Something Ventured:
July 27th, 2001
By Brent
Holliday
Greenstone
Venture Partners
"We're
loading up our Woody
With our boards inside
And headin' out singing our song "
- Beach Boys,
Surfin' Safari
This
isn't summer! Summer is supposed to be a time when
traffic is lighter, work is interspersed with golf and
vacation and people are feeling better about their
world. Instead, what we have is heavy traffic due to the
knuckleheads in the transit business, work interspersed
with pink slips and people in the technology business
feeling that their world is crumbling all around them. I
know that I sat here and told you that we were in for a
long, crappy ride for the remainder of 2001 and into
2002. It's easy to predict what will happen. It's hard
to actually deal with it.
Here's
a partial list of the unhappy news of the summer so far
in BC:
· 360 Networks is on it's last laboured breaths,
causing many people to lose their jobs or fear for them
in the coming months
· JDS Uniphase is about to cut the rest of the few
hundred jobs in Victoria that it hasn't already
· The former darling of early stage technology, Abatis
Systems, sold one year ago to the day for US$700M to
Redback, has been decimated internally and all of the
top people have evaporated
· PMC-Sierra is set to announce a dismal 2nd quarter,
pointing to a continuing inventory glut in the telecom
sector
· Sierra Wireless had its newest, biggest customer go
Titanic on them (Metricom), and their 2nd quarter was
miserable, leading to 30 immediate job cuts and
scrambling for revenue from somewhere else
And
that's just the public companies. In the private
sector... well, just walk closer to the street edge of
the sidewalk in Yaletown to avoid the falling bodies
from the windows above. Have you asked a CEO of an early
stage company how much fun it is raising money these
days? There are a couple of very big deals, either just
inked, or about to be inked in the private technology
side here in BC which will appear to counter this trend.
But ask the CEOs in private if they received the
valuation that they wanted. Let's just say that most, if
not all, of the CEOs closing financings this summer will
tell you that they hope that this is the bottom of the
downturn, because they couldn't get much lower in price
without selling the company completely.
So,
this must be good times for VCs then, right? We get to
receive healthy portions of good opportunities when
times are tough. So we should be happy. Never a better
time to invest, right? Yes and no. For a new
opportunity, yes. There is a new bushel of very
interesting start-ups this summer. For an existing
investment, no. We are facing the same excruciating pain
in raising money for the companies that we already have
investments in from years gone by. It is extremely
difficult and every VC is feeling pain as they decide
which companies warrant the most attention in their own
portfolio.
Once
again, I am not here to point out the crappy news and
then offer no suggestions. I'd like to offer another
important factor to consider for those of you in early
stage technology companies. In order to help you raise
the fuel you need and keep the boat pointing into the
wind through this horrific storm, you need to constantly
improve your company with any and all available
resources. In case you have forgotten some of the other
basics of survival, look at my March
30th (Cash-Strapped Start-up Odyssey), April
27th (If Not You, Then Who?) and May
25th (Rules of Engagement) columns for more tips.
VCs
have told you over and over again that the number one,
single, most important factor in the successful creation
of a huge technology company is management skill. In the
past I have talked specifically about what skills a
management team needs at the various stages of a
company's life. The fact is that BC is not overrun with
serial technology entrepreneurs and most start-ups lack
the experience at the helm as they raise their first or
second rounds of money. Without under-emphasizing the
fact that a search for more experienced talent at the
top is critical, I want to talk about another area to
shore up your company's management: the Board of
Directors.
Your
Board, like your management team, is scrutinized by the
potential investors. Your Board should be experienced
and value-added. First of all, a Board of Directors is
absolutely necessary to have, according to the laws that
govern our business practice. A Board is there to make
the senior management accountable to shareholders and to
make decisions in the best interest of the shareholders.
In a public company, a Board is made up of all
outsiders, save the CEO. This gives the Board some
objectivity so that they act in the best interest of
your grandmother holding shares in that company. Unless
of course you are Book4golf.com, in which case you stack
the board with analysts that report on your company and
CEOs of companies that you order all of your services
from… but I digress.
The
Board needs the CEO on it, by law. The rest is up to the
shareholder's agreement in the company. It is better to
have fewer Board members early on in order to manage the
process (five is a good number). In a private company
the Board is very important as they make most of the
very big decisions about the company (budget approval,
fundraising, hiring and firing of senior management,
whether and when to sell or buy companies, etc.). Board
of Directors meetings are usually monthly in a start-up,
meaning that they function as a proper governing body,
approving resolutions, but also as a management
assistance group, offering advice and thinking of
strategies to move the company forward.
