By Michael
Volker
A look back at 2001, CPC
Update and Coming Events
In this week's column, rather than focus on
"tech futures", I thought I'd revisit the articles from the past year.
Here's a trivial pursuit question for you: Who
used the phrase, "irrational exuberance" to describe the stock
market and when did s/he say that? Well, like me, you probably guessed that it
was U.S. Fed Reserve Chairman Alan Greenspan. But, as for the second
part, i.e. "when"; you might be surprised to learn that he said this
almost exactly five years ago; in December, 1996. Many would have guessed March,
2000 when the Nasdaq was topping 5100. But five years ago, the Nasdaq was
only at 1297! The Dow was only 6422 and it was believed that it would hit 10K in
2000 which it did. Yesterday, the Nasdaq closed at a very rational 1976. The
Nasdaq started 2001 at 2470 and peaked at 2892 in late January (consistent with
the January phenomenon). The low of 1387 came in late September, a month that
many wish never happened.
For the year to date, the Dow average has
slipped 5.8%. The S&P 500 is down 12% and the Nasdaq has tumbled 19.3%.
Always trying to be optimistic, I started off
the Jan 12
column by referring to a story by Don Wolanchuk, an
"expert" in market timing who predicted that the Nasdaq should go
through 5000 this year. He's one of Market Timer Digest's Top Market Timers,
having won 17 annual timing awards since 1989. Some of his greatest timing calls
were widely ignored by the investment community. Looks like your timing was a
little off this year, Don! Maybe 2002?
My own view a year ago was that the market has
corrected and has bottomed out. Maybe my own timing was off by a year. Once
again, many are optimistic (love that confidence!). Low interest rates, high
cash hordes, and improved consumer confidence (which rose this month for the
first time in six months) all bode well for the markets. Once again, folks such
as Benjamin Pace, managing director at Deutsche Bank Private Banking
are saying, "We've probably bottomed in this market and this economy, and
2002 should be pretty good.''
In the Jan
26th column, I found myself again promoting the Canadian Venture Exchange
(CDNX) as I've done in many columns. I often mention companies like QLT
Inc. (TSE:QLT), Burntsand Inc. (TSE:BRT), Westport Innovations
(TSE:WPT) Spectrum Signal Processing (TSE:SSY), ALI Technologies (TSE:ALT),
Silent Witness (TSE:SWE), eDispatch.com (TSE:EWD), Infowave
Software (TSE:IW), Inflazyme Pharmaceuticals (TSE:IZP), Forbes
Meditech (TSE:FMI), StressGen Biotechnologies (TSE:SSB), and many,
many more B.C. firms which got their start on this exchange.
I've always liked the CDNX because it provides
an alternative early stage financing vehicle for emerging companies, while at
the same time giving venturesome investors an early "entry"
opportunity.
As we end the year, I worry more than ever about the
future of the CDNX, since it was taken over by the TSE this year. Will it become
even more regulated? Does it make sense to apply TSE-style rules to a junior
market? Can companies afford the time and costs associated with modest junior
market financings? And, where are all the brokers? I voiced many of these
concerns in my April
20th column, along with some thoughts on how to make it fly.
Then, later in the year (see November
16th), the CDNX liquidity problem was highlighted, i.e. daily trading had
fallen to a mere $10 million from $260 million in the past year and a half.
Share volume was down to 20 million/day from the peak in March 2000 at 170
million/day. My view was, and still is, that we need to get speculators and risk
takers back into the game to bolster volumes and provide real investors with
liquidity.
To make the CDNX more effective under its new ownership
by the TSE, I suggested that members of its
board should not be predominantly brokers and financial types. It should include
entrepreneurs, especially accomplished ones that have nursed their companies
through the junior markets and those who oversee companies presently listed on
the CDNX. These are, unfortunately, missing at the board room table.
But, the solution to the liquidity crunch rests
in going beyond our provincial boundaries and getting American companies and
investors to see it as a better alternative to the OTC. There's a big void
between the OTC and the Nasdaq small cap market - hence a market opportunity for
the CDNX to seize. In my columns in 1999 which you can still find in the T-Net
archives, I pushed for a North American identity (I never did like the CDNX
name! and still don't).
In February,
I felt flattered by the fact that others were imitating the technology index
(the T-Net20) which I created back in May, 1998. Like the T-Net20, the CIBC
BC Tech Index is also based on the top 20 BC companies, ranked by market
capitalization. It was pegged at 100 as of January 1, 2000. Business in
Vancouver launched its New Economy Index to track 25 of B.C.'s
leading public "technology-oriented" companies each week in a
market-weighted index. Companies in the index are taken from each year's BIV
Top 100 Public Companies list, which is ranked according to revenue. It
includes software firms, technology favorites such as Burnaby's Ballard Power
Systems, pharmaceutical companies, wireless firms, fibreoptic network developers
and entertainment businesses.
