Invest
in Spin-Offs, Misc Musings, Capital Pool Corps Update and Events
Update
Invest
in a University Spin-Off
Why not invest in a
University Spin-off? Chances are that you already have. Indeed, if you're a
taxpayer, that's a fact.
If
it weren't for you, the taxpayer, our local universities would not be nearly as
innovative as they are. Thanks to your investment in research and development,
these universities produce not only B.C.'s best natural resource - its talented
people - but knowledge that benefits us all as well as numerous spin-off
companies which contribute to our Province's GDP and economic well-being.
Indeed,
some recent reports have noted that within this decade, the tech sector
contribution to National GDP will be comparable to that of the resource sector.
I suspect B.C. is not far behind.
Not
only are the universities prolific in their entrepreneurial quests, but I see
literally hundreds of new tech startups each year. Of course, many of these
won't make it, but that's OK, because if we don't keep the hopper full, we won't
get many dropping through. The New Ventures BC business competition that
was recently launched received over 100 startup entries!
Not
only can we benefit indirectly from these spin-offs - we can make further direct
investments in many of them - either as sophisticated investors or as angels
supporting pre-public ventures or as Joe Street-investor once they hit the
public markets.
In
the mid-1980’s, universities across Canada and the U.S. set up technology
transfer offices in order to commercialize their intellectual property and take
new discoveries to the marketplace. At first this was done by finding suitable
business partners who would acquire a license to a technology by paying a
royalty to the university and its inventors.
However,
royalties flowing back to universities were minimal. On average, a return of
less than one percent of R&D expenditures was realized. By setting up a
company to commercialize some specific intellectual property, the likelihood of
success and the potential return to an institution are greatly increased. This
is because a raw technology requires a great deal of development (and capital)
beyond the research stages in order to make it commercially viable. A
corporation, properly financed with good management, will also be able to seize
new market opportunities and acquire and develop its own know-how.
An
executive from a large pharmaceutical company once commented, “We big
companies are very bad at commercializing early-stage technology. But if your
spin-off company is a success, and the technology is relevant to our business,
we will buy out your spin-off company at almost any price."
The
University of B.C. (UBC) and Simon Fraser University (SFU) have
created over 150 spin-off companies some of which are now substantial
corporations which, in turn, spawn other new ventures. Last year alone, these
universities formed some 20 new
companies. Based on new companies created per million dollars of research
expended, these institutions have ranked in the top 10 in North America for
several years running.
Together
with the University of Victoria, the University of Northern BC,
and the Technical University of B.C., they are actively drumming up new
initiatives on the innovation front. The University of Victoria’s Innovation
Development Corp is working with more than a dozen spin-offs to
commercialize their technologies and the Technical University has created TechBC
Corp as its business “front end”.
By
collaborating with each other and in partnering with organizations such as the B.C.
Advanced Systems Institute, the Science Council of B.C., and the Vancouver
Enterprise Forum’s Angel Network, these schools fuel the growth and
development of their spin-off companies by attracting both the human and
financial capital to these ventures. The angel
network is a good way to connect with these at the formative stages.
Last
year, these collaborations resulted in the establishment of new research and
development centres such as the New Media Innovation Centre which will
provide a pipeline of technologies for new business opportunities.
So,
what do some of these spin-offs look like? Here are a few recent pre-public
examples. I believe that these may represent good ground floor investment
opportunities.
Cogent
Chipware Inc.,
one of SFU’s most recent spin-offs, based on 15 years of research at the
"Very Large Scale Integration Computer Design Laboratory", was formed
by researchers and students to specialize in voice-coding technologies for the
telecommunications industry. These guys are really pushing the state-of-the
art in putting systems on silicon.
Another
SFU company, NeuroStream Technologies Inc., recently received venture
backing from the Working Opportunity Fund and the Business Development
Bank of Canada to develop and produce “nerve cuffs” – a patented
surgically implanted electrode which monitors messages from a patient’s nerves
in order to control prosthetic devices or to bypass neurologically damaged
pathways to facilitate bodily functions - something many of us will need as we
approach our golden years.
BandGap
Photonics Inc.
is one of UBC’s latest spin-offs. Founded in 2000 and backed with $5 million
in venture capital from Ventures West, the Working Opportunity Fund
and angel investors, BandGap intends to use photonic crystals for the
fabrication of next generation optical telecom devices.
UBC
has also spawned many life sciences companies such as NeuroMed Technologies
Inc., Inphogene Biocom Inc., and Kinexus Bioinformatics Corp.
Since 1984, UBC has
contributed $12.3 million towards the technologies which it has licensed to the
spin-off companies which, in turn, have obtained an additional $29.1 million
from government support programs. The private sector has invested $663.1 million
in these companies representing a 16:1 leverage in investment made by the
private sector against public support.