It
might be easier to describe what a Board should not have
before offering suggestions and examples of how to
create a great Board. Here are the no-nos:
1. Do not have more than 25% of the Board made up of
founders. Remember, a Board needs to be objective and a
board stacked with founders indicates to an investor
that they are more interested in protecting their own
interests than moving the company forward.
2. Do not have investors only on the board.
Overweighting in investors skews the decisions towards
the interests of the investors. Equally as bad as the
one overweighted in founders.
3. No relatives of the senior management. A big red flag
for investors is the father or mother or uncle of the
CEO or CTO on the board. Even if they invested in the
company, it is a recipe for disaster and the new
investors will run away.
4. No lawyers. Unless they add some direct value to your
situation, you do not put your company lawyer on your
board.
5. No shady characters. Do your reference checking on
the outsiders you are bringing to your board. Ask around
town and see what people think of the person before
offering them a seat. The last thing you want to find
out is that your new board member was banned from the
public markets or has a criminal record.
At
a future date, I will tell you about how to manage a
Board and run effective Board meetings in early stage
technology companies. We have had the distinct pleasure
of sitting on some incredible Boards that function well
and meetings run efficiently. But, for now, I want to
focus on who should be there in order to help you raise
money and help your company succeed.
An
ideal Board for an early stage technology company has 5
to 7 members and is populated by one CEO, one or two
investor representatives and the rest being outsiders to
the company. That means that three to five of your
members should be "from industry". At least
one of these members should be from your industry
directly. But they should not be from a customer or a
strategic partner (and obviously not from someone who
could compete with you, duh!). You need objectivity on
your Board, so a customer would be perceived as biased.
Usually you can get recently retired people from your
industry if you can't find someone directly in it. You
want a CEO, if you can get them. You want the most
impressive, most successful name that you can attract.
This is the domain expert that will review your company,
its business plan and its people and add incredible
validation to your company by agreeing to join the
Board.
The
other outsiders should add incredible value in other
ways. Ideally, you would get a person with years of
operations experience in a rapidly growing company. This
person may not know much about your specific industry,
but they have been through the rigors of growth and can
be a mentor to your CEO in terms of internal decision
making. Again, shoot for the best possible name that
adds the most validation to your company. You want the
investors to point to the name and say, "Look who
is on the Board of this company". Finally, try to
add people to the Board that have different styles and
different points of view. You should try to have a
"hard-nosed" personality that will shake
things up. You should try to have a person very familiar
with numbers, like a CA, that can help the internal
staff with high level accounting or budgeting issues.
You should try to have a contrarian, or devil's
advocate, that constantly questions the decisions and
forces management and other Board members to really
think through the justifications for decisions.
One
local example of how a well-picked Board turned out very
well for a company is Xantrex. I was on the Board for 18
months while at my previous venture capital employer.
The Board was made up of 7 people, the CEO, the Founder,
two investors and three outsiders. One of the outside
Directors was Peter Van der Gracht, at the time a
successful entrepreneur with Nexus that was working in
senior management for Scientific Atlanta. While not
directly in the same field as Xantrex (a power supply
company in the test and measurement business at the
time), he was an expert in operations and growing a
company from zero to millions. His advice for Nazir
Mulji, the CEO, and the rest of the senior management
was always very salient with respect to manufacturing
and operations internally. He knew by instinct how to
drive costs lower and maximize profit. Another outside
Director was Bob Cecil, former CEO of Plantronics, a
California based multi-million dollar manufacturer of
telephonic headsets, among other things. Before Bob's
unfortunate death, he added incredible value and
validation to Xantrex because of who he was. Bob was a
"name". He was a big wheel and he had
evaluated Xantrex and found it worthy of his time. Quite
a coup for Nazir and Xantrex. Finally, the third member
from the outside world was Mossadiq Umedaly, the CFO at
Ballard Power at the time. Mossadiq was the industry
guy. Ballard and Xantrex were not working directly
together, but they were both in the electric power game.
Mossadiq was the "numbers" guy, as the CFO,
but is also a master at raising money, having cultivated
relationships around the world with his work at Ballard.
