We are really good at early exits in BC and Alberta

Generating higher returns is a good thing, but I wonder if early exits in AB/BC have an unintended negative effect - by exiting earlier, they make less of a splash. With the exception of Flickr, none of the companies you mentioned are very well known. Even with Flickr, the perception is that they had to leave BC to get the real money.

This lack of splash, as I'm calling it, helps perpetuate the myth that AB/BC are poor places to do a startup. It also forces writers like yourself to preface everything with "Contrary to general opinion".

Sorry Basil, but I'm going to have to disagree that this is a good thing.

Certainly the short-term return-on-investment looks good. However, by selling early, these companies are placing their fortunes in the hands of others who, if history is any indicator, will either move the company (Flickr purchase by Yahoo!), or hollow out the company before selling it on the scrap heap (Trillium purchase by Intel).

If the companies don't stay, don't grow big, and don't generate IP and recurring revenues that stay largely in BC, then there is a risk that we will not cultivate the kinds of "anchor" companies that ultimately train entrepreneurs up, and spin them out to generate new companies and innovations.

This then shows that most entrepreneurs in BC and Alberta are narrowly focused in building something and selling out.

What I want to see more of, is startup in BC and all of Canada not having intent to flipping the business (early) but rather grow it and make it great where its founded.

Markus Frind of plentyoffish.com is a great example!

Folks, this is a real dilemma for our two provinces. Yes, early exits generate excellent, quick returns for their investors, which is a key reason for investing in the first place. But, I also agree, they leave a very limited tangible, long term legacy from which other entrepreneurs can gain valuable knowledge, team members, and opportunities.

What I think we need is the right mix of the early startups that convince VCs to come and build their successes with us, as well as some large, successful "grow ups" that emerge from this pool, find the critical talent and infrastructure they need to remain local, and then contribute to our critical mass for future growth.

What we have to ultimately avoid is the concept emerging in hockey...."home town discounts". If an entrepreneur and his or her investors decide to stay and build a company locally, it has to be for the right, positive reasons. It's difficult to monetize the intangible "home town" benefit in the board rooms of the VCs, so we have to do everything we can to make staying and growing just as much a success as leaving early.

Where would we start?

[...] I did my first post on early exits last week – all of the comments were negative. Google produces surprisingly few hits on the [...]

Thanks for the excellent comments on my post. I think an open debate on early exits would good for the future of the tech industry in our province. Let’s see if we can expand the dialog.

Mack: Good point on 'splash'. More would be better. These days the most important news is on blogs not on newsprint or cable. Let’s all contribute out thoughts on Techvibes, our own blogs or anywhere else we can share our ideas.

What do you think of developing a local ritual where we use good-natured peer pressure to encourage anyone who sells a company for more than $10 million to host a REALLY big party for everyone in the tech community? With an open bar…we could all help celebrate their success. I think that would increase the splash.

Brendon: I appreciate your perspective, but I don't agree with all of your points. Yes, companies do get moved after being acquired. My first company, Nexus, did but Creo didn’t; Club Penguin says they aren’t moving.

But your concern seems to be that without big companies we won’t “ultimately train entrepreneurs up, and spin them out ...” In all of my talks to university students, I warn them to “Try hard not to get a ‘real’ job first”. After working in a Fortune 500 company and watching a few hundred startups, I believe that working in a large company is actually detrimental to entrepreneurs. Almost every aspect of the culture in a big company is contrary to the ideal culture a startup. Working in a startup, or very young company, is the best place to learn to be an entrepreneur.

Eugene: You summarize the consensus. There seems to be some maternal, or provincial, urge in most of us to want our companies, like our kids, to live here. I feel it too. But I’d like to know WHY you think that. You mention Plenty of Fish as a company that is still here. The Peer1 homepage has a link to the Plenty of Fish story with a video; the summary says that the company was founded in 2003 and still only has ONE employee. OK, I agree that Markus is probably paying a lot of tax these days, but other than that, what’s the benefit to the community of having the company remain in Vancouver? (I’d change my mind if Markus hosted a really big party.)

Paul: Your thoughtful post includes some of the elements I responded to earlier. You want ‘legacy’ and hope entrepreneurs will ‘gain valuable knowledge’ from working in big companies. You also bring up a very good point about ‘critical mass’.

Critical mass has been a hot topic for debate in BC for many decades. We all seem to want our tech community to be bigger. But why? Vancouver is consistently ranked as the best place in the world to live. Now that our tax structure is competitive it’s not hard to get people to move here (the exchange rate is another story.)

