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

Something Ventured:
October 27th, 2006

By Brent Holliday
Greenstone Venture Partners

Bears and Bulls In BC

“I don't wanna be a tiger
'Cause tigers play to rough.
I don't wanna be a lion
'Cause lions ain't the kind.” – Elvis Presley, Your Teddy Bear

It’s about this time of year when bears begin to hibernate.  But first they fatten up before the long sleep.  If you are a metaphorical bear regarding BC’s technology industry, then it follows that you believe the short term is very bearish and that perhaps in a little while the bear will go to sleep and things will get better.

Of course the opposite animal metaphor in finance circles is the bull.  We have a few bulls here in BC, ranging the giant ranches of the Thompson/Chilcotin.  They have tons ranging the prairie grasslands of Alberta. No need to draw the comparisons about the overall economies in these two provinces.  Things are still hot in resources and that’s no bull.

But back to the tech sector here in BC.  Let’s look at some data points that have me believing a bear is awake and has been fattening up recently to hopefully head for a long sleep:

The public BC companies have taken it in the shorts in 2006, although some have rebounded off their lows in the summer (All USD):

  • Angiotech – bad drug coated stent study brings its market cap to a cool $800M today from a hot $2.4B in 2004, although its low after the news in the summer was $715M.
  • QLT – Its swoon from $2.5B value in April of 2004 continues.  Today it sits at $735M.
  • More bad news in life sciences from Aspreva, the IPO darling of early 2005.  Today it is at $680M value, up from its post IPO low of $423M, but dramatically down in 2006 from $1.1B just five months ago.
  • The lone bright spot in life sciences is AnorMed, only because it is in a huge acquisition tussle and has tripled its value to $455M in two months as a result.
  • Ballard Power is cruising along at a value of $800M, down from $1.1B in 2004.  Its stock has done little in 2 years.  QuestAir has had its stock move up and down, but its market capitalization is still small comparatively.
  • PMC-Sierra has shown good financial results lately, but the company value is $1.37B now, down from $4.4B in 2004!  It is up slightly from its low if $1.1B nine months ago.
  • Sierra Wireless is over $300M in value today, a dramatic improvement on $168M in March of 2005, but down a lot from $921M in July of 2004.
  • MDA was on a huge roll coming into 2006 and peaked in April at $52 a share.  Then it plummeted to $36 in August and has recovered slightly.  They report on Halloween, so let’s hope their 3rd quarter is not scary.
  • Business Objects (owner of Crystal Decisions) has been on a sickening roller coaster in 2006, peaking at $3.88B value in March, careening down to $1.77B in July only to rebound dramatically to $3.4B today.  Hang on to your seats over there in Yaletown.
  • Finally, Electronic Arts fell to $12.5B in value in the middle of 2006 only to recover to $16.8B today.  But still, it is off of the $21B level seen in 2005.
  • Convedia comes to mind as the only successful technology exit this year in BC.  Some smaller ones happened (I don’t count Sierra Systems, which was already public).

Venture funding is a reasonable indication of whether the up and coming technology companies are doing well.  Looking at the 2006 data (Q3 numbers have yet to be released, so I will await those with interest):

  • BC saw $226M invested in 2005 and $212M in the first half of 2006, shaping up for a huge year…  Remember that Xenon and Zeugma alone counted for $50M of that $212M. The announcement of $26M invested just yesterday in Layer 7 and Talent Technologies pushes us over last year without seeing what happened in Q3. Great job BC!

Looking deeper in the numbers across Canada gives me pause however:

  • Our deal level is down, meaning less companies are receiving more money.  This is a good thing if we are trying to build more large tech companies.  While this increase to $2.7M per deal is impressive over the last year, the US average deal size is $9M. So we are going the right way, but are not even in the game with the US.
  • New financings are declining in comparison to follow-on financings.  The new companies represented 20% or less of the total money for four of the last five quarters, where previously it was 25-30% on average.
  • We now rely on 35-40% of the money invested to come from foreign sources.  Why?  Companies are forced to go look elsewhere when things like this are happening in Canada: Average quarterly investment in VC backed companies has been steady at $400-450M for 3 years.  The amount of foreign investment has increased steadily, ergo Canadian VCs are declining their investment totals.  Q1 2006 was the lowest collective total since 1996. Labour sponsored funds (such as Working Opportunity Fund) invested 39% less in Q2 2006 over the previous year.
  • VC fund raising is down 20% year over year in Canada.  In the US it is up 20%.  Oh-oh.

Enough data, what about the anecdotal evidence?  Recruiters are smiling these days in BC as there is continued strength in job demand at every level.  Hiring is the best leading indicator of confidence among technology CEOs.  It seems to be continuing here.  Most BC technology CEOs I have talked to are predicting growth in 2007.  But, then again, who wouldn’t be predicting growth if they want to stay in the job.

There has been some grumbling about a lack of new opportunities over the past year and if you look at one more fact about financing that “bears” repeating: New investments by VCs are down.  They are putting more money in existing companies.  If you are a bull, you might point to heightened angel activity (purely anecdotal) and say that the VCs just aren’t as risky as they used to be.  Perhaps.

If you are a bear, you might say that the big public BC technology companies are having recent troubles that may continue.  If you are a bull, you point to the recovery from some very low lows.  It’s tough to be bearish about the early stage when the evidence, anecdotal and real, points to the opposite.  But I spoke of some alarming trends that may spook the early stage, especially if they are looking for capital.  Let’s hope that BC bucks what looks like a Canadian trend in the wrong direction.  So, it seems that the bears win when it comes to the big companies around town, for now, but they are hibernating still at the early stage in BC.  Let’s hope they stay asleep and let the bulls run.

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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