The T-Net20, which was pegged at 1000 on Jan 1, 1998
actually topped 10,000 in 2000. I, the optimist, was predicting it would reach
"2000 in 2000". In 2001, it dipped below the 2000 mark and, alas, it's
hovering around 1200 at present.
In
March, I
posed the question, "how long will this correction take?" The obvious
answer rests with the economy's performance. If so, what will make the economy
boom? Now, with 20-20 hindsight, we know that March marked the start of the
U.S. recession and the use of "correction" was a bit of a misnomer. We
were in denial.
In
the USA, two-thirds of the economy is determined by consumer spending.
The theory is that if the Fed drops interest rates, consumer spending
will be stimulated. But, will it be enough? Another
theory is that if the markets do well, the prosperity enjoyed by investors and,
in particular, successful entrepreneurs will further stimulate growth through
their own re-investing (e.g. as angels) activities.
We certainly saw this happen in March of 2000. Most of the wealth was created in
the tech sector with dot-com and internet companies leading the way. The sudden
rise in valuations allowed many to plow their unexpected good fortunes back into
many new ventures. And I'm sure that it stimulated a heck of a lot more spending
than a small percentage drop in lending rates. I noted that recent rate
adjustments had little impact. I did say that the Fed was not being
dramatic enough in its moves. But, as we've
seen, the U.S. Fed has been tenacious in continuing to drop rates throughout the
year (followed by Canada) to lows never before experienced by readers of this
column who may be younger than I. I'll take a 4% (Cdn) prime rate anytime!
In May, we elected a new government in B.C. Tech folks
were particularly delighted because the industry finally found a politician,
B.C. Liberal leader, Gordon Campbell, that was on the same page with
respect to the importance of the tech sector to the economy.
In August, positive signs were already evident. For
example, changes in securities regulation to make for a
business-friendlier environment. Whereas securities commissions are generally
set up as watchdogs to protect investor interests, the new B.C. government made
an interesting structural change. Historically, the B.C. Securities
Commission has reported to the Ministry of Finance and Corporate
Relations. Now, the Commission will fall under the Ministry of
Competition, Science and Enterprise (interesting new name, but why not
shorten it to something catchy like Innovation BC?) headed up by Rick
Thorpe and the Ministry of State for Deregulation headed up by Kevin
Falcon.
On a side note, the B.C. Securities
Commission should be commended for taking the lead in providing investors
with disclosure information. For example, it is much easier to get insider
trading information on directors of B.C. companies than it is to get such
information on directors of TSE companies in Ontario. Similarly, the CDNX
provides a lot more information on its listed companies than you'll find for TSE
companies. Hopefully, upon taking over the CDNX, the TSE will apply some of the
CDNX's practices to its operations.
In early November, I attended a seminar put on
by the B.C. Securities Commission. What a breath of fresh air it was!
Together with its counterpart in Alberta, the BCSC plans to introduce some
sweeping changes to the money-raising rules as early as next Spring. Much of the
red-tape now facing companies and investors will be eliminated.
In other government news the Premier announced the
composition of his special Premier's Technology Council. It consists of fourteen
fairly well-known figures in the tech sector. Eleven of these are CEOs or
executives of companies, 6 of which are CEOs from companies listed in the
T-Net20 (Ballard Power, Burntsand, CREO, Pivotal, Inflazyme Pharmaceuticals, and
PMC Sierra). It strikes me as being a fairly well-chosen group and the
strong industry/company orientation is good - maybe even a bit on the heavy
side. There could be a little more representation from the R&D sector in
B.C. The only representative in this regard appears to be Dr. Victor Ling,
VP of Research at the BC Cancer Agency. Also, the small emerging tech
sector, with the possible exception of Shannon Byrne, CEO of Paradata
Systems Inc, does not appear sufficiently represented. The needs of new
enterprises can be quite different - especially with respect to government
policies - from those of more established enterprises. For example, there's
always been some debate about trade-offs between income tax breaks for
professionals (to reverse the brain-drain) and investment tax breaks or
incentives (which is required to encourage angel and other start-up investors).
I never thought I'd hear myself say that there's too much industry (especially
senior) representation! OK, I confess my bias: I think Universities are key
drivers for the tech sector and it all begins with small entrepreneurial
companies. The Premier ought to have their ear, too.
