By
Michael Volker
Investment
Climate in BC?
What's
the investment climate in BC for tech companies? We know that it's hot for the
resource sector. In Monday's Report on Business (Globe & Mail) the headline
read: "Junior miners rake in $3-billion". That's the capital that
flowed to speculative junior mining companies last year. Investors' appetite for
resource companies hasn't been this strong in years. I'd love to see a similar
headline for the tech sector.
A
few weekends earlier I was chatting with Joe Martin of Cambridge
House who runs an annual investors conference in Vancouver. Joe was
elated because he had the best attendance in years. Booth space for resource
sector exhibitors was sold out. Attendance was at record levels.
A
few years ago, the resource sector was down and tech was up. At that time, Joe
bolstered his attendance somewhat by featuring the tech sector. No need for that
this year!
Rather
than seeing the reverse situation, mining up and tech down, this year actually
looks good for both the resource and tech sectors.
So,
what's the investment sentiment for technology stocks? You've heard me rave
about some great initiatives that the Province has taken to boost investment in
the tech sector. In fact, the Premier is on record as saying that his goal is to
triple the amount of venture capital in BC.
Under
the recently revamped Small Business Venture Capital Act (SBVCA), the
government offers a 30% tax credit to investors willing to bet on entrepreneurs
building their technology ventures. When coupled with an RRSP, investors can
enjoy an almost four-to-one leverage (e.g. a $5,000 investment can mean as
little as $1,300 at risk). What a deal!
The
fact that it's a great deal for investors is tempered by the fact that this
incentive is limited to only $20 million annually in tax credits, meaning that
only $67 million in total can be raised under the program each year.
In
the past several years this limitation has not been a big issue because the $20
million was always far from being fully utilized.
Now,
for the first time, the $20 million is proving to be insufficient to meet
investment demand. What's different this year? Well, for starters the SBVCA
program was greatly improved last Spring by allowing small businesses to use the
tax credits directly to attract individual angel-style investors. Imagine,
having 30% of one's capital requirements secured up front merely by having to
find the other 70%! More than 100 companies signed up to take advantage of this
superb opportunity.
In
addition to allowing companies, as well as provincially registered Venture
Capital Corporations (VCCs) to raise capital under the SBVCA rules, the
government extended the time frame for tax credit applications to coincide with
the popular RRSP selling season - i.e. let investors get the 30% tax credit
until Feb 29th and let them apply it to the 2003 tax year. In other words, an
investor who writes a $5,000 cheque this month will get back as much as $3,700
of that in April, leaving her with only $1,300 at risk. WOW!
Not
only did 100+ companies register, six new professionally-managed VCCs registered
to pool capital for purposes of financing growing technology ventures.
By
the second week of February the tax credits (applicable to the 2003 taxation
year) were sold out. You can imagine that many companies, VCCs and most
importantly - investors - were very disappointed. Especially hard hit were those
that were counting on using these credits for 2003. The larger public VCCs such
as BC Discovery (VCC) and BC Advantage (VCC)
used up their entire allocations and raised over $10 Million each. The smaller,
private funds such as the one I'm promoting - WUTIF Capital (VCC),
the Okanagan Capital Fund (VCC) and NDI Life Sciences (VCC)
that don't have the budgets for large public distributions of their shares were
caught by surprise and are severely impacted. For me, it was like having a
reserved seat on the Olympics jet only to find that I was bumped off.
And,
the timing couldn't have been worse - right at the peak of the RRSP February
selling period. Although many attempts were made to convince our political
leaders as to what a good news story this is, we have (so far) been unable to
get any extensions. Think about it - individual British Columbians are investing
in our tech sector - more than we've seen for some time! Let's keep up the
momentum. Remember what the Premier said about tripling venture capital in BC.
What a great start. Let's not stop the train now.
One
of the arguments against expanding the tax credits this year is the Government's
commitment to manage a balanced budget. Indeed, this past Wednesday's Vancouver
Sun headline read: "BC budget balanced and bullish: 'Best is yet
to come'".
(Sidenote:
my January column
was titled "Bullish on BC!" although I must admit that some of my own
bullishness has been dampened somewhat by not getting the VCC tax credits
extended.)
I'll
be the last one to argue against a balanced budget, but when I read it, I
noticed that there's wiggle room everywhere - contingencies and even a $100
million surplus. Increasing the VCC program by a million or two is no big deal.
It's not really an expense item anyway.
Just
consider the economic contribution (taxes and jobs) that companies like QLT
Inc and Angiotech provide? QLT
recently reported that its annual profit tripled to $44 million (that's
profit after tax - QLT reports $24 million in taxes - more than the entire VCC
program!) on sales of only $146 million (beautiful margins, eh? -compare that to
Telus' quarterly profit of like amount). The payback is
immediate through payroll taxes alone let alone factoring in the downstream
wealth creation benefits. QLT reports that And then there's Xantrex
Technology Inc - it recently announced plans to do a full-blown IPO on
the Toronto Stock Exchange.
