Outlook 2002, BCSC is Listening, Capital
Pool Corps Update, an RRSP Idea and Local Events
Outlook 2002:
Last week, I addressed the Vancouver Board
of Trade at its annual "Outlook 2002" presentation on the B.C.
economy. My talk focused on the B.C. technology sector. I warned, though, that
I'm not an economist. When in university I almost dated one though. However,
when I asked her for her phone number, she gave me an estimate! Speaking of
estimates, have you ever wondered why economists predict to decimal-place
accuracy? (Ans: To show that they have a sense of humor). In trying to be
vaguely correct rather than precisely wrong, here's what I said.
First, with respect to GDP contribution, in the
year 2000, high tech contributed 3.9% of the province's GDP. Although this does
not sound like much, it was only 2.6% in 1995. High tech has grown at an
impressive 10-year average annual growth rate of 9.2%.
There are currently some 61,000 employees
working in more than 7,800 firms in B.C.'s high tech sector. The revenues of
these firms add up to close to $10 billion. If you add up the sales of the top
100 companies as found on the T-net, you'll get a figure over $6 billion for the
2000 fiscal year. But, if you add to that an estimate of sales contributed by
firms with branches and divisions, you'll get a number closer to $8 billion!
Firms such as IBM, Motorola, Crystal Decisions, JDS Uniphase (until
recently), Raytheon, Honeywell, Broadcom and Electronic Arts are
among those with a strong presence in B.C. Electronic Arts alone probably
produces close to $500 million in its worldwide studios based in Burnaby.
Just 5 years ago, we had no $100 million sales
companies in this province. Now, we have more than a dozen. QLT Inc. (TSE:QLT)
is the first biotech company to achieve this level of sales, reporting $31
million in its latest quarter with an enviable bottom line to boot. When it made
its public debut on the CDNX (formerly the VSE - yes, the VSE!) a decade or so
ago, you could have bought it for less than a buck. And, two companies made it
into the billion dollar club last year. Indeed, Creo Products (TSE:CRE)
and PMC Sierra (NASDAQ:PMCS) both reported more than C$1 billion in sales
for their latest reporting period. I was a little disappointed that these
achievements passed by without much hoopla. We really do need to promote our
sector a little more! I hope they at least had a pizza and beer employee party.
With regard to what's included under the
"high tech" banner, there are three main thrusts. These are: Infotech
which includes hardware, software, communications, microelectronics, electronics
internet, new media and entertainment companies;
Biotech which includes life sciences, genomics, bioinformatics,
biopharmaceuticals, medical devices; and Technology (for lack of a better word)
which would include alternate energy (fuel cells & components), aerospace
(this is an $800 million industry with 7000 employees in 50 companies),
manufacturing, and miscellaneous science & technology ventures. Here's how
they stack up:
| |
Employment |
Sales (2000) |
Market Cap |
| INFOTECH |
50,000 |
$6 billion |
$7b - $10b |
| BIOTECH |
3,000 |
$200 million |
$5b - $6b |
| TECH |
8,000 |
$1 billion |
$5b - $6b |
It's noteworthy that the market values of these
three groupings are roughly comparable. Yet, the maturity of these technologies,
using revenue (or employment) as a proxy, clearly shows that biotech is still
very nascent, yet highly valued.
At the market peak in the Spring of 2000, the
aggregate market capitalization of the publicly-traded B.C. tech companies was
close to $100 billion. Currently that figure is closer to $20 billion. Yet, just
5 years ago, that number was under $5 billion.
Numbers aside, there's a more grass-rootsy way
of seeing the progress that's being made. It really warms my heart when I go on
my weekly shopping spree at Costco and see products such as Xantrex's
Jazz (tm) auxiliary power device on the shelves. Or, for that matter, to
see the shrink-wrap boxes of EA Sports games produced in Burnaby. Another
example occurred during a recent trip to Silicon Valley. I was watching a local
business channel which just happened to be talking about Bloomberg's
"buy" rating on two B.C. stocks, namely PMC Sierra (NASDAQ:PMCS)
and Pivotal Corp (NASDAQ:PVTL). Imagine, in Silicon Valley!
