Ventures West - October 27, 2003 - Venture Capitalist Takes His Time

With instant IPOs over, building a business returns to a long-term plan, GORDON PITTS writes

It sounds like heresy, but venture capitalist Robin Louis welcomes the subdued mood that has gripped his industry since the tech crash three years ago.

Mr. Louis, the 58-year-old president of Ventures West Management Inc. of Vancouver, says he felt uneasy about the big instant payoffs accorded even the rawest technology entrepreneurs during the 1999-2000 bubble.

"I'm kind of a believer that over the long term there is no shortcut. If you want to create something that is of value, you've got to spend the time," says Mr. Louis, who is also the new president of the Canadian Venture Capital Association, which represents the industry.

In Mr. Louis's view, venture capital has returned to fundamentals, having cooled down from an overheated state when a startup with no revenue and no business model could instantly reward its backers with "a liquidity event" -- usually, by going public.

The correction was painful as valuations plummeted, he says, but "we are now back to normal." That means a venture capitalist might invest in a tiny company, see it roll out a product, help it grow to tens of millions of dollars in revenue and then go public -- over six or seven years.

"To build a real business, it takes that long," says Mr. Louis, who has spent 13 years in venture capital, plus a stint as a high-tech executive.

Still, he would clearly like to see more choice of potential investments for Ventures West, which has closed one financing deal this year, compared with eight all of last year. In the past, it closed as many as 12 financings in a year. The firm currently holds stakes in 40 companies.

Mr. Louis figures today's trickle of deals partly reflects the excesses of 1999-2000 when a lot of companies got funded, thus cleaning out the transaction pipeline. Also, he blames it on the pervasive gloom in the technology industry that is only now starting to lift.

For the past two years, would-be entrepreneurs concluded that because markets were so bad and few initial public offerings were being done, it was not a propitious time to start a business. So they hung on to their day jobs, creating a dearth of venture capital prospects.

In fact, about the only IPOs being done were income trusts of mature, cash-positive businesses. Ventures West studied the income trust model, but concluded that because most of its investee firms have negative cash flows, this was a totally inappropriate mechanism for them to go public.

Now, as technology markets improve, more venture deals are beginning to surface, Mr. Louis says, and Ventures West might end up with a half-dozen investments by the end of the year. That's the nature of the game -- the deal flow is always uneven, markets retrench and markets rebound.

"The only way to make sense of it is to invest consistently in good businesses over time." In any given year, you may not be able to do an IPO, but "if the company is doing well, that's fine -- you just wait another year," he says.

"At the end of the day, if you invest in any company that does well, it will have value -- you can say that for sure. What you can't say is when someone will come along and see the value and want to own it."

Mr. Louis has an unconventional training for a venture capitalist, as the holder of a PhD in physics. But he moved early from academia to the computer industry. In the mid-eighties, he became CEO of a Vancouver developer of school administration software, which was eventually bought out by a British company. He effectively retired in his mid-40s but was getting bored, when along came Ventures West with an offer.

He sees himself as a rarity among venture capitalists in not having an MBA, but it's hardly a handicap. The truth in venture deals rarely lies in the financial numbers, he says, but instead in products, markets and people.

By the time Mr. Louis joined in 1991, Ventures West had already made its famously successful investment in alternative fuel pioneer Ballard Power Systems Inc. But Mr. Louis was there when it backed Pivotal Corp., a developer of customer relationship management software, and Angiotech Pharmaceuticals Inc., a biotech firm with a market capitalization now of about $2-billion.

Pivotal has suffered hard times recently -- and is the subject of a potential takeover offer -- but "we sold enough at bubble prices that it was a great investment for us," Mr. Louis says.

Not every investment has been a winner, though. "I wish I could sell all my investments at the peak. But if you could do that, the game wouldn't be fun, would it?"

Mr. Louis says the venture capital business in Canada looks promising, as long as the education and research pipeline generates a flow of ideas. While some banks have retreated from private equity, a core of large pension funds remains committed. Venture capital, he says, "generates premium returns if you can stand the long-term nature of it, the illiquid nature of it, which pension funds can do well."

Over the past three decades, Ventures West has raised about $500-million from institutional investors, with its last fund, which closed in 2000, coming in at about $235-million.

But he does not see venture capital as the single panacea to Canada's ills and its ticket to becoming a high-tech power. "You have to have an increase in all parts of the technology ecosystem. You need more capital but you also need more technology, trained people, entrepreneurs, startup companies."

He sees it as a delicate balance: If there is too much venture capital, it gets invested in the wrong things, generates "crummy returns," and hurts the future flow of funds. When too many entrepreneurs chase not enough money, good ideas don't get funded and they go elsewhere.

But he warns that startup owners cannot be relied on to provide an objective viewpoint. "No sane entrepreneur is ever going to say there is too much venture capital."