By MEGHAN FULLER
Montreal-based TechnoCap Inc. recently made public its internal returns-not a common practice for the venture-capital company. "We did it this time to demonstrate that you can still make favorable returns in the venture and technology businesses, even in this environment," explains Richard Prytula, TechnoCap's president and founding managing partner.
The venture capitalist had a 4% internal rate of return (IRR) for the first six months ending June 30, 2001, a net more than 16 percentage points above the NASDAQ and 17 points above the Canadian TSE 100 indexes for the same period. TechnoCap has seen a 31% IRR net per year since its inception in 1993. All of which begs the question: How has it managed to succeed as others struggle?
While the company representatives admit they have lost and will continue to lose companies just like everyone else in the space, they have attempted to mitigate the effects of the economy in several ways. According to Prytula, TechnoCap has established a niche by focusing on companies with massively parallel technologies. Its investee companies in the networking hardware space, including Hyperchip (Montreal), Yotta Yotta (Edmonton, Alberta), VIPswitch (Quebec), and Big Bangwidth (Edmonton), "have massive scalability that will give us a hundred to a thousand times the scalability of anyone in the market," says Prytula.
"If you were to look, for example, at Yotta Yotta's NetStorage, you would see that it's a massively parallel technology, massively distributed," he explains. "If you were to look at Hyperchip, you would see it's massively parallel semiconductors. If you were to look at BigBangwidth, you would see that it's massively parallel nanophotonics. That's our niche. That's what we do."
Prytula believes TechnoCap has also been successful because it has not focused on just one technology sector; it invests in a broad spectrum of technologies from software to storage to semiconductors. Also, the company has remained focused on its original business plan, tabled last November.
That said, Prytula admits his company is not out of the woods yet. "We've got an environment with a very high failure rate-and a failure rate that's going to be increasing," he asserts. "Deloitte & Touche [a New York-based consulting firm] just did a study of East and West Coast venture capitalists. Seventy-eight percent of them think that one-third of all technology companies will fail in the coming months. That's the environment we're in."
In today's economy, many venture capitalists have chosen to focus on their existing portfolio, and TechnoCap is no different. The company has turned much of its attention on current "investee companies," as it calls them, providing marketing and recruiting and helping to seek out potential co-investors.
TechnoCap recently closed a $26-million round of funding for Yotta Yotta. Co-investors included Banc of America Securities (Palo Alto, CA), Noble Networks (New York), Bombardier Trust UK of London, Davenport Capital Ventures (Boston), Grosvenor Funds (Washington, DC), Optical Capital Group (Columbia, MD), Morgan Keegan (Memphis, TN), and Desjardins of Quebec City. When asked how TechnoCap managed to get so many investors on board in the current economic climate, Prytula cited "focus, consistency, and just keeping at it."
Keep at it they will, particularly in light of what Prytula sees as a gradually improving marketplace. Markets typically exhibit highs and lows, but in 1999-2000, the telecommunications market experienced boom years in which the market was very high. "Then everything stopped and went straight down to nothing," he explains. "We have had nothingness for a period of time. Then all of a sudden at the end of the nothingness, there will be huge demand because everyone has held their demand back and they have no choice but to procure. They will all procure at the same time."
When asked how companies can keep themselves strong until the market recovers, Prytula had this to say: "It is no longer first to market that is important. It's last man standing. Hold onto all of your cash and manage yourself so that you will be alive when the market comes back."