Although this visibility is encouraging and
even though we've seen some impressive growth, the industry, by any measure, is
still young with a much bigger future ahead.
What is the "root cause" of this
industry progress and what will continue to drive it? Well, it all starts with
R&D - research and development. Our universities and colleges are the
fountains from which the innovation process emanates. They not only spin off
many successful companies directly, they also breed the talent and the
intellectual property that perpetuates the process. Just for the record: The University
of B.C. (UBC) has created more than 100 companies to date. UBC's current
research spending is in the $200M range while Simon Fraser University
with its more modest $25M budget has produced some 60 new ventures. According to
BC Stats, SFU and UBC have been issued more U.S. patents, on a cumulative basis,
than the top institutions in Alberta and Ontario. The University of
Victoria, at $30M, ranks second in funded R&D.
The amount of R&D conducted in B.C. is
approximately $1 billion. This represents 0.9% of GDP. The general view is that
this is too low, especially in comparison to the rest of Canada at 1.5%. At the
2000 Business Summit conference in Vancouver, a stated goal was to
increase this to 1.125% by 2005. This concerns me because it isn't ambitious
enough. When you have political leaders like Paul Martin saying that he
wants to triple Canada's total R&D spending from $15 billion to $45 billion
in 10 years, it makes me wonder if we're not being a little too conservative.
Why, even according to Canada's "Innovation Agenda", the direct
federal support for R&D is slated to double from $3.7 billion to $7 billion
by 2010. How about that? With a very competitive after-tax corporate cost of 45
cents on the dollar, B.C. is well positioned for more.
But R&D on its own doth not a business
make. Innovation is the key to growth. Entrepreneurs are the champions of
innovation. They are the ones who take the raw intellectual properties and
transform these into consumable, market-driven products and economic wealth. As
an industry evolves, more entrepreneurs are attracted to, and cultivated by, the
industry. Role models emerge for others to emulate. For innovation to occur and
entrepreneurship to work, access to capital is needed.
So, how are we doing on the money side in B.C.?
Pretty good, actually, especially in B.C. Venture capital investments for the
2001 year where just over $600 million as compared to approximately $450 million
in 2000. There were some fairly large deals included such as Xantrex
which raised $58 million and Xenon Genetics which raised $70 million.
This is a good indication that B.C. is becoming an attractive region for tech
investment. B.C. outperformed Canada and the USA in terms of VC activity. The
level of foreign participation is also on the up.
Entrepreneurs face their greatest challenge
when seeking start-up capital. So-called "seed" or "angel"
money is what gets the innovation process rolling and is the first step towards
moving an idea or concept closer towards becoming a commercial reality. VCs tend
to keep away from, or at best dabble in, early opportunities. This is the turf
of angels. In fact, I strongly believe that if a company cannot attract an angel
investor, it will find it even tougher to get any form of institutional funding.
Angels, which are by my definition tech entrepreneurs investing their own money,
provide a company not only with capital but also with some expertise (not to
forget the old Rolodex). They also add credibility.
Furthermore, the mindset between angels and VCs
is entirely different. VCs, because they invest other people's money, are
obligated to think of all the reasons why they should not invest in a
company. Angels, because they are accountable only to themselves (spouses
notwithstanding), think of the reasons why they should invest. Getting an
angel is kind of a rite-of-passage.
Tracking angel activity is not easy. Because of
the more informal and personal nature of this type of investing, reliable
statistics are not available. However, by my own estimates, I figure that angel
deals in 2001 amounted to something between $40 and $90 million. No small
change! I base that on just what I've seen or heard about. Hence, the numbers
could be even greater. This resource cannot be underestimated. It will, in my
view, become the most important resource for startup CEOs. Information on B.C.'s
angel network can be found at www.vef.org/vantec.html.
I have been a big fan of the public market as a
source of capital. A stock exchange such as the Canadian Venture Exchange
(CDNX) plays a major role. VCs tend to pooh-pooh this exchange because they
frown on companies going public "too early". Yet, it provides
companies with another option. For those deals that are perceived as too risky
to bet other people's money on, a wide public distribution in which hundreds of
people risk a few thousand dollars as compared to a few investors risking
millions, this is a good alternative. It also gives the street or retail
investors a chance to speculate on the next hot tech venture (maybe the next QLT
Inc or Westport Technologies - both of which started off on the CDNX).