Here's a list of some
publicly listed spin-offs in case you want to get in on the action. Although any
micro-cap stock investment is risky (synonymous with big rewards), there's a
major advantage in betting on a University style venture. That advantage relates
to due diligence. If you hear about an aerosol-spray AIDS cure produced by a
relatively unknown OTC-BB company, versus a QLT-like (i.e. UBC spin-off) company
listed on the CDNX (remember - that's how QLT Inc. got its start), which
one is likely to be more credible? You can rest assured that an institutional
association has intrinsic value brought about by internal processes such as peer
review, sponsored research, and high professional standards.
Many on this list got started
on the CDNX (or the VSE or ASE). Many are inter-listed, i.e. also trade on the
Nasdaq market.
With regard to spin-off success rates, there
are relatively few failures. That's because these deals are usually based on
solid technology, good management and are adequately funded (though never
enough). The downside, if any, may be that the company is acquired for either
its team and/or its technology. Liquidation events are rare.
Misc Musings
In a recent column, I suggested that readers
might become more active in their investments by keeping an eye out for notices
about upcoming AGMs (Annual General Meetings). Just after mentioning this, I
received a flurry of annual reports and AGM notices from some of the local
companies in which I own shares. Since the majority of companies use the
calendar year as their fiscal year-end, and due to the requirement that an AGM
be held within 6-months of year-end, naturally there are many June meetings - so
keep on the lookout.
I noted that there's no easy way to find out
which companies have upcoming AGMs. Indeed, many prefer not to be too open about
this. Today's issue of USA Today emphasizes this point. It notes that
some companies, e.g. software developer Net-Sol has scheduled its AGM in
Pakistan! The article also gives shareholders some comfort in noting that proxy
fights can be worthwhile in that shareholders do have a voice.
I attended a very informative session at Canaccord
Capital recently at which Nick Majendie provided his assessment of
the market and his prognosis. I liked his approach: he interviewed management in
53 companies in order to glean some investment insights.
Majendie noted that whenever the Fed has
dropped interest rates in past years, market gains of 20-25% occur during the
first 12 months after such cuts. With regard to tech picks in his portfolio, he
likes Telus (TSE:T). He notes that it has the best, i.e. lowest, PEG
ratio of 0.34 due to a very low (less than 5) P/E ratio. Now in the $30's, he
targets a 2003 price of $60.
Just two weeks ago I mentioned
that 360Networks (TSE:TSX) was trading at $1.93. Now, it's a third of
that price trading in the $.60 range. I can't recall a high profile, high
flying, credibly credentialed stock suffering so badly so quickly since its IPO
just last year. The stock traded as high as C$35.90. It's a local company that
really looked promising. So....is it a buy? It's a gamble. Maybe the debt
holders, with their U$2.5Bn in loans will end up owning the company. At least
the company is building an asset, i.e. network capacity, so when broadband
demand increases (as I'm sure it will - remember Gates wondering why anyone
would ever need more than 64K? Or Ken Olsen of DEC wondering why anyone would
ever want a PC?) you can bet that this physical plant will gain in value. In the
meantime, it's amusing how management (remember Maffei was a CFO) can play
around with financial statements to tell a good story. But, before you speculate
on this one, you should know that cash on hand a month ago was around $600M and
the burn rate is $150M per month. Hey, you can't even play Blackjack in Vegas
for less than a buck!
Here's a
little Nasdaq trivia - 142 Canadian firms trade on Nasdaq. Last
year, the dollar volume of Canadian stocks trading on Nasdaq was U$765Bn -
$100Bn higher than all trading on the TSE. The Nasdaq accounts for more than 60%
of all trading on US markets - both in dollars and shares.
So far, as we know, the TSE has
shied away from making any deals with Nasdaq - seeing it more as a competitor
than an ally. Since the TSE is taking over the CDNX, wouldn't it make sense for
Nasdaq to make a bid for the TSE? I still think it would have been good for the
Nasdaq to make a competing bid for the CDNX! Someone was sleeping at the wheel.
Hungry for an IPO? Kraft Foods
Inc completed its IPO of U$8.7 bn this week - the second largest next to ATT
Wireless which raised U$10.6 bn last year. That should satisfy a few
appetites. Can't live without those Kraft dinners.
CryptoLogic Inc (TSE:CRY), a Toronto based
company with a quarterly $8M profit on $16M sales (Wow!) is trading at a
trailing P/E of only 20. The company makes on-line gaming software for the
gambling industry. I only mention this because I noticed that Canadian players,
such as Chartwell Technology Inc (CDNX:CWH) of Calgary and Total
Entertainment Inc of Montreal dominate this space. Known as a conservative
nation, I guess we Canadians like to make it easy for others to fritter away
their money. This is a hot area because Nevada is expected to allow on-line
internet gaming. On-line gambling presently accounts for only $1.6Bn of the
$40Bn gambling industry in the U.S. In Vancouver, an emerging player, Jenosys
Enterprises Inc (CDNX:JET) is getting in on the action, specializing in the
Bingo-player niche. Let's hope for a bingo on this stock. You can roll the dice
for two-bits.