It's
companies such as this (ie. tomorrow's tech winners) that will get their start
fom VCCs such as WUTIF Capital, BC Advantage, Okanagan Capital, Pender
Growth, BC Discovery and NDI Life Sciences.
In
Quebec, a VCC-like fund was launched and it immediately raised some $150
million!! Compare that to our 6 funds scurrying to raise one-third of that. We
gotta think BIG - just like the BC Lottery does! BIG, BIG, BIG - not CUT, CUT,
CUT.
Raising
capital, as any tech entrepreneur will tell you, is difficult in the best of
times so you never say "no" when investors are lined up to fund you. I
just can come to grips with turning away investors.
So,
am I still bullish on BC? Yes, you bet I am - but only as long as we keep the
doors open for investors in our companies. Oh, and by the way, you can still
invest under the SBVCA - it's just that you have to wait a little longer to get
your tax refund!
Ready
to Rocket 25
In
January, I attended Rocket Builders' IT Outlook 2004 seminar. Rocket
Builders is a B.C. firm that does market research on emerging technology trends
and uses this information to help companies and investors to capitalize on
growth opportunities.
Over
the last few weeks Rocket Builders has presented their analysis to investors all
over the Pacific Northwest. What caught my attention was the interest that they
were getting from Seattle-area investors and venture capitalists.
I
interviewed Reg Nordman, Geoff Hansen and Dave Thomas,
Rocket Builders’ partners about their “Ready to Rocket 25” list and their
“IT Outlook 2004”. Here is a summary of that interview.
The
"Ready to Rocket 25" list names twenty-five private B.C. companies
that are best positioned to capitalize on the information technology (IT) trends
that will contribute to faster growth than the IT sector as a whole.
This is only the second time that Rocket Builders released this list
along with its annual "IT Outlook 2004" report in late January.
I
thought it was cool that the Vancouver
Sun picked up on this and did a huge layout on the 25 firms
featured here. It's these entrepreneurial firms that we often don't hear about
until they appear as overnight successes and then we wonder, "Gee, why
didn't I invest in that one?"
How
did they choose these twenty-five companies? They came up with this short list
by mapping hundreds of technology companies against the key trends identified in
their Outlook report.
Since
this is only their second time at doing this one would wonder how well last
years picks fared. As it turns out, last year's "Ready to Rocket 25"
list featured fifteen companies that met or exceeded double-digit growth and
three companies that were acquired, with the majority of the twenty-five
receiving new financing in 2003.
What
is the Rocket Builders view for the BC technology sector in the next year?
Unlike
the pessimism about the industry last year, analysts are now predicting growth
for the IT sector. Although predictions of 5% growth are pretty modest, some
areas of technology and some vertical markets are seeing in excess of 20%
growth. And, despite the tough economic times of recent years, the industry
continues to produce innovative technology, introduce new strategies, and
implement new business models.
What
are the top drivers for the marketplace? According to Geoff Hansen, continued
innovation and investment by IBM, Intel and Microsoft and key emerging
technologies such as Wireless Handheld Devices, On-Demand Computing, and Social
Networking are the key drivers to draft. One new driver of growth opportunities
is regulation of governance, privacy, security and digital copyrights.
What
quick market advice could you give BC Technology companies?
Pay
attention to the importance of vertical markets for the IT industry. The
financial services, manufacturing and government vertical markets are
consistently growing year after year, and the retail, healthcare and government
verticals are expected to exceed 20% growth in IT spending.
What
I found particularly encouraging is the response from the folks in Seattle to
the Rocket Builders presentation. Aside from being very well attended, the
participants were enthusiastic about BC companies’ prospects. They noted that
the Vancouver market is starting to mature. Many Seattle VCs, including Ignition
Partners and Encompass Ventures, commented that they will be increasingly
looking at BC companies. They rated the overall quality of Vancouver companies
as very high.
A
number of private and public companies map well to growth trends for 2004. Many
combine innovative technology with a vertical market that provides significant
growth. Examples of these private companies include:
ActiveStream
- users can package and transmit personalized videos with standard emails. Their
technology provides users greater intimacy as it connects people and messages.
(don't confuse with ActiveState that was sold last year for $32 million)
Bycast
- approaches health care using utility computing for accessing medical images.
They make medical professionals more efficient and reduce cost while providing
patient data with the security required by regulatory standards.
Galeforce
- combines Microsoft CRM with a targeted solution for the financial services
industry. They combine the power of Microsoft’s marketing initiatives with the
largest and most lucrative vertical market.