More tech firms are taking this route. Approximately 50% of new CDNX listings
are technology companies.
Last year, CDNX financings suffered badly. In
the first nine months of the year, only $57 million was raised by tech companies
as compared to $187 million the year before (the boom year). This drop was due
to the beating which public markets in general took in 2001. Many investors
retreated in the wake of the tech fallout. Exacerbating this is the time and
cost factor associated with dealing with the regulatory regime and our country's
insane system of provincially regulated securities commissions. (On the positive
side, it keeps a lot of lawyers employed). Due to the over-regulation which has
taken place good companies have been discouraged to list, leaving the marginal
ones for investors. The lack of good deals contributes to the lack of investor
interest. Hence, we have a downward spiral. Everyone stays away.
In B.C., securities regulators are listening
(see item below) and I'm optimistic that in future will have a more conducive
regulatory system. Additionally, we'll have to take steps to make the CDNX
really hum. We have to get investors, brokers, companies, promoters, and
deal-makers back into the game. I think we can do it without compromising on
investor protection through adequate disclosure - not so much on business plans
and technology as on people backgrounds and track records.
In addition to the entrepreneurial zeal and the
improved access to capital, B.C. has a rich infrastructure to support the
development of the tech sector. B.C. is home to numerous institutions, industry
organizations, and collaborative initiatives. In addition to the five
universities and several colleges, we have organizations such as the B.C.
Science Council and industry-led B.C. Advanced Systems Institute,
industry "voices" such as the B.C. Biotech Alliance, the B.C.
Technology Industries Association. There are networking and educational
opportunities through the Vancouver Enterprise Forum and New Ventures
B.C. Finally, there are specific, new R&D institutes such as the New
Media Innovation Centre (NewMIC), Fuel Cells Canada, and Genome
B.C. as well as organizations such as the National Research Council,
and numerous other research facilities (e.g. B.C. Cancer Agency, Feric,
Forintek, and Paprican - to name a few).
As for technologies that are "hot",
I'm seeing lots of interest in the following areas:
Infotech
- Microsoft's "dot-net" vision will create some new
opportunities especially in communications and collaborative software (side
note: even though many software companies saw their revenues fall last year,
Microsoft continued to enjoy quarterly growth - now a U$25 billion goliath).
We'll also see lots of activity in data sharing technologies (e.g. XML),
wireless products (hardware and software), and digital convergence (the melding
of entertainment, communications and computers).
Biotech
- There's a lot of interest in genomics, proteomics, and bioinformatics
especially as these relate to drug discovery.
Technology
- we'll see continued interest in alternate energy (fuel cells), advanced
materials and nanotechnology.
How does all this translate into 2002 growth
prospects for the industry? I believe that we should see continued growth (as
measured by revenues) in the 8-10% range. We won't see the impact of many of the
new initiatives (i.e. NewMIC, Fuel Cells Canada, or Genome BC) this year, but
these will lay a foundation for the future. High tech tends to create its own
demand, too (after all who needs a PC anyway?) and more people are seeking to
make their fortunes in high tech.
As some students recently learned, if you take
an idea from someone, that's plagiarism but if you take many ideas from many
people, that's called research. Here are the results of some of my
"research" when I polled some of our industry leaders on their views.
Alan
Winter
[CEO
- NewMIC, now CEO of Genome BC]: “It
may be a tough year for B.C. in general but not so bad for the high tech sector.
Small companies will find it more difficult to attract funding as V.C.s put
their money into previously-funded firms that require follow-on capital. We
should see a firming up at the higher end of the value-chain as revenues
stabilize and continue from their pre-2000 levels. Overall, I’m optimistic.”