In my June
columns I featured university spin-off companies. The
University of B.C. (UBC) and Simon Fraser University (SFU) have
created over 150 spin-off companies some of which are now substantial
corporations which, in turn, spawn other new ventures. Last year alone, these
universities formed some 20 new
companies. Based on new companies created per million dollars of research
expended, these institutions have ranked in the top 10 in North America for
several years running.
What drives this, and
indeed is the foundation for technology ventures, is research and development.
Canada's Natural Sciences and Engineering Research Council (NSERC)
provides much of the university R&D funding (around $500 million) that's
behind the technology being commercialized by these spin-offs.
In its recent annual survey
on Corporate Canada's R&D spending, Research Infosource Inc. reports
that total R&D expenses for the top 100 Canadian companies (i.e. top 100
ranked by R&D expenditures) accounted for $11.1 billion in 2000. This
represents an increase of 28.5% over 1999. Sounds good, right? Actually, they
should have spent even more if you compare expenditures to revenue (which you
should). Since revenues were up substantially for this group, R&D as a
percentage of sales was only 4.4% (compared to 4.5% in 1999).
On September
7th, I wrote about "corporate governance". I noted that a
special committee, known as the Joint Committee on Corporate Governance (see
www.jointcomgov.com),
produced an interim report, dated March 2001, in which it made various
recommendations as to governance practices, especially pertaining to board
matters.
I suggested that company directors, senior
officers, and shareholders take a look at these recommendations and provide some
feedback. The Listed Companies Association (www.lcacdnx.com),
which represents CDNX listed companies is interested in making sure that its
members are not nails being hit with a sledgehammer. What's nice from a
ideological perspective may not work for practical reasons. In any event, the
document makes for some interesting reading.
The Joint Committee produced
its final report in November, making fifteen suggestions (down from its
originally proposed 27 in the interim report).
Stock
Exchanges such as the TSE and CDNX, which along with the CICA
(Canadian Institute of Chartered Accountants) commissioned the study, are
now deciding on how far they should go in requiring that their listed companies
comply with same.
On the regulatory
front, a new
system - known as The System for Electronic Disclosure by Insiders (SEDI),
took effect October 29, and insiders are now required to file their trading
reports electronically. Investors now have access, free-of-charge, to insider
reports via the Internet, giving them more timely information about insider
transactions.
Investors
are able to obtain reports such as: a weekly summary for all reporting issuers;
the details of individual transactions by insiders; a list of registered
insiders for each SEDI issuer; and an issuer "event history", which
includes a stock dividend, stock split, consolidation, amalgamation,
reorganization, merger or other similar event.
The $12.2
million SEDI system was developed for the CSA by CDS Inc. (a subsidiary
of the Canadian Depository for Securities, Ltd.), which also developed
and operates SEDAR - the main repository for corporate filings (see www.sedar.com).
In late September, in
one week alone - following the September "war", more than a trillion
dollars (US) in North American market cap was wiped out. The Nasdaq was trading
where it was back in mid-'97 and locally, even my most revered barometer for the
B.C. tech sector, the T-Net20 index, fell below its inaugural value of
1000 set in January, 1998. It was trading in the low 800 range.
In October,
I wrote about entrepreneurship and picking winners and how to spot the next
rising star. Initiatives launched during 2001, such as
New Ventures BC, showed that entrepreneurship is hot! The winners of the
first competition (see Oct 5th column for a summary) may be the tech stars of
tomorrow. It was an honor for me to serve as a judge in the Ernst & Young
Entrepreneur of the Year Awards. I also attended the Investment
Forum's "Venture All-Stars" gathering on Safeco Field in Seattle,
which for the first time, featured not only Seattle's HOT 25 companies, but also
Vancouver's HOT 5. In the same month, the Vancouver Enterprise Forum's
angel network has held its first meeting of the season and the BC Advanced
Systems Institute celebrated its first 15 years at a party attended by
dozens of tech entrepreneurs.
That same month, there
was a ribbon-cutting ceremony at the New Media Innovation Centre (NewMIC).
NewMIC is a collaboration between industry, academia and government that focuses
on the research, development and commercialization of cutting-edge new media
technology.
Working from a 25,000-square-foot
state-of-the-art facility in Vancouver, NewMIC is an interdisciplinary centre at
which players in the new media industry can share resources, learn from one
another and push the boundaries of how we think about new media. Sustaining
Members are Electronic Arts, IBM, Nortel Networks, Sierra
Wireless, Sony Corporation of America, TELUS and Xerox.
Academic Members include The Emily Carr Institute of Art & Design, Simon
Fraser University, TechBC, University of British Columbia and University
of Victoria. Government Members are the Government of British Columbia,
the National Research Council of Canada and Western Economic
Diversification Canada. Partnership Members include BC Advanced
Systems Institute and TRLabs. NewMIC also has more than twenty
Industry and Professional Affiliates. For a complete listing, please visit www.newmic.com.