Maestro
CMS - combines two significant trends, ASP business models and website
content management. Their service is available ‘on demand’ and they enable
companies to control timely data and deliver it rapidly via the web. (note -
this one may be speaking at next week's Vancouver Enterprise Forum on Feb 24th.)
New
Heights’ - communications package enables users to combine PC based
information with their telephone system. They link user specific information to
real-time communication as they combine desktop data and features with
innovative telephony solutions.
Sxip
Networks - has an innovative approach to ‘Identity Management’.
Their solution targets many of the security (and identity) issues associated
with the Internet. (Dick Hardt who founded ActiveState is behind this one. Those
angels that missed Dick's first venture, might wish to take a look at this one.)
In
summary, the Rocket Builders group observed that BC has some strong clusters of
technology innovation in wireless, telecommunications, visualization and media,
and customer engagement technologies. BC continues to have technology leadership
in many fronts of the IT industry. Although they are bullish about BC companies
this year, they caution that progress won’t be without hard work.
Specifically, companies need to continue to pay very close attention to
execution and profitability this year.
The
opportunities are greater in 2004 than last year. Look for Rocket Builders’
‘mid-year update’ at the end of Q 2 for the latest on the private companies
that are; ‘Ready to Rocket’.
I
believe it's great for us to be optimistic about the prospects of our home grown
crop of technology deals, but when others – such as venture capitalists south
of the border – start to take note, that’s even better!
For
more information on the “Ready to Rocket 25” list, please go to:
www.rocketbuilders.com/r2r2004/index.html
VEF UPDATE
Next week's Vancouver
Enterprise Forum event will focus on our favorite subject - money! The
event is on Tuesday, February 24, 2004 from 5:30 PM to 8:00 PM and is titled,
"Salesmanship begins when the VC says no - How Maestro CMS
and NeuroMed Raised Money After the Bubble Burst".
What are the lessons that seasoned CEOs learned
the hard way as they raised venture financing for their companies - after the
bubble burst? How do you get past a "gatekeeper" and get a VC's
attention? What makes a company attractive to a VC? What are the pitfalls to
avoid? What proactive steps does a company have to take to successfully close a
round of venture financing? What are the differences between closing on a first
round and later rounds?
The VEF's February event is always a popular
one for technology entrepreneurs: how to successfully raise money to fund their
new ventures. Attendees will hear from CEOs in software and biotechnology on how
they managed growth with venture funding. The evening's speakers will include Thierry
LeVasseur, founder, president and CEO, and acting CTO of Maestro CMS
Corporation - which recently closed its first-round financing with Ventures
West - and Natalie E. Dakers, co-founder, president
and CEO of NeuroMed. Last year, NeuroMed closed a Series C
financing of US$32 million, marking the largest private biotech financing in
Canada last year. In addition, David McIntyre of Ventures West
will deliver a presentation on venture capitalists: how to pick one, what VCs
look for, and some dos and don'ts approaching VCs.
Last month's Vancouver
Enterprise Forum event - on Tuesday, January 27th focused on
launching new products and building revenue. Certicom Corp from
Ontario - with Scott Vanstone of Certicom made a special guest
appearance. He be talked about how this technoloy has been sold around the
globe. The co-sponsor for this event is the University of Waterloo.
Leonad Hordyk of TiR Systems, the other
presenter, is on a roll. Both companies are public companies. Both have been in
business for more than a decade and both are just now starting to break out -
check their stock prices!
A complete calendar of local technology events
can be found on T-Net's
Events page.
SFU's TIME Centre
If you're an entrepreneur looking for a place
to get your company started; there's some great space available at Harbour
Centre downtown. SFU's TIME Centre provides not only office space but
also access to various resources, e.g. tech advisors, access to capital,
mentors, etc. Worried about the high cost of being downtown? Well, not to worry
- they'll even reduce the fees and take some payment in the form of equity.
Check www.sfu.ca/time for contact info.
A reminder: SFU's TIME Centre is open for
business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business
Centre" (looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? There are some
great facilities for holding your company's AGM. Why hang out at MacDonald's
when you can work productively at the TIME Centre? Drop by and check it out! It
is located at SFU's downtown campus at 515 West Hastings St.
Michael
Volker, a technology entrepreneur, is Director of the University/Industry Liaison
Office at Simon Fraser University, past Chair of the B.C. Advanced Systems
Institute, Chair of the Vancouver
Angel Network and past Chair of the Vancouver
Enterprise Forum. He owns shares in many of the companies he writes about. Copyright,
2004.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is
a bi-weekly column that focuses attention on new and emerging BC publicly listed
technology companies.
Contact: risktaker@volker.org
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