If you read the papers lately, you will know that
Xantrex is now run by Mossadiq. Nazir is still there
working hard on growing the company. But, back in 1998,
when we started talking in the Board meetings about
possible acquisitions to vault Xantrex to the big time,
Mossadiq's eyes were twinkling. You could see it
beginning to take shape in his mind. All in all a great
Board, that lead to an even greater company in size,
revenue and a bright future.
Sitting
on a Board requires the person to assume some risk, as
the Board is ultimately liable for many aspects of a
company. People do not join Boards lightly. That is why
investors look at Boards carefully and see who has
deemed the company worthy of the risk. The make-up of
the Board is also critical because of the importance of
the decisions that will be made in an early-stage
technology company. So choose carefully and shoot for
the best, just as you would with your management team.
Letters
From Last Time:
Last time, I wrote a rant about the
possibility of $4B being pumped into a Canadian
broadband initiative. I received a lot of feedback, but
chose the following letters for their opposing points of
view on what I wrote on this divisive issue:
Hi Brent
I think you missed the driver for providing broadband
into rural areas. It is not only a question of what they
will download. It is also a question of what they will
upload. Are there digital networking businesses that
good emerge from these rural connections. I would
suggest there are, especially in the area of distributed
peer-to-peer technologies. Some very smart people live
in rural areas and more would prefer to live there if
they could do meaningful work and be vital members of
society. If Canada is to win in the knowledge economy we
need all of our best minds engaged. The economic
benefits of this could justify the public investment
without justifying a private sector commitment.
Broadband access may also help to reduce the cost of
health care (remote diagnostics) and education, as you
indicated.
You are right that access and services provided through
that access need to be kept balanced, and that to a far
greater extent than is generally realized network
configurations should be driven by evolving services
rather than the "let's build big pipes"
approach.
This said, my gut reaction to Minister Tobin's proposals
was similar to your own, and I think we need a full and
open public debate with good accountability in place if
and when such a project goes forwards.
Enough said
Steven Forth
I did indeed miss the significance of
the "upload" and I don't discount it at all.
But I am sticking firm to my thesis that we need to
spend a lot of the proposed money on building better
services that make the pipe useful and necessary for all
Canadians to have access to. Thanks for a great point.
Hi Brent:
With regard to your most recent article, although you
have several good points, I don't think people from
rural areas would appreciate your "hick"
portrayal of their web-surfing or television viewing
habits. Having grown up on a farm during the 70's and
80's I can tell you that even then I was craving
broadband access. At the time a "grass-roots"
information service was being demonstrated by MTS and I
couldn't wait to get on-line with it - unfortunately it
never materialized. The thing you seem to be missing is
that rural people are just as sophisticated as urban
people. I might even hazard to say in many cases they
are more sophisticated. As a young man I was less
distracted by all the goings on in the city (movie
theatres, sporting events, concerts, etc..) and spent
much of my time focused on learning (especially science
and computers). I didn't miss the "excitement"
of the city as the occasional visit was all that was
required. The same holds true for many of my friends.
Most of us have long since moved to the
"big-cities" but I for one would move back to
the rural areas in a heart-beat if the same kinds of
opportunities were available in a small town (or on a
farm) as I have in the city. The availability of
broadband access throughout our nation will initiate
services that may not be practical at this time. If and
when telecommuting becomes a reality (for some people in
the city it already is), lifestyle will be more of an
issue when choosing a place to live then occupation!
Government services may be deployed more rapidly if all
Canadians had equal access to them. Not to mention
educational services, "real" video
conferencing, etc. I think the mandate to deploy
broadband equally to all Canadians is the right decision
now and especially for the future. The sooner the
infrastructure is in place, the sooner it will evolve
beyond what we can imagine today! Just my two-bits
worth...
Regards,
Scott Evenson
Former "Jerry Springer" Farm-boy from Manitoba
who does give a rat's ass...
Scott: I am indeed sorry if my
generalizations offended anyone. My wife grew up in
rural Ontario and she has never seen a Jerry Springer
episode, either. My intent was to show that rural people
are not demanding the service, which is counter to your
argument that they are. I propose that all rural people
will demand the service only when they can see great
benefit, such as the ability to update driver's licenses
and/or receive government payments or support by simply
logging in as opposed to driving to the big city to get
it done. Again, I am sticking to the plan that you can't
build the pipe and then the service. If you are going to
involve public money, then you should spend it equally
on upgrading the service for government, health and
education and smartly deploying bandwidth to serve those
improved e-services.
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).
Something Ventured Archive
Online Venture Capital Guide
Printable
edition
© 2012 T-Net. All Rights Reserved. |