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September 2, 2004 |
By Al Emid
The Investment Community Is Loosening Its Collective Purse Strings. Are The Tough Vc Days Coming To An End?
On June 30, Brian Buckley and his colleagues had more to celebrate than the upcoming Canada Day holiday. His company, Vancouver-based Contec Innovations, had just closed a second round of private placement financing worth $310,800. The funding means Contec can proceed with plans to market its mobile services delivery platform for wireless data.
Contec is one of many technology firms currently receiving warmer welcomes from capital markets than it would have experienced in the recent past. It was less than two years ago that Backbone reported the bursting of the tech bubble, which, combined with fallout from various stock market scandals, left investors feeling “large doses of fear, distrust, suspicion and doubt….” (Trouble and more trouble, December 2002.)
Yet Buckley, an investor relations manager, has seen the current sea change first-hand. “Investors, venture capitalists, corporate finance individuals — they’re all more open to the idea. Enough time has passed now; the further we get from the tech bubble (the more) they are willing to invest.”
In addition to distance and time, heretofore restricted investor demand is also driving the new environment, according to Eric Slavens, initial public offering services leader at PricewaterhouseCoopers in Toronto. “There is a pent-up demand looking for higher returns and we’re starting to see that,” he said. The flow of cash for tech projects is best viewed against the larger backdrop of greater availability for various types of speculative ventures, including mining, he added.
A recent PricewaterhouseCoopers survey said that with 47 new issues, Canada’s IPO activity to date in 2004 has been the best for new issues overall since the bubble burst in 2000.
THE GOOGLE EFFECT
The current optimistic climate is partially driven by the stock market’s belief that purchasers of technology hardware and software are going to ramp up spending after years of depressed sales, said Gavin Graham, vice-president and director of investments at the Guardian Group of Funds in Toronto.
Twenty-one of the company’s 30 mutual funds have some level of holdings in technology and telecommunications. Graham said the upcoming Google IPO will overshadow the market with an unpredictable effect on would-be money seekers, meaning the window of opportunity for smaller companies has an uncertain time horizon. The Google IPO is set at approximately US$2.7 billion.
The risk-reward trade here is that if Google soaks up too much of the available capital pool, later issues might be stalled or their promoters may be forced to lower their financial sights. Alternatively, if Google strongly whets investors’ appetites, later issues will go more easily and produce greater amounts of funding.
To those who buy into the latter possibility, Graham recommended, “I might leave [a pitch] until after Google goes public.” Looking for money often means understanding the target market, Graham said, explaining technology investors have a specific perspective that allows for risk-taking. “If you’re buying a tech IPO you’re not buying it for dividends and you’re not buying it for earnings,” he said, recalling many pre-bubble offerings had neither sales nor earnings, only expectations, at time of offering. “The greatest factor that is important in selling growth businesses like tech is optimism, because you are optimistic that this product or technical invention is going to actually become the next Dell, Microsoft or Intel.”
LANDING THE DOLLARS
For executives at these future giants, securing financing means playing the game by some of the rules that fell by the wayside during the tech bubble, according to Susan Allen, emerging company practice leader at PricewaterhouseCoopers in Toronto. Her group issued a report earlier this year entitled Emerging Canadian Software Companies: The CEO Perspective. “The back of the napkin doesn’t work anymore,” she said. “It’s back to business plans, a realistic path to profitability, and the market potential.” For example, Buckley credits Contec’s focus on Asia, including the huge market in the People’sRepublic of China, with some of its investor appeal.
Flexibility and humility also loom large on Allen’s list of attributes for successful money seekers. Depending on the situation, those responsible for providing the funding may require a seat on the company’s board of directors. They may also require added weight to the management team, since the chief executive officer may be more of a visionary than an administrative and organizational mastermind. “You’ve got to be willing to deal with the fact that you may not be the CEO a year from now,” she added. “They may feel they need to bring in some people with other expertise or references that can help the company get to the next level. You may need to have humility.”
Allen also said companies that once struggled may now be rewarded. For example, an experienced management team that’s “been there done that before” is an asset. That was the case at Contec, where the three top executives claim 55 years of combined experience. Contec began in late 1999 and survived the bad news that followed. During its recent financing, investors viewed the company as an organization that made it through the tough times. Buckley agreed.
Investors are more confident in companies that simply survived. “We’ve gone through one of the worst periods that anyone can remember in the tech sector, and managed well,” he said. “Those are the kinds of opportunities investors will pay special attention to: companies that made it.”
Investors, he said, believe survivors will benefit handsomely “when the sector does really turn around.”
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