So what do you think Bill Gates invests
in? This week's edition (June 18) of Business Week (BW) shows that he's
up about 11% on his 14 major holdings (which require public disclosure). His
best pick? Canadian National Railways (TSE:CNR). Bill's half a billion
dollar investment is up 42% year-to-date!
The same BW issue features the Info-Tech 100
report. You'll be surprised when you see who's in the top 10. And, you'd never
guess that Canada's Celestica Inc.(NYSE:CLS), a contract manufacturer, is
the #1 pick. Celestica was an IBM spin-off (IBM is #6 on the list) aiming
for U$20 billion in revenue by 2003. Chances are you haven't even heard of the
other 8 in the top 10.
One other item you can read about in Business
Week (no, I don't own shares in BW) is what's happening with respect to income
taxation in the USA. We, in high tech circles, have often blamed our loss of
talent to the U.S. on high local taxes. In view of our new Provincial
government's making good on its election promise to substantially cut personal
income taxes (giving British Columbians a top marginal rate of 43% - B.C. cut
its take by 25% - from 19% to 14%. The 14% gets added to the Federal
government's 29% top rate), knowing what the U.S. is doing should be of
importance to all local high tech CEOs. You'll find that although the U.S. is
also cutting taxes substantially, it is only doing this for a temporary period
of time - 10 years. It's actually a helluva mess down there - something they
must have learned how to do from us. In any event, note that the U.S. federal
piece of the pie, presently at 39% is dropping to 35%. But, you've got to add
State taxes to that. So, the grass is no longer greener down there. In fact,
they've even got a little crabgrass mixed in with the turf.
Since Fathers Day is approaching,
and in the (wishful) hope that my kids might be reading this column, here are a
few tech gadgets that any Dad can use: Compaq's "internet
appliance", the IA2, is a nice 15" internet terminal priced at
only U$299 (U$399 for the IA1 sexy flat screen version). So far, I've
only seen these in the U.S. Vtech has announced its E-mail PostBox
for a mere U$69! That comes with an LCD display which pops out of a full-size,
trim keyboard. Just what I need! Soon, you'll be able to pick up little email
devices in the checkout line at the drugstore (RIM - watch out!).
And if you're thinking about
digital video and photography, Sony's latest Handycams offer both modes
with pretty good capabilities in either mode (usually a product is either Video
with a minimal photo capability or vice-versa). One "must-have"
feature which Sony offers is an analog input which allows you to feed in all
your old technology home videos and convert them over to digital tapes which you
can then easily transfer to, and edit on, your PC and/or transfer to a CDROM or
DVD. On this point, there are a number of companies which will take your 2-hour
home movies and transfer them to a DVD for you for less than $50 per tape.
For the road-warriors among you,
I've notice that some airports (e.g. Chicago's O'Hare) now have "Cyber
Concierges" with internet-ready booths with T-1 speed ports. We can use
more of these. It's amusing how many travelers now pound away on their laptops
while waiting in airport lounges (guess where this column was written? The lucky
guesser gets a free restaurant coupon from me).
Capital Pool
Corporation (CPC) Update
In this column, I
keep track of Capital Pool Corporation ("CPC") companies (see
chart below) 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 and JCP programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Since the program
was launched, more than 250 CPCs have been formed and more than 30 have
completed their so-called Qualifying Transactions (QT). It takes at least a year
- usually longer - for a CPC to find a suitable takeover candidate and another
six months to a year for a deal to be finalized. One way to expedite the
process is to eliminate the need for a special shareholders meeting to approve
the deals - leave it up to the CPC boards.
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.
An introductory article explaining
CPCs may be found at www.bctechnology.com/statics/mvolker-jun
Local
Happenings
Next week, the Vancouver
Enterprise Forum will be holding its end-of season Annual Celebration
Dinner wrap-up event on June 19th. The subject is: Wireless Data in BC:
Twenty Five Years to Overnight Success. The keynote speaker this year is David
B. Sutcliffe, President, Chief Executive Officer and Director of Sierra
Wireless (TSE:SW). Mr. Sutcliffe has been the President and Chief Executive
Officer of Sierra Wireless since 1995. He has over 20 years of experience in the
high technology industry. Prior to joining Sierra Wireless he was a President
and Chief Executive Officer of Xillix Technologies (TSE:XLX) Corp. and
prior to that was the Vice-President and Business Unit Manager at the Mobile
Data Division of Motorola.
Sierra Wireless is a leading
provider of wireless data communications hardware and software products. The
company's mission is to be the world leader in wireless data modems and enabling
software. In this global, high growth industry, Sierra Wireless is the wireless
enabler for laptops and Personal Digital Assistants (PDAs), providing wireless
access to the Internet for people using these portable information devices.
Details and registration information on the event are at www.vef.org.
For a complete calendar on
technology events, check T-Net's
Events page.
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? 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 Harbour Centre campus at 515 West
Hastings St. More information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company's AGM.
For a convenient printable, pdf version of this
column, click
here.
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