Market Commentary
August 25, 2011
Joe Timlin - Vice President, Investments
The first half of 2011 was in many ways similar to the last half of 2010. At a macro level, mergers and acquisitions continued at a steady pace, confirming our cautious optimism from last year. Working Opportunity Fund exited its investment in QuIC Financial Technologies when the company was acquired in an all cash deal in January 2011. We also completed the exit of publicly traded Zalicus Pharmaceuticals, on a pick up of volume in the beginning of the year which allowed us to sell the Fund’s holdings in an orderly fashion in the public markets. Lastly, Colligo Networks was exited through a management buyout.
IPO activity continues to be strong, but skewed in favour of companies we would describe as very mature. In the last year, we saw the IPO of some very large technology companies such as Open Table and LinkedIn, and the acquisition of Skype by Microsoft. For companies with revenues below $100M per year, the primary exit vehicle for investors remains acquisition. Most of the Fund’s investments fall into this category, and therefore our focus remains on M&A.
We continue to see strong inbound interest for the Fund’s profitable fast growing technology based companies such as ResponseTek, Layer 7, Teradici and LightHaus. These companies are in a strong position to grow organically, raise capital should they determine they want to grow more quickly by increasing their sales capabilities or by acquiring another company, or potentially to become part of a larger organization through being acquired.
There have been some exciting developments at D-Wave and General Fusion. D-Wave completed its first commercial sale of the world's first production Quantum Computer to LockHead Martin (NYSE: LMT) who will be applying the D-Wave processor to their most challenging computation problems. General Fusion continues to execute against is technology milestones, which, if successful, would see the development of the world's first fusion based power generator. Progressing well against their milestones, both companies have been successful in attracting new investors. In May 2011 General Fusion announced a US$19.5M round that included two new investors: Cenovus Energy, through its Environmental Opportunity Fund, and Bezos Expeditions, the personal investment company of Jeff Bezos, the CEO and founder of Amazon.
In the first half of 2011 the Fund invested in two new companies advancing promising technologies in British Columbia. Metafor Software, a company focused on application migration to the cloud, is the second company we've funded founded by Toufic Boubez. His first company, Layer 7, is performing extremely well for us so we were very excited to work with Toufic a second time. We also invested in GrowLab Ventures, also led by a second time entrepreneur from our portfolio, Leonard Brody, who founded Now Public, a company we exited in 2009.
There have been some challenges to report as well. Tekmira Pharmaceuticals is involved in a legal process with its partner Alnylam in a dispute over ownership and use of Tekmira's intellectual property. The dispute has been detrimental to the values of both companies, and it is our hope the dispute is resolved in the next 12 months. NxtGen failed to raise the capital it required to continue on, and as a result the company is winding down and selling its assets.
Looking forward, we continue to monitor the economic situation in the United States and internationally. Although most large US corporations are sitting on cash and continue to be strong partners and potential acquirers, the decrease in value of the US dollar in the last year and a looming possibility that corporate spending might be curtailed in the near future are issues of concern for VC backed companies. The fact that a lot of the portfolio is more mature companies and not reliant on additional funding is very encouraging, and we continue to feel the Fund’s portfolio is well positioned to perform well.
The above contains “forward looking statements”, including statements based on management’s current beliefs and assumptions in respect of the plans and prospects of, and results achieved by, portfolio companies, timing of venture portfolio investments and possible exits, general market conditions and information that was obtained from third parties. Actual results may differ from those implied by such statements or information as a result of numerous known and unknown risks affecting the Fund and current and future portfolio companies, including risks inherent in emerging businesses with unproven products or limited sales, general market and economic conditions, including IPO and M&A market conditions, and other risks referenced in the Fund’s public disclosure record. Many of these risks are beyond the control of the Fund, its manager and the Fund’s portfolio companies. Neither the Fund nor the manager assumes any obligation to update such statements or confirm the accuracy of such information.