Seven ways to profit from the great Canadian sector rotation back into technology
The path of least resistance…. “Give ‘em what they want.”
There’s a growing rotation of capital flows being diverted from
resources stocks to the tech world lately, and many entrepreneurs have
jumped on the bandwagon, starting a host of technology ventures. And
more are sure to follow. After all, “Give ‘em what they want” is the old
promoter’s adage.
“The Canadian capital markets are still extremely overbought in resources, 49% as of last month,” Difference Capital
CEO Neil Johnson told us last May. “At the height of the dot com mania
in 2000, tech and media deals accounted for 28% of the Canadian capital
markets. Now it’s under 3%. The pendulum needs to swing back. The sector
rotation could see as much as $200 billion coming into the sectors
we’re investing in at Difference.”
Capital markets sector allocation in Canada and the US. Note the non-resource growth gap between both countries. Source: DCF
Here at CEO.CA, we try to provide what the market wants. So — here
are seven ways to profit from the sector rotation back into technology.
1. Invest in a public VC firm.

Late last year Vancouver promoter
Keir Reynolds floated
LX Ventures,
a publicly listed early stage tech investor, and recruited Mike Edwards
to be the firm’s CEO. LXV has since made several investments, and recruited
notable advisors in Sheldon Inwentash, one of Toronto’s most
diversified promoters, and Allison Lawton, a noted technology investor
and filmmaker. LXV raised money last fall at $.10 (with a half warrant
at $.30) and at $.20 (with no warrant) this spring. The shares last
traded at $.21, holding steady above the last financing price. The pros
of investing in a company like LXV are its intellectual property
(respectable management and advisors) and diversification (multiple
investments). The main con, which is the dealbreaker for me, is the
heavy cost associated with being public (some $200-400k each year),
which will quickly drain the company’s coffers should none of its
investments work out and management lose interest.
2. Speculate on tech stocks.
New Zynga CEO and Canadian Don Mattrick

Investors looking to cash in on the great sector rotation back into
tech can go about it the old fashioned way: by speculating on technology
companies that are already public. The benefits here are that that
they’re liquid (you can trade in and out of them), they tend to be more
advanced in their development compared to early stage VC, and research
on them is readily available.
Cantechletter.com
does a great job of covering public technology stocks, and many
brokerages have research analysts covering these companies. Cons include
a lack of diversification, seemingly sky-high valuations already for
some of these companies, and a difficulty to get a leg up on the market.
It’s tough to have an edge among such a crowded pool of investors,
but if you’re a true believer, competition shouldn’t stop you.
*
3. Invest in a public merchant bank.
Difference Capital co-founders Henry Kneis, Mike Wekerle, Paul Sparkes and Neil Johnson.

Public merchant bank Difference Capital
has a unique business plan. It provides investors with exposure to more
advanced-stage technology investments, with enough consulting cash flow
to pay the bills in the interim. The pros of investing in Difference
include a sound management team who has invested heavily in the company,
a sustainable business model, and a diversified portfolio. Difference’s
vehicle also has some tax advantages. Cons include a 2% and 20%
management fee, which may scare away some investors, and heavy
competition from other Canadian investment banks who also want to invest
in and advise later stage tech companies. Difference has said that they
wish to work — not compete — with other banks.
4. Invest in a private VC fund.

Leading private technology venture capitalists — such as Kleiner
Perkins, Sequoia Partners, and Andreessen Horowitz — typically raise
long-term money in private funds using the 2% and 20% model. While these
funds tend to be concentrated in markets like San Francisco and New
York, Vancouver’s Boris Wertz is worth mentioning here. Mr. Wertz’s Version One Ventures
has made several investments since raising money from some of the most
successful retired tech-veterans we know, who don’t mind the 2 and 20%
performance fee at all.
The pros of investing in a private VC fund (Mr. Wertz’s, in this
case) include a strong management track record, management’s own capital
on the line, a diversified portfolio,
a lack of costs associated with being public, and so on. Cons include a
lack of liquidity — your money is typically tied up for years — and
despite high-profile successes, performance for private technology funds
has been spotty. To quote Mr. Wertz,
“Don’t look for silver bullets: Success is ultimately the result of
many small steps over a long period of time. If you believe in silver
bullets, you should play the lottery.” Additionally, access to the best
managers may be difficult for some investors, but we like this route
more than the preceding suggestions.
5. Become a VC or angel investor.

As Fred Wilson said,
“Buyer beware. Do your diligence. Diversify your risk. Prepare to lose
money. That’s the rules of startup investing but not everyone knows
that.” This model entails you either raising money or using your own to
finance early stage technology startups, and is very, very risky. Angel
investor Howard Lindzon likes to use
Angel List
to source new ideas. He also taps a global network that he’s spent
years developing. “My focus has been about creating the best [deal]
flow,” Howard once told me. Pros associated with this model include the
potential for huge gains. Cons include heavy competition among angels
and VCs, con men screwing you over, the fact that you likely know hardly
anything about tech, and etc. Not for the faint of heart.
6. Learn to code.
GoldPriceNetwork founder Mr. Mohamed Hassan

It might be that the best way to take advantage of the growing sector
rotation into tech would be to become a web developer yourself. Ignore
the myths about a plethora of development talent available in cities
like Toronto, Calgary or Vancouver — they’re inaccurate. A good
developer is extremely hard to find and can easily command six figures
in Western cities. Learn to code, and if you have the stomach for it,
you can start your own venture. Many technology investors, myself
included, will not touch a startup without a technical cofounder. If
that’s you, you hold all the cards. There are no cons associated with
this model.
7. Start a web development prospect generator.

I can only think of one model better than learning how to code to
help you profit from the sector rotation back into tech, and that is to
mimic the prospect generator model from the mining business. In mining,
prospect generators are typically technical professionals who joint
venture their projects to promoters who pay for the exploration.
Prospect generators typically invoice promoters for their efforts AND
get to keep a piece of the action, and when the promoter’s run out of
money, which is the case 90+% of the time, the projects go back to the
prospect generators. It’s genius really. While I have yet to see a firm
of web developers labelled as such in tech, my firm, the Pacific Website Co., has always been keen for this type of business: Bring me your tech venture idea and we will build it, for cash and shares.
*
While the case for the sector rotation back into tech looks
promising, I don’t expect anything near the shenanigans of the late
1990s tech bull market. Investors memories aren’t that short.
I’m also apprehensive toward early-stage technology ventures being
public because of the heavy costs — both time and money — associated
with being listed. My thoughts are that if an early stage tech deal has
gone public, something is wrong, like there are stock manipulators
lurking behind the shadows. While this isn’t always the case, the OTC
market in the US offers a steady stream of examples.
But with new legislation in the US allowing founders to advertise
their financings, investment opportunities, albeit less liquid ones,
should abound for investors.
Whether you’re speculating in mining or technology ventures, remember this formula: Ventures = gambling.
Again, as Fred Wilson said,
“Buyer beware. Do your diligence. Diversify your risk. Prepare to lose
money. That’s the rules of startup investing but not everyone knows
that.”’
With that said, speculators these days want tech, and you ought to give it to ‘em.
http://ceo.ca/seven-ways-to-profit-from-the-great-sector-rotation-back-into-technology/
Excellent read!
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