Dan
Gelbart
[President
& Co-founder, CREO Products Inc.]: “Creo's
fortunes are tied to the printing industry which is tied to the world economy in
general (being one of the worlds major industries)…. We are using the
recession to develop many new products which will be launched over 2002. The
first one, for the creative side of graphic arts is being launched (this month)
at MacWorld. The price of success and large market share in a large market is
that you can not move much faster (or slower) than the market you are in.”
Brent
Sauder
[Exec
Director, BC Advanced Systems Inst.]: “What's
going to be hot will be limited by what early investors will put their money
into. Biotech still attracts the dollars. Telecom (hardware & software) will
be tough but basic "building block" technology components are still of
interest (e.g. microelectronics firms WestBay, Cogent Semiconductor, Vector 12
come to mind).”
Paul
Lee
[Sr.V.P.
& COO - EA Worldwide Studios]: “My
gut [feeling] on Industry Growth in BC is probably 7%.
There has certainly been a drop in the technology industry as a result of
the dot-com crash and as a result of the economy. As the Premier has stated,
technology really is a productivity tool for industry in many ways…. Biotech,
alternative energy and the entertainment software industry continue to do well.
Companies like EA, Crystal Decisions, ALI Technologies, QLT, Ballard
Power, Questair, Inex, Stressgen, Xantrex, MDSI, MDA, Fincentric, and many, many
other Biotech and alternative energy companies continue to do well.”
Greg
Aasen [VP, PMC
Sierra]: “We have stated publicly that we see a bumpy year,
that inventory problems will continue through mid year. End demand for
more bits on the internet is still growing so we are optimistic that the long
term outlook is good.”
George
Hunter
[Exec Director, B.C. Tech Industries Assoc.]: “As you might expect, I'm
bullish. We're expecting to see a strengthening market thru the year. Cap-ex
numbers indicate an improvement in IT purchasing. It should be a good year for
new and refinancings as the positive economic climate begins to unlock the
trillions of investment dollars currently sitting on the sidelines. I think it
would be a great year to start or finance a company....
Lots of talent available, improving financing environment and technology
companies at realistic valuation. Biotechs mobile and alternative energy all
look strong.”
The prognosis for BC's overall economic
performance is that GDP is likely to be around 1% this year and as high as 3% in
2003, much like Canada as a whole. High Tech will be a shining light for many
years to come.
BCSC is Listening
I thought you might be interested in knowing
that the B.C. Securities Commission has launched an initiative to seek
advice from "new economy" companies in B.C. making the capital-raising
process easier for them. In the past, the BCSC was mostly concerned about
protecting investors - not building companies.
As part of Gordon Campbell's promise to cut red
tape (cutting red tape is good as long as it's not cut length-wise), the
Commission now reports to the Ministry of Competition Science and Enterprise
(the open-for-business guys) and the focus now is to assist companies rather
than collect fines for minor violations.
Its goal is to simplify securities regulations
in B.C. for new economy companies. As such, it is asking for your
opinion. I'm truly impressed at their genuine interest in getting feedback. Go
to www.bcsc.bc.ca
to respond to the survey which the commission has launched on its website. It is
asking industry participants - including those who advise or help fund these
ventures - to share their financing experiences and plans and to identify
barriers to capital raising in B.C. The survey is an initiative of the
commission's newly created New Economy and Adoption of Technologies group. Now,
that is NEAT!
In a press release, the commission noted the
"growing importance of high-tech companies which generated 3.9 per cent of
B.C.'s GDP in 2000 and are growing at a higher rate than the overall provincial
economy. It created the NEAT group to help find ways of streamlining regulation
of the securities market and to offer regulatory support to firms operating in
the new economy."
In addition, the NEAT group will conduct focus
groups and interviews with industry participants to hear their thoughts and
opinions on specific regulations that hamper their capital-raising and business
activities as well as what regulatory changes would help streamline regulations
for new economy companies. A summary report of the group's findings is expected
to be available in late spring. Any questions or comments should be addressed to
Derek Patterson, chair of the NEAT group at 604-899-6801 or dpatterson@bcsc.bc.ca.
An RRSP Idea
Registered Retirement Savings Plan are great
tax shelters for Canadians. They sure beat setting up a Cayman Islands Corp
(besides, you can go to Whistler rather than bake in the sun).
