Thursday, February 26, 2009

Where do VCs go next?

Ex- Celtic House guru Andrew Waitman has been quietly building his next empire over at The Pythian Group, where he assumed the CEO role last October. According to its profile, "Pythian is a database, systems and applications administration outsourcing company providing managed services, performance, security, business continuity, governance and compliance services for database infrastructure running Oracle, SQL Server and MySQL, the ERP applications that run on those platforms, and the enterprise operating systems and hardware that those databases rely on."

Friday, February 20, 2009

Bridgewater Systems: The Challenges of Mature Start-Ups

I’ve been fascinated by the recent press surrounding Ottawa-based Bridgewater Systems, whose current circumstances illustrate well the challenges of a public start-up.

Bridgewater is one of the last Ottawa telecom start-ups to attract significant venture capital, from Vengrowth, EagleOne/Newbury, Terry Matthews’ Wesley Clover and even from strategic investor Alcatel-Lucent, among others. The company had been publicly contemplating an IPO since the early 2000s, before finally biting the bullet in 2007, driven in part by the desire of some of its VCs to generate some cash from their investment.

Here’s where things get interesting. Despite becoming a public company, Bridgewater’s board post-IPO looks more like a private board - comprised of VC nominees, management and in one case a strategic consultant to the business. Great set of board members, but their strengths all appear to lie on the operational side. Which perhaps explains why the Company appears to have left itself without any defensive mechanisms to stave off the overtures of hedge funds such as Crescendo Partners.

Why is being a target an issue? It’s not, if you think your company’s stock is trading at a reasonable value. But whose is at the moment? Even in the best of cases, boards today who have received attractive offers from hedge funds find themselves unable to make a recommendation to their shareholders, due to the reluctance of advisors to give fairness opinions in support of that recommendation.

Public company boards often have in place tools that allow them to slow down or discourage proxy fights to ensure that the best price is obtained in these kinds of circumstances. At our firm, we try to ensure that our public clients understand the kinds of shareholder defenses that can be put in place from day one following an IPO - from the simplest (staggered board terms, which make it hard to replace the entire board in a proxy fight) to a shareholder rights plan and beyond.

As more and more start-ups making the transition to the public markets to accommodate the liquidity needs of their VCs, shareholder defenses are becoming a start-up issue, too. Public company boards differ from those of private ones in that they must split their focus between (a) oversight of operations and (b) awareness of stock market dynamics and how they might affect shareholder value. It’s important to expand the skill set of any company as it transitions from private to public to include someone who understands proxy fights and market dynamics.

The irony here is that companies like Bridgewater, who spent their formative years working towards an exit for their first backers, may well find themselves on the liquidity merry-go-round once more. Hedge Funds generally seek the same return on investment within the same time frame as VCs. Stay tuned.

Tuesday, February 17, 2009

Venture Capital in Quebec

Make sure you check the web for Reseau Capital's report on Venture Capital investment in Quebec for 2008, to be released this morning. Quebec has been the most active province for VC transactions in recent times, so these numbers will present indicators of VC activity at its most optimistic. Also an interesting indicator of provincial government appetite for support of the industry.

Wednesday, February 11, 2009

Les is More, But he's Gone

Thanks to the healing properties of several cold and flu medicines, I've been off my game for the last few weeks. Which caused me to miss the Feb 4 announcement of Les Lyall's departure from Growthworks. Les came west a few years ago to set up Growthworks Ontario shop, then returned to the B.C. fold last fall, on the heels of GrowthWorks material change report, filed on Sept 6, 2008 announcing that David Levi would be stepping down as President and CEO of GrowthWorks and its managed funds in March 2009, to be replaced by Les.

Fast forward to Feb.4 2009 and the press release that Les Lyall is no longer with Growthworks. David Levi was quoted as saying "Because of the recent downturn and turbulence in the financial markets I have decided to remain in the role of President and CEO of GrowthWorks and its managed funds."

Growthworks Ontario remains in the hands of boy wonder Tim Lee, who earned his stripes at Vengrowth and was known to those of us in the industry for his ability to pick great companies and entice them away from the rest of us, the bastard.

Off to take more vitamin C.