The Fallout

Brent Holliday

| February 1, 2009

“That don’t kill me, can only make me stronger” – Kanye West, “Stronger”

For some technology companies created before 2000, this economic downturn is, in the immortal words of Yogi Berra, “like déjà vu all over again.” The B.C. technology sector contracted by more than 30,000 jobs in the aftermath of the technology meltdown at the beginning of this decade. This latest carnage seems like a cruel joke: it’s happening all over again when it seems we just recovered.

In this space last month, I spoke of creative ways to survive and find cash in a downturn like this one. The reality is that many companies will not survive another year. As in a flu pandemic, the weakest of the companies will not survive. Those with little cash reserves and little or no revenue are likely cooked. Those companies that did not make big enough cuts to their expenses soon enough will also come to an inglorious end.

While the employees, investors and creditors of these failing companies may beg to differ, this is probably a good thing for the industry on two levels: fewer companies will be chasing such scarce resources as capital and talented employees (the Darwin effect) and those companies that can survive the downturn with clever management and sheer determination will make better companies when the economy recovers (the cockroach effect).

The beginning of the ’90s was a dire time for the local technology industry. A fledgling tech sector made up of MacDonald, Dettwiler and Associates Ltd., MPR Teltech Ltd. and a smattering of local wireless, software and biotech companies were trying to survive the lack of resources that the recession brought.

Two institutions scraped and begged to put together capital to invest in technology. Ventures West closed a small fund of between $25 million and $30 million through incredible determination. It took over two years. It was the firm’s most successful fund, as it invested in some great cockroaches (see below). Love it or not, the Working Opportunity Fund emerged at the same time, when capital resources were scarce and became a very significant player in early-stage capital in this province. With fewer companies scooping up all of the available technology talent (and BC Tel famously selling off MPR Teltech in pieces), the new capital was able to find successful companies. The Darwin effect seemed to work well for the investors and shareholders of those companies and the technology industry as a whole benefited from that downturn.

One survival story was Penmagic. Founded in 1990 and the precursor to Pivotal Software, it was an application provider for the Apple Newton. The market conditions and the death of its platform did not deter this cockroach. Penmagic CEO Norm Francis changed business plans when the Newton famously flopped, and he started a sales-force automation company that went public and in 1999 made investors and shareholders rich.

Similarly, Creo started in the optical tape drive business for data storage. It developed a terabyte storage system in 1990 that had a market of, well, the IRS and the CIA. Out of the dark days of the beginning of that decade when no one was buying its product, the company reinvented itself around the computer-to-plate printing process and completely changed a multibillion-dollar industry. Another cockroach made good.

These two companies are good examples of the cockroach theory of business evolution during dramatic economic downturns. However, there are always exceptions. Next month, I’ll look at the cockroaches that didn’t die – but should have.