Foreign Buyout Protection: Angels and Techtonics

A new provincial fund is banking on private-sector partners to create protection from the steady stream of foreign buyouts. But will it be enough to create a techtonic shift?


Once upon a time, BrightSide Technologies Inc. was a shining all-B.C. example of high-tech genius. And its timing was impeccable. Consumers worldwide were about to be swept up in a mania for ever-larger, eye-popping television sets, while everyone, from geeks to grandmas, was moving to larger computer monitors. And BrightSide, an angel-funded UBC spinout, had developed an LED-based high-definition TV (HDTV) technology with startlingly vibrant colours and a 3-D effect that gave great depth to onscreen images for both home and office.

Those who saw the technology in action were dazzled. Among them was California-headquartered multinational Dolby Laboratories Inc., which earlier this year laid out US$28 million in cash to swallow up BrightSide and its 20 full-time employees. And, as is often the case in takeovers, executives including CEO Richard MacKellar departed.

“But all the technical crew is retained, and they’re moving into a nice, new facility, and they’re going to be part of a growing organization here in B.C.,” says MacKellar, also a former CEO of another UBC spin-out tech company, NxtPhase T&D Corp. Currently building a new house in Victoria, he expects to be back in Vancouver by this fall to begin building yet another company, likely in the clean-technology space.

So despite the hot product with huge potential, it was an old B.C. tech story for BrightSide: a young, innovative company acquired by a major outside buyer to become the division of a multinational. BrightSide will likely continue to grow, but it will only do so within the confines of Dolby.

MacKellar repeats an all-too-common refrain in the B.C. tech sector: things might have been different if there had been more funding available for early- to mid-stage tech ventures in B.C.

But now there’s a glimmer of hope that the refrain might just be on its way to the dustbin of forgotten tunes, thanks to the new $90-million B.C. Renaissance Capital Fund set up this year by the Ministry of Economic Development. The idea behind the fund is that the money would be divvied up between three or four funds run by venture capitalists – some, it’s hoped, from outside the province – who would put up at least $80 million of their own cash. The money would then go to companies that the VC funds deem ready to move to the next level of corporate maturity.

“Now, I’m not saying [the Renaissance Fund] would have changed the decision in the case of BrightSide, but it would have given us a greater number of options to consider in the path forward,” says MacKellar, who describes the Dolby deal as a good one for BrightSide’s angel investors.

The hope for the Renaissance Fund is that fledgling companies such as BrightSide will at least have the opportunity – even if they ultimately decide the buyout route is best for them – to get the funds that would enable them to stay independent and grow to become Microsofts or Googles. This would buck the trend of B.C. companies becoming absorbed by giant multinationals such as IBM, Kodak and Business Objects.

The vision for the Renaissance Fund, says B.C. Technology Industry Association president Rob Cruickshank, is that the VCs attracted by the ministry’s $90 million will be able to bring in additional smart, savvy money from outside the province. The B.C. tech companies would not only get funding but be able to use the expertise of these sophisticated external investors to bring in more experienced management than is available in B.C.

As well, says Cruickshank, outside investors could start to see additional opportunities that would encourage them to dole out even more money to B.C. firms than they initially intended.

“The other thing it does is bring new expertise into the province and the relationships that these people have with venture-capital firms in the rest of the world,” Cruickshank adds.

MacKellar agrees, saying that the increased access to qualified investors with good contacts that will come with the Renaissance Fund can only be good for B.C. “I think it will help to grow companies larger and help to have more flagship companies grow in B.C.,” he adds.

The good news so far is that the interest in putting the province’s $90-million Renaissance Fund to work has been strong. At least two dozen venture-capitalist organizations have put forward bids to set up funds. “That’s terrific because it says that people are saying, ‘Gee, good concept,’” says Cruickshank.

Of course, even if the fund succeeds, it doesn’t guarantee that B.C.’s tech industry will be immune to the continuing onslaught of mergers and acquisitions. MacKellar says that no one should be surprised that B.C.-based tech firms and their innovative ideas are being bought up. He even points to Silicon Valley as a hotspot for M&A activity: “For every Google that appears, there are hundreds of companies that grow and become acquired by others.”

Nobody is denying that acquisitions are a fact of life in the tech sector, but for several years there has been a sense in the B.C. tech community that companies have not been getting a fair opportunity to grow beyond their early or middle stages despite, in some cases, dazzling innovation or technology.

