 |
Venture in the Valley Job opportunities may have dried up in Silicon Valley, but there is still money - and now Canadians are getting their share. January 14, 2002 |
| SAN JOSE, Calif. — Handol Kim smiles ruefully as he looks back on his
two years playing gatekeeper to the stream of Canadian companies seeking
money from venture capitalists in California's Silicon Valley. From early 1999 until early 2001, during the biggest venture capital giveaway in history, Kim was Canada's consul and trade commissioner in the valley's heart, the city of San Jose. "When I was at the consulate, I was pulling my hair out, because I was going `Hey, we're leaving so much money on the table!'" Kim recalls, referring to the dozens of companies he knew did not have a hope of wooing what valley people call "the VCs," the venture capitalists. Those Canadian companies may have had great technologies, great people and great ideas but, for the most part, the California VCs weren't interested. "The thing that makes it so easy (for many people) to get deals done in Silicon Valley is that Silicon Valley is so used to doing deals," says Colleen Sato, a Toronto native in her early 30s and now a partner with Newbury Ventures, based in Los Altos., Calif. "The lawyers understand, the accountants understand, the VCs understand, the entrepreneurs understand what a start-up is and how it works. (But) I don't think Canada is quite there yet." Venture capitalism is an industry that invests money in projects involving a substantial element of risk. Usually, the money is put up for a new venture, or for the expansion of an existing business, in exchange for shares in the business. Because of the risk factor, the failure rate is high. But companies that win often win big. Venture capital has launched some of the world's biggest companies, including Intel Corp., Microsoft Corp., Cisco Systems Inc., and Sun Microsystems Inc. More than in any country on earth, venture capital is an integral part of the U.S. economy. The U.S. National Venture Capital Association estimates that its 450 members back companies that account for 3.3 per cent of all jobs in the United States and 7.9 per cent of the gross domestic product. Between 1995 and 2000, at the height of Internet euphoria, the venture capital pot grew at an astonishing rate — from $6 billion (U.S.) to $104 billion. Some venture capitalists were able to deliver staggering returns to investors, sometimes hundreds of times their initial investment. When the market cooled, many investors went bust but many others plowed their profits back into new venture funds. They continue to do so. The National Venture Capital Association says venture capitalists raised more than $6 billion during the third quarter of 2001 and invested almost $8 billion. Compared to the boom years of 1999 and 2000, those figures might represent a massive slump. But they far exceed the money raised and invested in any other year. Canadian companies may have missed the boat earlier, but in some ways conditions are good for them now. Venture capitalists say they are paying attention not so much to fast talkers now but to companies offering value, revenue and prudent management. "Proposals from people who were rushing to get through business school so they could put their fraternity buddies together to start the next dot-com — we don't see those anymore," says Sato of Newbury Ventures, who came to California via Newbridge Networks in Ottawa. "Quality is much, much better." Sato is among the 16 members of the Canadian Venture Capital Advisory board, launched by Handol Kim at the Canadian consulate in 1999. It meets four times a year to vet business plans and refine pitches from promising Canadians firms. The aim is to help them entice VCs into putting up money. "The venture capitalists who are on Canada's advisory board control $17 billion in venture funds," Kim says. "That's more than double all the venture capitalists in Canada combined." Last month, 375 Canadian companies attended a two-day venture capital seminar sponsored by the consulate on how to woo VCs. Rule Number 1: Think big. That's what Ray Thackery did a few years ago when he co-founded SeeUThere Technologies, a company that streamlines the cost of business travel and meetings. Thackery, a former Digital Equipment executive from Ottawa, moved to California specifically to raise venture capital. SeeUThere raised $34 million in Silicon Valley, enough Thackery says to take it to profitability and an IPO perhaps late next year. "In the U.S. alone, the amount of revenue that we touch is $100 billion," he says. "We can demonstrate that we can create a savings of around 7 per cent to 10 per cent in total corporate travel and expenses. Those are very big numbers." Having a big idea is one thing. Having the management team needed to execute it is another. Venture capitalists in Silicon Valley use a simple method to assess good management. They like to back proven winners. Canadian companies often come up short. "(Canadians) may know the stuff and they may know customers, but maybe they were only manager of a certain regional company in Canada," says Kim. "It's different when a former vice-president from Oracle is going to start a company. The VCs think, `Wow, he was at a big company. He's more likely to succeed.'" Thackery assembled the