Due to recent cuts in capital gains taxes,
RRSPs are no longer as attractive as they used to be (hey, I'm not complaining)
unless you're doing a lot of active stock trading. It may be better to hold
long-term investments with no annual income outside an RRSP. An exception to
consider is the Working Opportunity Fund ("WOF"). WOF is a
labor-sponsored venture capital fund available for BC investors.
Here's what Jarek Matysiak at Canaccord
Capital has to say about it: "I recommend WOF highly as a prudent RRSP-type
investment. It has been a top 10 Canadian Equity fund over the past 9 years
(since inception). Plus, it carries with it a major tax advantage: you get a
permanent tax credit of 30% in the year you buy it. This plum deal is more or
less limited to $5,000 per person per year (one can invest up to $13,500 to
receive a total of 20% deductions, but to maximize the tax credit percentage to
30%, $5,000 is the limit. I generally recommend $5,000 as the most clients
should consider). The investment requires the money to be locked-in for 8 years
(usually not an issue for RRSPs or long-term investors. However, there are also
a few exceptions to the 8 year lock-up: death, losing your Union job, or being
physically disabled breaks the lock)."
"For a contribution of $5,000, you receive
a $1,500 tax refund (not to be confused with a mere tax deduction).
Approximately half the $5,000 investment gets invested into either the TSE 300
or money market bonds (your choice) while the other half goes into their venture
capital portfolio (their track record has been among the top 10 in Canada over a
9 year period. Examples are their purchase of Angiotech (TSE:ANP) at
$2.75, now worth $90; Stressgen (TSE:SSB) at 80 cents, now worth $4.50;
and HotHaus (private) in which they invested $4 million and sold for
about $170 million a few years later, which represented the largest win by any
Canadian venture capital manger in Canadian history). This fund completely
avoided the dot.com craze as one would expect from truly experienced venture
capitalists (they never understood how exactly the revenues would be realized,
so they never invested in them). Make a $5,000 WOF investment as part of
an RRSP contribution and you will receive up to $4,000 back in taxes in April
(depending on your tax bracket). Do this year in year out, then, in year 9, sell
1st year investment and roll it back in for a second 30% deduction. So after 8
years, it can feed itself while continuing the annual tax credits beyond year 8
- all without committing any new money."
"Here's an example: Joe invests $5,000 per
year for himself and for his wife Betty's spousal RRSP ($10,000 total). Let's
assume a 40% tax bracket for each. Over an 8 year horizon, a total of $80,000 of
pre-tax money is invested ($5k x 2 people x 8 years). From this, $24,000 of tax
credits ($1,500 x 2 people x 8 years) and another $32,000 of RRSP contribution
tax savings will have been refunded (40% of $5k x 2 people x 8 years). That is a
total of $56,000 of taxes that are avoided ($24k of the 56k) or deferred ($32k
of the $56k), respectively. Net after-tax out of pocket cost to Joe and his
wife? $80k - $24k deduction- $32k deferral = $24,000. Now, the average return
for this fund (not including the tax savings) has been about 12% during the past
9 years. Assuming a conservative 5% going forward, the total after 8 years of 5%
annual average growth will be $100,265. The Bottom line: Joe and Betty will
invest $24,000 out of pocket over 8 years to hold $100,265 worth of RRSPs after
8 years assuming it grows at less than half its historic average rate. Then, for
year 9 and beyond, they will collect $3,000 of tax credit each year for doing
absolutely nothing other than having their investment advisor redeem $10,000
worth of the fund and then turning around re-purchasing $10k more that same
minute. No new injections of capital need be made to do this. Transactions
Costs: first purchases cost $30 while subsequent purchases in other years will
cost $15. There are no brokerage commissions to pay nor are any costs to sell
once the 8 years are up. So, Joe and Betty would pay a total of $60 for their
first $10k purchase while paying $30 each year after that in which they buy more
(only if they buy more, of course). Foreign Content: WOF is not only Canadian
content, it RAISES the foreign content limit of one's RRSP to a maximum of 55%
from the normal limit of 30%."
