A High Class Problem

Here is a nice problem to have: your company is growing too fast. After a couple years of survival and recovery stories, it’s nice to hear that a few technology companies around town are having a huge "problem" with growth. With compelling products and services being effectively marketed and efficiently sold, companies can’t help but grow.

But a few companies hit the sweet spot of market timing and/or a significant partnership and take off like a rocket. A few examples: Vivonet signed a deal in May with a massive customer that compels them to ship five times the point of sale terminals that it has cumulatively shipped to date! Avigilon, the BCTIA Emerging Company of the Year, has seen explosive growth in Europe for its HD video surveillance systems. Pareto Logic has grown immensely on the back of its unique affiliate marketing strategy. Elastic Path is knocking the cover off the ball with huge client wins, such as Symantec, and the massively successful Olympic e-store. Other explosive growers include IQ Metrix, Vision Critical and Make Technologies, all of whom have seen significant uptake of their new products.

Isn’t it nice to have a company’s sales forecast exceeded?

When these disruptively positive changes happen in a company, there is initial celebration at the good fortune. But before the champagne gets sticky on the floor, the realization hits that the Company has changed. Now you need to meet expectations of these new customers; you have to deliver new services and customer care. Your billing and accounting systems might need an overhaul, and your communications strategy needs to keep up. Your hiring practices might go out the window, as you look to accumulate bodies in seats. The company needs to finance the new inventory and/or manage cash flow better.

When you start to drink from the firehose, it is hard not to get wet. Solving these issues is a challenge to management as they transition from start-up to globally-recognized technology company.

In talking with the CEOs or investors in some of the rapidly growing companies in BC, several themes emerge that are remarkably consistent. To be closer to global markets and customers, companies are expanding with US and European offices. All are concerned with access to the type of talent a growing company needs : customer care, sales (direct, channel, inside) and operations (expanded capacity to deliver product or services). Every one of the CEO’s and investors wants to grow a huge BC-based company and not necessarily sell. If they are a "10 year overnight success" then they are exploring ways to get some liquidity for early shareholders and investors, such as adding a private equity firm that will happily buy existing shares. Vivonet did this type of transaction in May.

I am very excited about this new crop of high flyers in the local technology industry, even if they have "problems" to solve. We should be so lucky as to see more like them.

Liquidity For Angels, Family & Friends? Maybe.

Imagine you are an angel investor (perhaps you are). Over the past few years you have made investments and lost a few. The problem today is that all of your other investments have plunged and your net worth is where it was when you graduated from university (hey, you are in good company... Warren Buffet lost $27 billion of his net worth last year according to Forbes). Still, in your portfolio of start-ups are some real solid, growing companies. If only there was an active market to take these things public or sell, giving you some much needed liquidity!

In a well timed attempt to help the poor downtrodden angels of the United States, Sharespost was unveiled this week, listing 200 private angel and venture backed companies that appear to be doing well in the marketplace (Twitter, Facebook and Tesla Motors are among the companies). The idea is that as a common stock holder, you can post your shares (minimum $25,000 worth) at a price and see if buyers will accept your contract. Similarly, buyers can post their wish to purchase at a price per share and see if sellers will comply. This is an extension of, and attempt to grease the skids for, a secondary market that can happen today by chance meeting over cocktails or over the phone. But it is not without complication. One of the main reasons private companies are not liquid is because the insiders don’t want it to be. Most start-ups I have been a part of (some 45 now since 1995) have tight restrictions on transfer of shares, in some cases, even requiring board approval. Sharespost claims (in their FAQs and Legal sections) that they can have you sign agreements to transfer shares that won’t contravene terms like Right of First Refusal and Right of First Offer. One other small issue... No Preferred shares are being offered. Why not? Why can’t the VCs (who typically create and own the Prefs) get a little of this action? Because Prefs are often convertible with conditions like 2 or 3 to 1 into common, liquidation preference and the nasty double-dip: dividend accrual.

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VCs and Sheep: Separated At Birth?

This just in: VCs are sheep. In case you missed it, they all tend to look and act the same, although they smell much better. The VCs I mean. After being one of the flock for 14 years, I can speak to the herd mentality that drives the up and down cycles of the early stage investment community. The Wall Street Journal, citing Venture Source, reported that 57% of VC deals completed in the first quarter of 2009 were funded by existing investors, up from 44% a year earlier. That is 57% of a much smaller number of total financings that took place in the US (down 47% Y/Y) and Canada (down 25%Y/Y).

Why do VCs tend to invest in less new deals? Because, like sheep, they are skittish. Any loud noise, such as LPs yelling over conference speaker phones, tends to send them scurrying for the comfort of portfolio triage. After all, that's what the first quarter of 2009 was. VCs looked at their portfolio and started to make decisions about who should get more money and who should die a miserable death. Here are a few of the fallen.

We have seen this movie before. In late 2000, early 2001, the same thing happened as the huge hangover of the dotcom/telecom party started. I have two columns that I wrote in March 2001 (they are over in my Archives) that talk about the same thing happening then as now. It is all part of the cycle of funding. The VCs will hunker down and only nibble at new deals for the first year or so, provided that they feel that the valuation is a good deal for them. At the first sign of recovery (VCs think exits, so a few IPOs or some more aggressive M&A), the funds will start flowing.

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