right stuff. "We didn't have much of a problem, because — between us — our management team had taken, either at senior executive or a director level, probably five companies public." But Thackery now admits that his company stumbled by missing a major selling point for Canadian firms. Canada is cheap. SeeUThere Technologies initially set up solely in the Silicon Valley and Thackery regrets that. "I think we would have done better if we had spent most of our money in Canada," he says, "if we had done most of our hiring there, and just had sales and support in the States. "We have been pretty frugal but when I look back at what we spent in rent, and the cost of engineering, we actually could have had a few more million cash in the bank if we had done it another way." SeeUThere Technologies has since opened a Vancouver office for customer support and engineering. Such dual-nation operations are becoming more and more common with Canadian firms, particularly if they want money from U.S. VCs. As Sato explains, "If we've invested in a (Canadian) company, we say — `We like your company, keep your R&D where you are, but set up your headquarters with your sales and marketing in the United States. That requires a lot more travelling for the founders but that is a model that can work. Keep part of the team where it needs to be.'" Canadian nationalists might call that a deal with the devil but for a U.S.-based venture capital fund, it has obvious advantages. VCs do not simply want Canadian firms to follow the American business model. They also want those firms to be, for financial purposes, U.S. companies. "If a Silicon Valley or a Boston VC invests in a Canadian company," Kim says, "they want the Canadian company to create a U.S. parent and they want the Canadian company to be a wholly owned subsidiary." If the company goes public, VCs want it to be on the Nasdaq, not the Toronto Stock Exchange. From the moment a company is founded, employee stock option pools, or ESOPs, should follow generous U.S. models, rather than the typically stingy Canadian variety. Failure to do so kills potential deals. "People here were saying to Canadians, `You can't attract the best and brightest in Silicon Valley (if you keep) your ESOP that low,'" says Jeanne Weaver, head of the Canadian consulate's new-venture program. "You have to restructure the company, pay hundreds of thousands of dollars in legal fees to address some of these problems." If a Canadian firm can show it's got the market, the technology, the management and the financial structure to succeed, chances are good that it still won't get funded. The economy is slow at the moment. VCs who couldn't produce winners during good times are not anxious to try when times are bad. More than half of all venture capital investments during the third quarter — $4 billion — went to what's called "expansion" of existing portfolio companies. Often that means propping up companies that have run out of money and the VCs are not yet willing to write off their investment. Less than 1 per cent, a paltry $74 million, got earmarked for start-up companies. Jim Orlando, for one, doesn't sound worried. Originally from Timmins, Ont., and a former Nortel Networks executive, Orlando is among a handful of Canadians in Silicon Valley with their fingers on VC cash. He's a principal with Battery Ventures, a San Mateo firm with $1.8 billion in assets. Sure the recession hurts, he says, but it has a silver lining. "Every big company in the communications industry has announced layoffs," Orlando says. "With that, you now have a lot of people who are interested in starting their own companies." Orlando has helped Battery Ventures make early investments in a couple of Canadian companies, notably Akara, an optical network firm headquartered in Ottawa that also has offices in Boston. Battery also partnered with a Vancouver VC firm, Greenstone Ventures, to form Inkra Networks, a California-based computer firm with 35 per cent of its employees in Canada. Newbury Ventures, where Sato works, has gone one step further, setting up a subsidiary office in Ottawa, operating under the name of Eagle One Ventures. In September, Newbury and Eagle One joined a $24 million (Canadian) investment in Kanata-based optical network firm Meriton Networks. "There are a lot of institutional investment houses in Canada that want to learn, replicate the Silicon Valley model of doing things, and make investments in Canada," Sato says. "We are co-investing with these groups, which I think will be good for Canada in the long run." Handol Kim, the former consul, is now an entrepreneur wooing Silicon Valley VCs on his own behalf. "A lot of people were out there scoring big and making success," he says. "I wanted to try it." Kim joined Coradiant, an Internet company that had raised $24 million (U.S.). It was founded by Canadians, is headquartered in Boston, has offices in Silicon Valley and New York, and runs an R&D centre in Montreal. How does Kim enjoy the switch? "It's been a wild ride, I'll tell you," he says. "It's been rough but, man, it's good." ------------------------------------------------------------------------ Bob Nixon, now a California-based business reporter, created the first streaming video business show on the Web and is the former host of a daily technology program with CNBC Asia. |