MONEY TALKS by Andrew Waitman

Inputs (cash invested) are widely published and celebrated or fretted about. Outputs (cash returned to investors) must equally be published and celebrated or scorned.

WaitmanHighEdit-111X196.jpgShow me the green
From SCAN's Print Edition

I refer to the universally understood green ─ money ─ not the eco-friendly green repackaging meant to dupe consumers. And specifically I am speaking about that most popular recent gripe of Ottawa technology companies: “Why is there so little money for early stage start-ups here?” This question, incessantly posed by local media and organizations with “association” in their name, was recently posed to me directly. I will suggest an alternative question while explaining the obvious answer to this one.
With some friction due to information inertia, cash flows on the basis of greed and fear. The recent sub-prime debt “crisis” illustrates both these human traits vividly. This should not be news to anyone. Investors (rationally and irrationally) seek the highest returns for the least risk. So we should consider four elements: actual returns and risk and perceived returns and risk.

Let's start with financial returns from Ottawa based technology (including life sciences) start-ups. What have they been for any investor, be it angel, professional or other over the past ten years? Five years? It’s a good question. By the nature of “private” investment it is often difficult to determine. One key tenet of investor interest is information transparency. However, given the nature of venture private investments it is often difficult to demonstrate anecdotally or in aggregate, regionally or in a generalized way, the actual returns of a class of private investments.

Only when perceived returns are viewed as substantial do investors become more active in the venture private asset class. Human nature tends to share success widely (called bragging) and hide failure (called embarrassment). Therefore, if financial success is not obvious and widely perceived it likely does not exist very broadly. It may exist sporadically, however this is likely insufficient to draw in new investors.

So my suggestion to organizations with “association” or “institute” in their names, is that rather than fret about the lack of investors and mistakenly seek government “assistance” to rescue natural market forces, let them help solve the information transparency issue by publishing aggregate financial returns for the region. Inputs (cash invested) are widely published and celebrated or fretted about. Outputs (cash returned to investors) must equally be published and celebrated or scorned.

When Celtic House experienced a series of highly publicized successes in Ottawa from 1996 through 2000 with the sale of Skystone to Cisco (US$97 million), Cambrian to Nortel (US$300 million) and Extreme Packets to PMC Sierra (US$425 million), the actual and perceived returns in Ottawa venture dramatically shifted to the good and US$3 billion of venture money flowed into Ottawa from 1999 to 2002.

Investors pursue perceived returns against perceived risk. So let’s address the issue of risk...actual and perceived. The most relevant question today is simply this: “Why do we not have more success both in numbers and scale?” Address that issue, intelligently and thoughtfully, and you touch the core of the investment issue and gain insight necessary to attract more investors to the region.

The challenge for Ottawa and the community interested in attracting new investors to the region generally and high technology startups specifically is to help shift perceptions of risk and returns. How could one do this? One way is to demonstrate obvious and consistent start-up success. For ten years I’ve been stressing the need for six to ten start-ups to reach the $100 million revenue level. Two factors impact perceived risk: consistency and scale. Consistency represents repeatable patterns and illustrates that a community has the necessary components for repeatable success. Think Silicon Valley in the United States.

Scale represents the size of actual and perceived returns. RIM is valued at $50 billion by investors today. Sandvine, a Celtic House seed invested company, is valued at $800 million today, six years after its first investment. Both companies are based in Waterloo. Build this scale of success and consistency in Ottawa and perceptions about risk and returns in the region will begin to shift and investors and investment will follow.

So the question germane to the real discussion of investment scarcity in the Ottawa region is “Why do we not have more success and larger scale success?” I will address this question in a future column.
Andrew Waitman is managing partner of Celtic House Venture Partners, specializing in early stage investments in high technology companies.

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