19 Sep 2015 BC Tech Survivors Will Emerge Leaner and Meaner: Outlasting a Downturn, Companies ‘Even Stronger than Before’
Content provided by The Vancouver Sun
Since Jeff Booth left his work in home construction to co-found BuildDirect, a tech start-up in Vancouver, he has survived market downturns that have swept through the sector, wiping out fledgling and established companies alike.
The first came when the dot-com bubble burst, shortly after the company started. Then came the financial downturn of 2009. So for BuildDirect, stock market volatility and talk of a chill settling over the North American initial public offering market, is nothing more than, well, business as usual.
His what-doesn’t-kill-you-can-only-make-you-stronger attitude could serve Vancouver’s tech sector well at a time of volatile markets.
“I think the best companies are forged in times of crisis,” said Booth, BuildDirect’s chief executive. “If the company looks at a crisis as an opportunity to do things differently and it drives creativity instead of blaming what the market is doing, some of your most brilliant insights come out of your most constrained times.
“It forces you to create real value faster, and that has been true in each downturn for us. You actually find out what you are made of, what your team is made of.”
Stock markets around the globe have been anything but stable.
On last month’s “Black Monday,” markets around the globe plunged when Shanghai suffered its biggest one-day drop since 2007. In a little over two months leading to the Aug. 24 meltdown, the Shanghai Composite Index had dropped 38 per cent and while there have been rallies and drops in global markets since then, the one consistent theme is uncertainty. Friday, global stock markets took another dip when the U.S. Federal Reserve left its benchmark interest rate unchanged at near zero Thursday, fuelling investor concern over prospects for the global economy.
“In my world, you hear much more the word caution now,” said Boris Wertz, co-founder of AbeBooks which was sold to Amazon in 2008. Wertz is an early stage tech investor, a founding partner of the venture capital firm Version One and a board partner in the Silicon Valley VC firm Andreessen Horowitz. “It’s about burn rates and controlling costs.
“I think people are starting to realize money is not as freely available as it was before. It’s not a panic, it’s a tightening of budgets.”
Wertz said last month’s Black Monday is a reminder, “an indication that something like that can happen overnight.”
Despite market fluctuations, Wertz shares Booth’s optimism.
“I think tech and venture capital have always gone through cycles, and people sometimes forget that,” he said. “The reality is also that great companies have been started in up cycles and down cycles.
“Some of the companies we are talking about now, Airbnb and Dropbox, were started in 2008.”
Wertz said in a downturn, “we’ll have serious talks with portfolio companies. We look at their burn rates and look at what they need to do to adjust,” he said. “Companies usually survive these downturns even stronger than before.”
Most affected in a downturn, Wertz said, are companies in late-stage and pre-IPO financing.
Canada has a handful of tech companies in that stage, many in Vancouver, including BuildDirect — a technology company that specializes in home improvement products — Hootsuite, Vision Critical and others.
Unlike the dot-com bubble, many tech companies now have a sustainable business model and deep enough pockets — thanks to venture capital — to survive without having to go to the public markets.
“Hootsuite, BuildDirect … they are super well financed. They are building real businesses,” Wertz said.
“If there is no IPO window for the next year, it’s not going to be such a bad thing for these companies,” Wertz added. “They are just going to wait until the IPO window opens again. It might be a year. It might be in two years.
“I think ultimately these companies all see the IPO as one step in their company’s development. It doesn’t have to happen now.”
BuildDirect’s CEO isn’t worried about windows closing. He sees it differently.
“Everybody talks about the IPO window, it’s not a window, it’s a screen and the best companies can go through any hole in that screen,” said Booth. “Sometimes it’s a wider screen and any company can through, sometimes the holes are smaller — but the best companies can go through. The screen never closes completely.”
Mike Wollatt, CEO of the Canadian Venture Capital and Private Equity Association, said private markets aren’t as affected by “short-term blips,” as publicly traded companies.
“The nice thing entrepreneurs find with venture capital or even private equity for that matter, it is a lot more patient,” he said. “Everyone from Porter Airlines to Shopify will tell you the nice part about having private partners is that you are not beholden to these short-term ups and downs.
“Your investors by definition are not short-term. These funds have 10-year horizons. They’re looking for long-term strategic partnerships,” he said. “It’s not based on the latest economic data out of China.”
Bill Tam, president and CEO of the B.C. Technology Industry Association, said while volatility in the North American market could mean some IPOs will be delayed, “if anything, the volatility has lessened,” since last month’s crash.
“The uncertainty around the IPO market is less than it once was,” he said.
“The ability for companies like Hootsuite and Vision Critical and BuildDirect and others to raise private equity is still very much in the works, which means the capitalization profile for companies at the later stage continues I think to be quite healthy,” he said. “The fact they have those alternatives is a real asset, especially given those conditions around the public market side.
“I think the fundamentals of a lot of the tech companies remain strong. There’s no question we will return to a stage when there is some normalcy in the market and people will still look for yield and they’ll still look for growth, and the tech sector represents opportunity around that.”
The stock market swings have cast a chill over some companies’ plans to go public. As markets plummeted in August, Massachusetts-based biotech company Raindance Technologies announced it was withdrawing its initial public offering because of market conditions.
Ottawa’s Shopify raised $131 million in an IPO that was heavily oversubscribed last spring, selling 7.7 million shares at $17 each. Shopify is trading around $28, above its IPO price, but some companies don’t fare so well.
During the August market turmoil, Twitter dropped below its IPO price of $26 US, although it has recovered to now trade at more than $27. And when it went public, Facebook surprised many buyers who got in at its $40 IPO price, only to have their shares drop to $16 within a couple of months, not recovering for over a year.
But Booth points out an early stock decline didn’t slow Facebook down: “They used all that money from the public offering to buy a mobile strategy and came out the other side.”
Booth said at times like this, there are naysayers and there are those who see opportunities.
“Some people go into a mode like this in fear and say the world’s going to fall down and some people say, ‘On the other side of this it’s going to create incredible winners,’” he said.
Brent Holliday, founder and chief executive of Garibaldi Capital Advisors, is on the lookout for those types of incredible winners. Inspired by the so-called unicorns — a buzzword in venture capital circles referring to companies with a valuation of $1 billion US or more — Holliday has put together a list of high-ceiling Canadian firms he dubs narwhals.
From Holliday’s narwhal list, Shopify and Vancouver’s Avigilon are both now public, with Avigilon completing its IPO in 2011. Others on the list include Hootsuite, Slack and the mobile messaging app Kik, with Kik most recently reaching the billion-dollar valuation when China’s Tencent, maker of WeChat, invested $50 million in the Waterloo, Ont.-based company. Slack — the maker of a workplace collaboration tool that was co-founded by Stewart Butterfield, who is best known as a Flickr co-founder — raised $120 million US in new venture capital funding with a valuation that put the company into the narwhal club.
Holliday said the current market gyrations will have the biggest effect on angel investing and on those companies looking to go public.
“The least impact would be on venture investing, growth equity investing, later stage, because they have such a long view,” he said. “They go into these companies for five to seven years, so especially the back-and-forth gyrations of the last couple of months wouldn’t matter at all to the longer-term investors,” Holliday said.
Holliday recalls how, in the days of the dot-com crash, venture funds continued to raise money.
“I marvelled at how venture funds in late 2000, early 2001, when the whole tech world was melting, venture funds were still raising money,” he said. “In reality they were saying, ‘Perfect. Let’s get in now. Let’s get venture capital investors investing in 2002, 2003, and we’ll make out like bandits when this market comes back.’”
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