By
Michael Volker
In
his first column for 2004, Mike explains why he's so bullish on the tech sector
in British Columbia and why he believes that it's one of the best places in the
world to build your technology venture.
Bullish
on BC!
I
often get asked by my colleagues back East and in Silicon Valley about the
outlook for the advanced technology industry in British Columbia. Although
I’ve always been optimistic, there’s good reason to be downright Pollyannish
in the coming year.
Although
the technology sector, especially in IT, has been in a slump for the past few
years, there are some good reasons for feeling upbeat. The public markets appear
to be breaking out of the bearish trends we’ve experienced for the past three
years.
In
BC, the mood swung when Vancouver won the Olympics bid for 2010 in early July.
Many of our tech leaders were involved in supporting this bid and the
first-place finish undoubtedly infused a winning spirit in many local tech
entrepreneurs. Most of the year’s good news happened in the second half,
following this milestone.
While
the broader markets represented by the Dow, the S&P500, and the S&P/TSX
all gained approximately 25% during the year, the Nasdaq – the technology
bellwether - advanced a cool 50%. BC’s T-Net20 index which tracks the top 20
public companies based in BC performed even better – up by 83% during 2003.
Although
much of the broader market activity can be attributed to the boom in the
resource sector, it ought to be noted that the Infotech sector was the second
strongest performer in the TSX index groups.
Nationally,
December was one of the strongest months in almost two years with respect to
investors' capital flowing back into mutual funds - close to $900 million versus
a net withdrawal of funds just one year ago. This is a strong indicator in that
cash is starting to flow back into the market.
Even
though we didn’t seen much action on the IPO front, as soon as Crystal
Decisions of Vancouver took the bold step of announcing one at US$172
IPO, it was quickly bought out by Business Objects for US$820
million at almost three times its annual revenue.
In
October, Honeywell bought Surrey-based and publicly traded Silent
Witness Enterprises for $84 million. And, numerous smaller companies
such as ActiveState and WestBay Semiconductor
were also gobbled up by foreign acquistors who appreciated the local talent.
These
buy-outs add to the growing pool of angel investors – entrepreneurs investing
in, and mentoring, new start ups. Indeed, Vancouver’s active angel network now
numbers in the hundreds and is becoming a growing force in early stage
financing.
It's
not just buy-outs but also buy-ins that help build our industry. In this regard,
Victoria's Carmanah Technologies Corp. (TSXV:CMH), a solar-powered
LED lighting firm recently bought Calgary's AVVA Technologies Inc. in an
all-share deal valued at some $3.9 million. Vancouver's SCS Solars Computing
Systems Inc. (TSXV:SCS) a small dot-com era startup producing software for
travel agents, announced that it bought Portland's Accovia USA for an
undisclosed amount. And, Creation
Technologies bought Edper Industries of Milwaukee for approximately
US$13.
The
innovation climate in BC got a boost this past year from two very significant
government reforms:
First,
BC’s Small Business Venture Capital Act was revamped last
Spring to bolster capital formation – up to $200 million - by providing a 30%
refundable tax credit to investors and making the program more accessible to
smaller investors. This created the formation of numerous VCCs – Venture
Capital Corporations including a few publicly offered ones such as the BC
Discovery Fund and the BC Advantage Fund. Each of
these is attempting to raise up to $10 million by February, 2004 but by
year-end, they were well on their way to hitting that target. (Discovery was 80%
of the way there and Advantage at 60% and that's pre-Christmas and pre-RRSP
season when the action really starts!)
Second,
the BC Securities Commission’s goal of eliminating red tape
and simplifying regulations resulted in companies being able to raise capital
from arms-length investors by using new, less-onerous (i.e. less costly)
exemptions from full-blown prospectus offerings.
Many
of the changes were especially welcomed by the many junior public companies
listed on the TSX Venture Exchange. This junior Exchange plays
an under-rated role, in my humble opinion. Some of our leading tech companies
(e.g. QLT Inc., Westport Innovations) may not
exist oday had they not used this vehicle to access many investors as opposed to
negotiating with a handful. Plus, it allows smaller investors to bet on tech
companies without having to take huge positions.
Actually,
there's a third piece of legislation that was supposed to be enacted in 2003 but
is expected soon. That's the new BC Corporations Act. This
replaces the Company Act and will be more like the Federal Act. It will make
companies look a little more like American ones which is, I think, a good thing.
For example, companies will no longer require unanimous consents from
shareholders when selling shares to raise capital.
Whereas
these initiatives helped in bringing more private investors to tech companies,
traditional venture capital firms showed promise as well. Ventures West,
for example, raised $158 million in its eighth Limited Partnership Fund. Newly
formed Yaletown Partners closed a $30 million limited
partnership after tenaciously working this goal since the 2000 blowout. The
November IT Financing Forum that was held in Vancouver
attracted many Canadian and American investors.
Just
a few days ago, I was asked to do a sales pitch to a U.S. firm contemplating a
move to B.C. Here are a few points that I gave them:
The
most important reason is the talent pool - being able to access skilled talent.
In this regard, our universities and colleges have produced great talent in the
past and are in the midst of a plan announced in the Ministry of
Education's 2002/2003 service plan a few years ago of "doubling
the opportunity" - i.e. the increasing output of computer science and
engineering graduates. One only needs to stroll the UBC campus
to see the aggressive construction and building expansion programs underway
there. Similar construction is
taking shape at Simon Fraser University's UniverCity on Burnaby
mountain and a new SFU Surrey campus replaced the Technical University of
British Columbia, with a strategy to double the number of student spaces there
to 860 by 2005/06.