“We’ve tended to be very good entrepreneurs and cowboys and inventors but not good at building larger, more sustainable firms that turn into what we call anchor companies – ones that spin off other companies out of them,” says Cruickshank.

And Vancouver-based Kathy Butler, managing director of investment banking for CIBC World Markets Inc., agrees there’s a definite lack of new public companies being created from B.C.-based start-ups.


Wwe aren’t seeing as many companies getting to that critical-mass stage in which they can go public” — Kathy Butler


“We aren’t seeing the number of IPOs you would see in the Ontario market,” says Butler. “We aren’t seeing as many companies getting to that critical-mass stage in which they can go public.”

The only homegrown public tech company universally recognized as a current major international player is the 3,000-employee MacDonald Dettwiler and Associates Ltd., which is an unquestioned force in such diverse areas as space robotics, satellite information and imagery, airborne surveillance, environmental monitoring, mapping, real-estate information software and even robotic surgery.

Otherwise, over the past few years, the story seems to have been one of acquisition, and even some of B.C.’s largest tech companies haven’t been exempt. There were the acquisitions of ALI Technologies Inc. (by U.S. drug wholesaler McKesson Corp. for $536 million), of Creo Inc. (by Eastman Kodak Co. for US$980), of LED lighting innovator TIR Systems Ltd. (by Royal Philips Electronics for $75 million) and of Crystal Decisions Inc. (by French-based Business Objects SA for US$1.2-billion), to name just a handful.

Other acquisition targets read like a greatest-hits list of B.C.-born tech start-ups: Anormed Inc., ActiveState Software Inc., eXI Wireless Inc., OctigaBay Systems Corp., MDSI Mobile Data Solutions Inc., Pivotal Corp., Radical Entertainment, West Bay Semiconductor Inc., Ludicorp Research & Development Ltd. (creators of, Convedia Corp., Chancery Software Ltd. and Fincentric Corp.


Richard MacKellarLike many before him in B.C., Richard Mackellar sold his cutting-edge start-up to a U.S. giant.


Another smaller company with a potentially bright future was Victoria-based PureEdge. By 2003 it had become a player, albeit a small one, in the market for business forms – the often annoying, time-consuming fill-in-the-blanks corporate paperwork, such as applications for life insurance. What PureEdge did was invent a “smart” form capable of filling in the blanks on forms automatically and then routing the completed forms through email for approvals and signatures. PureEdge had grown to five million users worldwide when it was bought for an undisclosed amount by a major partner, tech giant IBM Corp. Most of the firm’s staff of 70 stayed on, but the company itself was rolled into IBM as the IBM Victoria Software Development Lab.

“For us the great thing about selling electronic forms software is that forms are everywhere,” says former PureEdge CEO Eric Jordan, now executive entrepreneur in residence at UVic. “The downside about selling electronic forms software is that forms are everywhere. Electronic forms is such a ubiquitous space; it really made sense for us to be part of a larger organization.”

Jordan says he thought his company was doing well with its five million users, until he realized that IBM had 100 million users of its forms software. Butler says PureEdge had an excellent product, was highly regarded by its customers and was a leader in its area, but it was niche-focused. “To get to the next level, you almost have to decide: ‘Okay, we’re going to expand the breadth of our product offering,’ or, ‘We’re going to enter a new geographic market,’ whatever that may be. And sometimes there’s a risk with that, versus selling to a big guy.”

Even though PureEdge did decide to sell to the big guy, Jordan sees the Renaissance Fund as a boon to the tech sector. “Intelligent capital that has one foot here and one foot in another jurisdiction brings a whole new network and set of connections to the entrepreneurs and people who are doing business here,” says Jordan, adding that the expansion capital of course allows the company to grow.

Each of B.C.’s tech acquisitions has been a different scenario – whether it’s dissident board members of a company forcing a sellout, a public company taking too long to see its technology develop, a start-up simply being too small a player in too big a vertical space or enterprises with a lack of access to capital or no luck in attracting good management talent. But the fact remains: B.C. tech companies just keep disappearing.

Not that this scooping up of companies by always-on-the-prowl, cash-laden multinationals is seen entirely as a bad thing. In many cases, these operations have retained their workforce (sometimes even their name, as with Radical and Chancery) and have even grown, thus adding to employment in the B.C. tech industry.

