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

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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