Investment opportunity for VCs is good, but valuations much lower

The next two years should see a prime investment environment for emerging wireless companies seeking an infusion of venture capital, but they shouldn't expect to get the enormous valuations of the past. Nor should they expect the money to flow in as easily. That is the consensus of two of Canada's smaller venture capital houses, one from the West and the other from Central Canada. Barb Richardson, principal and director of Calgary-based Springbank TechVentures, and Leo Lax, one of the founding partners of Skypoint Capital of Ottawa, speaking with Report on Wireless on two separate occasions, note that since the telecom bubble burst in 2000, the recovery has been slow. But venture capitalists are once again investing, although with dramatically lower valuations. (The April 29 issue of Report on Wireless features an interview with Richardson about the upcoming Wireless Connections 2003 conference.) "I think it will continue to be a buyers market," Richardson tells RoW. "We're continuing to see very attractive valuations and we have the opportunity to get in on deals because the valuations are low and many of the larger VCs are preoccupied and focused on their existing portfolio. I don't see a lot out there that's going to double the valuations or rapidly increase the exits for these companies over the next 12 months. I think it will be a gradual improvement, but not a rapid one." Lax concurs, but believes the current environment may last until the end of 2004. "From an investment point of view, 2003 and 2004 will be pretty good. We'll be able to get good valuations and we'll be able to find good opportunities," he explains. "From an exit point of view, we see that 2005 and onwards will be the beginning of a good exit opportunity as the market starts to wake up. Hopefully, the public markets will start to reflect that and IPOs (initial public offerings) will become again a way of growing technology and taking venture-backed companies into the market." Despite the environment being ripe for investing, shell-shocked venture capitalists have insisted on using more stringent investment criteria and they say this will be the case for at least the next couple of years. Richardson says Springbank doesn't for the most part invest in pre-revenue companies. "Show me that there's a customer willing to pay money today. Let me talk to this guy and then I'll look at your business plan," she says in describing her company's investment approach. "Two years ago, it used to be if you had a good technology with a lot of IP (intellectual property) that you thought you could go out and get patents on and a future market, that would be fine," she adds. "Now we will not invest in a company unless they have at least beta test customers that we can go out and talk to and have those customers validate that the technology really works." Lax notes that Skypoint does invest in pre-revenue companies, but maintains the tests are just as rigorous. In addition to doing due diligence on the management team, the business plan needs to satisfactorily answer a number of questions. "If the technology is as you say it is and the product comes to be generated out of that technology the way you say it will, who is the customer who is going to buy it? Is that customer ready to buy in the same time frame as your product development is? How sure are you of that revenue opportunity and how sure is the customer that they are willing to buy this? Is your team experienced enough to manage the current environment and be able to deliver on time, on schedule and adjust potentially to rapid changes in the market? "Then we tend to use our own Rolodex and our own market information to validate what are the first targets for such product and how ready are those potential customers to actually part with their cash in a two- to three- to four-year time frame when these products may actually materialize," Lax explains. Future investment opportunities Since the telecom crash, there has been a shift in investing within the wireless industry as money moves away from pure technology plays to those that involve products or technologies that improve the bottom line of operators. Lax says Skypoint has focused a lot of its attention on companies making products that reduce the operating expenses of telecom operators. On a secondary basis, the company is exploring investment opportunities in products or services designed to improve the revenue stream. Wireless content is one of those opportunities, Lax says. "There is a big appetite for wireless content. Unfortunately, the digital rights issue has not yet been solved and that is creating an impediment for rapid and all-consuming acceptance. I see very moderate, but continuous growth (in wireless data) as people get more and more comfortable with text-oriented, graphics-oriented communications where they themselves are the generators of the content." Richardson says the Wireless Connections 2003 conference will serve as an excellent venue for insight on what is happening on the wireless data and wireless content fronts around the world. She notes that there will be sessions with NTT DoCoMo, the Japanese wireless operator that revolutionized wireless content, and Radiolinja, equally revolutionary on the wireless content and data fronts in Finland.

Investment opportunity for VCs is good, but valuations much lower

News | May 13, 2003

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