than in the Bay
Area. Picture a rusted gear on an abandoned 1948 pickup
compared to a banana skin on a roller skate in a marble
factory. It's actually not that bad, but you get my
point. In Canada, Ottawa has been "lubed up"
the most over the past few years as the friction has
decreased there dramatically. Their industry
concentration on telecom has them suffering their own
problems in this slump, but even a one trick pony like
Ottawa is a good place to invest if the friction is
lower. Why? Because in a downturn, when you are looking
for the best opportunities that have the bets chance to
make it out the other side, low friction is critical.
You only want to deal with people that are with you or,
even better, one step ahead of you, anticipating what is
needed next.
Back
in the hurricane days, friction was overlooked. People
focused on participating in the madness rather than
creating solid companies and therefore ignored the
friction. Now, in the cold light of a new economic
world, people that don't "get it" will be
roadkill. Investors have zero to no patience for newbies
today. Management has no tolerance for service providers
that they have to educate. It's not a mad scramble
anymore.
In
the early 90's, when our local tech heroes were small
companies, the friction in this town was immense. The
companies survived and thrived despite the lack of
knowledge and experience to draw on. We have learned a
lot, collectively, in the intervening years, improving
the situation for this downturn. During the big
hurricane years, we had our share of turkeys and a whole
lot of interest in our technology sector. Now, we are
back to creating real companies again during tough times
made tougher because we have friction. There is no quick
fix for it. The region will improve when more experience
and knowledge flows into it. That will take time.
Individually, we all need to self-check and make sure
that we are listening and learning. We need be
open-minded and flexible. We need to recognize people
that "get it" and get them on our team. The
experiences learned in the next months or years will
help us decrease friction and it will, indeed make us
stronger.
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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