In the November
30th edition, I was delighted to note that we
have a billion dollar winner! Burnaby's Creo Products Inc (TSE:CRE) is
the first B.C. technology company to hit $1 billion (Cdn) in sales. It is the
first member of this exclusive club. When I first came to B.C. a dozen years
ago, there were no $100 million tech companies. Now there are more than 10 that
have this distinction.
Finally, in my
writings a few weeks ago (Dec.14),
I took a look at the Top 20 companies to see which were presently profitable.
The result was a bit disappointing, especially insofar as previous performers
such as PMC Sierra and Creo Products were reporting red ink. Only
a half dozen companies are in the black!
The last article I wrote was on the Innovation
Agenda. Our federal government sees the high tech industry as key to our
country's future wealth. I believe that in order to build a strong industry it's
going to take more than just tax cuts (a good start, though!). We need to
encourage investment by having "going-in" incentives as well as
"going-out" breaks on income and capital gains. And, most importantly,
we need to invest in the natural resources of the tech sector - the human talent
and the on-going development of intellectual property at our research
institutions.
I found some interesting reading on the Government
of Canada's parliamentary web site. In
June of this year, the
Standing
Committee on Industry, Science and Technology
produced its fifth report titled, “A
Canadian Innovation Agenda for the Twenty-First Century”. The report notes
that “Innovation,
as founded on Science and Technology, has thus become the principal means for
achieving economic success in the twenty-first century.” Based on this
premise, it follows that an increase in research and development activities is
necessary for innovation.
Throughout the year, I mentioned tech financings in most
of the columns. I also identified some potential "Good Buys", i.e.
tech companies to invest in. Hopefully, some have paid off for you. In spite of
the doom and gloom perceived by public investors, technology companies did
continue to access the capital markets to fuel their growth. Indeed!
In the next column, on January 11, 2002, I'll be getting
back to tech "futures" and take a peek at what may lie ahead,
tech-wise for 2002 and beyond.
In the meantime, please relax - don't worry about your
tech investments (especially if they're in a promising B.C. venture).
I wish you all a prosperous 2002!
Capital Pool Corporation
(CPC) Comments and Update
In this column, I
keep track of Capital Pool Corporation ("CPC") companies as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. They provide companies with an
alternative to traditional venture capital financing. CPCs are the continuation
of the former VCP (Venture Capital Pool) and JCP (Junior Capital Pool) programs
on the Vancouver (VSE) and Alberta Stock Exchanges.
Regrettably,
though, the program could be working a lot better than it is. The current market
conditions, the lack of broker activity, the glut of CPCs, the red tape and the
uncertainty over the CDNX's future have all contributed to making the CPC route
one of last - rather than first - choice for companies seeking capital.
If you add up all
the CPC, VCP, and JCP companies that were formed since Alberta invented the idea
back in 1987, you'll find more than 1200 such companies. In total, these have
raised more than $3 billion (yes, that's a "b") for growing companies.
Since the CPC
program was launched in B.C. a few years ago, some 300 CPCs have been formed,
but only a small number, i.e. less than 50, have completed their so-called
Qualifying Transactions (QT). Right now, there are dozens just sitting there
with modest amount of cash - usually around $500K - not knowing what to do with
it. Under a relaxation of rules by the CDNX, CPCs are permitted to merge with
one another; coincident with acquiring a qualifying company, thereby eliminating
the need to raise additional funds.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities.
This list is updated on a
regular, e.g. monthly basis. It was recently updated to the end of November
and will be updated again early in the new year.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Coming Up
The next Vancouver
Enterprise Forum event will be held on January 22, 2002 and the topic is
"Finance: Venture Capital, the Banks, and the Market". This is always
a popular one and tends to sell out in advance. Details will be available at: www.vef.org.
The VEF's new tag line is: "VEF - Advancing Technology
Entrepreneurship."
A complete calendar of
technology events can be found on T-Net's
Events page.
Footnotes
If you're an entrepreneur
looking for a place to get your company started; there's some great space
available at Harbour Centre downtown. The New Media Innovation Centre (NewMIC)
and SFU's TIME Centre have teemed up to provide 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.
For a convenient printable, pdf
version of this column, click
here.
Michael
Volker is the Director of the University/Industry Liaison
Office at Simon Fraser University, Chairman of the Vancouver
Enterprise Forum, and a technology entrepreneur. He owns shares in many of
the companies he writes about. Copyright,
2000.
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: mike@risktaker.com
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