BCTIA’s Cruickshank uses Crystal Decisions as an example, citing two good outcomes: “One is that the employment has been retained, so that they continue to be a major employer and that they’re a centre locally for Business Objects.” Secondly, says Cruickshank, some Crystal people who left the company are now working on second-generation business-intelligence software.

As well, he says, when ALI was bought there were about 250 people there. “If memory serves me correctly, they’re employing over 800 people now at their location in Richmond.” He adds that the BrightSide acquisition could, over time, turn out to be a plus. “They’re going to retain the centre of excellence here, so there’s a recognition that the BrightSide guys have developed an interesting, unique technology,” he says. “Now they’ve got a larger company that’s got better access to capital and better access to the kind of partners they’re going to need.”

And, Cruickshank admits, if someone comes along to make an offer for a company, there’s nothing anyone can do to stop them selling it. “But you have to step back from that and say, ‘Well, okay, what do we need to do to try to encourage people, to make it easier for them to see a path to growth in this province?’ And, in our opinion, there are two things: one is access to capital and the second is access to talent.” This, says Cruickshank, is what the Renaissance Fund will offer.

What the BCTIA would like to see as a result of more money from the likes of the Renaissance Fund – along with the chance to build a killer corporation like Google – is a change in the fact that 95 per cent of its tech companies have fewer than 50 employees. “Maybe we could have 75 per cent of our companies with less than 50 employees and 25 per cent that are on the radar screen globally,” says Cruickshank.


“Intelligent capital that has one foot here and one foot in another jurisdiction brings a whole new network” — Eric Jordan


Vancouver venture capitalist Brent Holliday believes that one major advantage of the Renaissance Fund over what has been done in the past is that it’s not tax-credit based. Instead, says Holliday, once money is being made on the investment, the provincial government will take its money out, plus a profit, and all the subsequent earnings will go to the private investors. “And that gets guys excited: ‘Oh, I get more money.’”

Another hope of Holliday’s is that the $90 million, and the investment alongside it, will provide later-stage capital, which B.C. doesn’t have. “You have guys like BrightSide recently and ActiveState a few years ago saying, ‘You know what? I’ll take the $25-million or $40-million exit and I’m out of here.’ Their alternative has to be another rich capital market sitting right beside them that gives them the opportunity to grow. And when you don’t have that, you sell.”

While Holliday believes the provincial government is on the right track, he’s undecided as to whether the fund will work the way they hope. “The reason that it may fail is that it’s not big enough, because what they’re going to do with that $90 million is split it up into a bunch of funds,” says Holliday. “When you have $150 million, you’re a player – you have a sizeable fund that allows you to get into the deals and allows you to follow on with them and stick with it. If you’re going to split up $90 million four ways, then you haven’t really excited too many people.”

On the flip side of that argument, Holliday adds, it would be hard to invest $150 million just in B.C., especially if the fund concentrates on only the technology sector.Butler believes the best way for the Renaissance Fund to work would be to attract venture capitalists from outside the province to set up funds, rather than have the money go to B.C.-based VCs already in the game here. “If all the Renaissance funds go right back to these folks, it doesn’t really do anything,” says Butler. “What you need is an injection of perhaps another party or another couple of parties from outside that just bring a fresh approach and a new look to technology.”

Toronto-based Rick Nathan, president of the Canadian Venture Capital and Private Equity Association, doesn’t see B.C. as being unique in its search for capital or its problems getting tech companies to maturity. “I’m not aware of any particular problems in B.C.,” says Nathan. “I think our markets in emerging technology have been relatively soft for a long time now, really not yet fully recovered from the telecom crash and the dot-com crash in 2000.”

Nathan adds that, across Canada over the past couple of years, there has been approximately $1.6 billion of total venture capital invested. “So to put $90 million into B.C. funds doesn’t seem to me to be unreasonable.”

Will B.C. ever have its own Google, Cisco, Dolby, Microsoft, Kodak or Business Objects? BrightSide’s MacKellar believes so. “Can I sit here and say, ‘Yes, we’re definitely going to have one of those’? Absolutely not. But you can see that we – the entrepreneurs, the technical people, the government and the industry associations like the BCTIA – are putting the right building blocks in place. So I’m very bullish as to what the future looks like.”