"Why does the government allow this tax
break for these investors? Simply, it encourages investment in BC and encourages
smaller investors to save money. Please note, though it is labour sponsored, the
investment decision making process is in no way shape or form influenced by
provincial politics or influenced by the labor movement (i.e. the Unions). Zero
patronage has ever or will ever occur. Has the government's objective of
granting a tax break increased their taxes collected from capital gains down the
line? Yes! The amount of capital gains taxes gleaned from this fund's sales of
winners has outpaced the amount of tax credits they gave up over the years.
Proof that, when diverted to competent non-government hands, tax cuts today are
capable of stimulating greater tax revenue down the road...Finally, know that
this fund SELLS OUT each year as there is a limited supply ($80 million for this
RRSP season will be allowed). It is expected to sell out by the end of
January"
Call Jarek at Canaccord at 604-643-7347 if you
wish to discuss it further or check the WOF web site at www.wofund.com.
Capital Pool Corporation (CPC) Comments and
Update
In this column, I keep track of Capital
Pool Corporation ("CPC") companies as defined by the CDNX because
they may provide funding and management to, and in the process acquire,
technology companies. They provide companies with an alternative to traditional
venture capital financing. CPCs are the continuation of the former VCP (Venture
Capital Pool) and JCP (Junior Capital Pool) programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Regrettably, though, the program
could be working a lot better than it is. The current market conditions, the
lack of broker activity, the glut of CPCs, the red tape and the uncertainty over
the CDNX's future have all contributed to making the CPC route one of last -
rather than first - choice for companies seeking capital.
If you add up all the CPC, VCP,
and JCP companies that were formed since Alberta invented the idea back in 1987,
you'll find more than 1200 such companies. In total, these have raised more than
$3 billion (yes, that's a "b") for growing companies.
Since the CPC program was launched
in B.C. a few years ago, some 300 CPCs have been formed, but only a small
number, i.e. less than 50, have completed their so-called Qualifying
Transactions (QT). Right now, there are dozens just sitting there with modest
amount of cash - usually around $500K - not knowing what to do with it. Under a
relaxation of rules by the CDNX, CPCs are permitted to merge with one another;
coincident with acquiring a qualifying company, thereby eliminating the need to
raise additional funds.
Check our Capital
Pool Corporation chart (in .pdf format) for a
complete list of the CDNX's CPC and VCP companies, thanks to David Ing of
Pacific International Securities. This list is updated on a regular, e.g.
monthly basis. It was recently updated to the end of November and will be
updated again in the next week or two (check back!).
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Local Events
This week, the Vancouver Enterprise Forum
event focused on the topic of: "Finance: Venture Capital, the Banks, and
the Market". This is always a popular one and was another sell-out. First,
investment bankers and VC's reviewed venture capital activities in the province
as compared to other areas. Then, three entrepreneurs talked about their
approaches to accessing capital. Peter Briscoe talked about his company's
(Convedia Corp) success in raising some US$20 million last year from U.S.
and Canadian VCs under tough market conditions. Dr. Mark Murray,
President and CEO of Protiva Biotherapeutics Inc., discussed his
company's recent CDN$14.5 million first round financing from leading Canadian
venture capital firms followed by Derek Spratt, Chairman and Co-Founder
of Intrinsyc Software Inc. (TSE:ICS) who discussed his company's decision
to go public early in its evolution and the pros and cons of being a public
company at an early stage of its development.
What particularly struck home with me,
especially during Peter's delivery, was the HUMUNGOUS effort that it takes to
raise capital. The time (he started in Jan01 and got funded 9 months later) and
effort cannot be underestimated. The amount of work and commitment that goes
into the courting of a venture capitalist left me totally exhausted and in awe
of those who persist at this game. Indeed, a lesson for the naive!
Details of the talks (and info on upcoming VEF
events) are available at: www.vef.org.
A complete calendar of technology events can be
found on T-Net's
Events page.
Footnotes
If you're an entrepreneur looking for a place
to get your company started; there's some great space available at Harbour
Centre downtown. The New Media Innovation Centre (NewMIC) and SFU's
TIME Centre have teemed up to provide 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.
For a convenient printable, pdf
version of this column, click
here.
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