This
plan also included the creation of
the $45-million Leading Edge Endowment Fund, a cost-sharing program to
establish 20 BC Leadership Chairs in medical, social, environmental and
technological research.
In
last years Federal budget, support for research and development increased by
almost $2 billion (nationally). BC's share of that was augmented by additional
funding from the Province and from the private sector. Ambitious fundraising and
development initiatives at our universities will ensure an on-going commitment
to development our most precious natural resource.
At
the beginning of each new year, newspapers always take a look back at the year
that was and more often than not, they dwell on all the bad news stories of the
year. This year, the Vancouver Sun took a refreshing approach
when it highlighted some of the many positive global developments in science and
technology. And, here at home in B.C. we've got countless unsung heroes in our
research labs that we rarely hear about. Remember the SARS
outbreak last year? Remember, too, it was a UBC research team
led by Dr. Marco Marra of the BC Cancer Agency
that was the first to break the genetic code for the virus - proof that BC
scientists are among the best in the world. Remember, too, the some of our
long-standing tech companies such as MacDonald-Dettwiler play a
key role in NASA's space program. And, research in Criminology
at SFU has helped police in tracking down serial criminals.
From Angiotech's pharmaceutical compounds to Tim
Collings' V-Chip, BC's shown that it can be a global leader - small
wonder so many of our successes are snapped up by American firms.
A
vibrant tech industry requires more than smart people. It also means
intellectual property development, i.e. commercializing the investment in
R&D and turning that into marketable products and services. This takes early
stage, pre-venture capital, funding. In this respect, B.C. offers companies with
one of the best R&D incentive programs - the Scientific and
Experimental Development Tax Credit program (SRED) offered by CCRA
(Canada Customs and Revenue Agency). The Province of B.C. complements the
Federal contribution such that companies can get back - in cash in many cases -
up to 68% of researchers' salaries plus a smaller percentage of non-salary
expenses. This is not an exaggeration. Over $2 billion annually is contributed
by Canadian taxpayers to corporate labs. Although this is getting better known,
there are still many companies that don't take full advantage of it and, of
course, it's something that U.S. firms looking North have trouble understanding,
eh?
So,
let's say we've got smart people and some patents (B.C.'s universities generate
more patents than their eastern counterparts) and other intellectual property.
What else does it take to build successful companies? Correct - money! The
toughest funding for companies is in the startup stages. Although there's no
easy money, there is a growing interest and propensity by investors to take this
kind of risk.
Angel
networks in Vancouver (now numbering in the hundreds of been-there, done-that
seasoned tech entrepreneurs - see www.vef.org
and click on the angel links) are becoming mainstream and when coupled with some
of the early stage funds supported under the VCC program, emerging technologies
actually have a shot at getting some real risk capital.
A
notable surge in financing activity was recorded in the fourth quarter. Numerous
companies announced new financings. Biotechs were especially strong - Stressgen
Biotechnologies announced the completion of a $20 million
placement and Anormed Inc. announced that it closed its
offering of 6,000,000 Common shares for gross proceeds of $29 million. And on
the very last day of the year, Response Biomedical reported
that a non-brokered private placement undertaken by the company was
oversubscribed, raising gross proceeds of $1,741,445.
The
last piece of good news for 2003 was the launch of Leading Edge BC,
a new agency funded by $8.3 million by BC over a three year period to promote BC
innovation and investment in BC technology. Leading Edge BC is led by the
private sector, with the buy-in of many industry groups.
There's
no doubt about it - there are many reasons to be bullish on the tech
sector. BC is the place to build a technology venture.
Footnotes
In
addition to the BC Advantage Fund mentioned earlier, there's a
smaller boutique fund organized by yours truly, called the Western
Universities Technology Innovation Fund (WUTIF). WUTIF
is a pooled fund that is managed by angels and co-invests with hands-on angels
that work closely with their companies. This Fund may offer its investors not
only exceptional returns by excellent tax incentives. For example, investors may
get up to 74% of their investment back soon after they file their 2003 tax
returns. It's like a mini-mutual fund with a focus on BC tech companies. Check
it out at www.wutif.ca.
Speaking
of legislative changes, there's one that will affect most companies albeit many
have not awakened yet to the implications thereof. Privacy Acts - two competing
ones - Federal & Provincial both introduced on January 1st. It's not clear
which one takes precendent. The BC Personal Information Act is
broader than the Feds' in that it also applies to associations and non-profit
orgs. In essence, the new law attempts to afford greater privacy to consumers.
It will reduce unwanted solicitations by putting restrictions on the uses of
customer lists, for example. The one I really like is that companies will no
longer be allowed to send spam email (hurray!). The only problem with this is
that much of the spam I get comes from the USA. Employees will also be granted
access to their personal records and employers will have to be more protective
of employee data.
VEF
UPDATE
This
month's Vancouver
Enterprise Forum event - on Tuesday, January 27th will focus on
launching new products and building revenue. Some local companies will be
featured as will Certicom Corp from Ontario - with Scott
Vanstone of Certicom making a special guest appearance. He'll be
talking about how this technoloy has been sold around the globe. The co-sponsor
for this event is the University of Waterloo.
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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