If you talk to CEOs today, their biggest problem is that they can’t find good workers. This shortage is already creating some disconcerting, local wage inflation and employee churn. If you talk to the deans of BC’s engineering schools, their big concern is that enrollment is down. Thomas Hellman’s study shows we are already as good as anywhere in Canada or the US at generating returns from our tech investments. If we are already better, why would we want to be bigger?

Hmmm...Creo is still here, but does it qualify as an "early exit"? It sure wasn't a tiny company when acquired. Soooo, then how do you define early exit? Does Crystal qualify as an early exit?

Also, while your article is interesting, it misses a point: just as there are large differences between shareholder gains via short term strategies (think Carl Icahn) and shareholder gains via long term strategies (think Eric Schmidt), it is a mistake to point to returns on these so called "early exit" and paint them as being beneficial to the local economy. The next point is impossible to prove, but I believe that if we had fewer early exits, we would have more local technology and management talent.

I would love to see a local company try to become a world beater, just as Waterloo has with RIMM, Seattle has with AMZN and MSFT, and the Bay Area has with dozens of companies. Someone needs to become a billionaire locally, to reset the trajectory of our startups, and propel the ambition and imagination of the local community.

Isn't the "early exit" or "built to flip" what Vancouver has come to be known for worldwide? This approach has deep roots here and goes back to the early days of the Vancouver Stock Exchange and subsequently the CDNX, and TSX "Venture Exchange". And other better known industries are not immune to this same approach. The mining industry is all about trying to qualify a prospect and be bought out by a larger company or see booming stock prices based on "potential". BC has built an economy on it. Dont get me wrong. Not all companies in BC are like this... but take a look around... take a look at the investment banks and their junior financings. In comparison to the United States the real difference is simply that Canadian deals tend to seek or obtain liquidity at an earlier stage. Is this wrong? Certainly not for investors and other stake holders that have taken the higher risks associated with entrepreneurial start-ups. And certainly not the ones that buy in at a higher value and less risk for their own tolerance level (assuming their return expectations are realistic). Shouldn't every stakeholder have the opportunity to exit when they decide the time is right for them? Truly disruptive companies that become stand alone companies and not merely product extensions of existing large firms are very rare. If the question here is "should investors go exit later and go long for the better long term value of the Vancouver tech community?.... give me a break. Good luck getting that deal financed. ;)

I agree with Divesh. I think Basil did his best to make a 'virtue out of a necessity' - but falls short. After being banker to a number of start-ups that have been bought out - I think our community has become skewed to 'start-up and early exit' skill sets. We lack the full cycle skills which include those relevant to building the infrastructure of scalable organizations instead of partially formed concept companies. We will see that tier of management skill here if we get the startups to hang around longer.

[...] might be times when an early exit might not good for the venture capital investors. When I did my first post on early exits last week – all of the comments were negative. Google produces surprisingly few hits on the [...]

While I’d personally draw greater satisfaction as an entrepreneur from growing a company that would contribute to the local economy over long term (versus a quick flip), I am firmly in support of early exits where and when they present themselves.

Some related thoughts:

• The fact that the UBC study measured higher percentage returns for BC at earlier stages of exit tells me that there is a problem with how the entrepreneurs and owners of tech startups (across all jurisdictions) perceive their chances of success through the later stages of growth. These stats show that shareholders in other geographies are overestimating their expected returns (probably by underestimating their risk) when they think about holding on for a late-stage acquisition or IPO. If that’s the case, then the BC crowd is particularly savvy, relative to the broader market, in optimizing the timing of our exits. I haven’t read the entire UBC study, so perhaps this point about perceived outcomes has been made already.

• This discussion seems to imply that early-exit entrepreneurs have a choice: sell now, or sell later. If only it were that simple. In cases where a startup is courted with an early-exit opportunity, it’s because competitive pressures in their market space are demanding consolidation, economies of scale, or accelerated R&D. In other words, the very presence of an early exit opportunity probably indicates that the company would likely be unable to go it alone in its industry at that point in time. The frequency of early exits here may say more about the industries in which we participate and the kinds technologies we develop, rather than the risk tolerance of our entrepreneurs.

• Venture investors typically have a 5-7 year return horizon, and will probably be in favour of taking an exit within that time window. Any founder or entrepreneur that blocks a reasonable acquisition against the wishes of her investors, and then fails to deliver a comparable return down the road, won’t raise another dime in this town. For the entrepreneur, the stakes are pretty high, from a long-term career perspective, in rejecting an acquisition - irrespective of financial risk/reward.

• If we view early-stage companies as a “product” that our province “manufactures”, then selling those companies at a 5x return on invested capital (i.e. 80% gross margin) is a pretty good business model. Leveraging that “margin” through reinvestment into new, better-financed startups (“R&D”) by the newly enriched shareholders… that’s pure gravy.