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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry. Something Ventured: July 28th, 2006 By Brent Holliday Greenstone Venture Partners A Convenient Exit For Convedia “Lovers, keep on lovin' While believers, keep on believin', I'm so glad that I know more than I knew then. Gonna keep on tryin', Till I reach the highest ground.” – Red Hot Chili Peppers, Higher Ground Somewhere Terry Matthews is smiling today.  The last of his “children” has grown up and left the roost.  Convedia, FKA Starvision, of Burnaby has sold to Radisys (Nasdaq:RSYS) for US$105M and a possible further US$10M in earnout… all in cash.  Remember the go-go 90’s when the rage in technology start-ups in Ottawa and Vancouver were the Newbridge affiliates?  Terry Matthews had a huge company on his hands whose bread and butter was ATM (Asynchronous Transfer Mode) switches and other gear related to data networking.  He would take managers from within the company and allow them to roll out into new companies that would leverage ATM in some way and build new gear or new applications.  These were the affiliates.  They would be funded by Newbridge and Terry himself. Now, most of Canada knows that Newbridge was an Ottawa company and many of the affiliates were born right there.  Cambrian Systems sold to rival Nortel for $300M.  Tundra Semiconductor is a large public company. ACC sold to Ericsson for $280M. CrossKeys went public then faltered badly and was acquired by a UK company. What most people don’t realize is that four of the twenty affiliates created were based in Vancouver.  Why?  Vancouver had a huge office for Newbridge because they acquired their most successful ATM Access product from MPR Teltech (birthplace of a couple of other companies you may have heard of… PMC Sierra and Sierra Wireless).  Who were our four BC affiliates?  Castleton Networks made edge devices for network access.  It grew in Burnaby to about 60 people and was acquired back into Newbridge when it struggled to raise outside capital.  Vienna Systems was a VoIP pioneer largely based in Ottawa that was acquired by Nokia in 1999. Out here in Vancouver there were a dozen or so employees of Vienna.  The first VoIP wave was a bust and Nokia shut down everything in late 200 except the Vancouver office.  Nokia now has a few hundred people out here that were born from the ashes of a Newbridge affiliate.  Abatis Systems was a huge success for Newbridge when, in the summer of 2000, it sold for US$680M (at the time, because of the exchange rate, that was $1B CDN!) after starting in early 1997 in the offices of the old MPR Teltech.  The fourth was an ATM applications company with a telemedicine and distance education networking product.  The company was called Starvision Multimedia. Back in 1995, two Newbridge ATM experts from MPR Teltech founded Starvision Multimedia which proposed to use the advanced networking capabilities of ATM to deliver video applications to industries like medicine and education. Peter Briscoe and George Lipski thought that ATM offered a superior, quality controlled environment for these types of applications, especially over dedicated lines.  About $20M in venture capital agreed with Peter and George and MDS Capital joined Newbridge and Terry Matthews fund called Celtic House to fund the venture.  By 1998, when I looked at the company in my BDC Capital days, they were foundering.  Expensive dedicated lines were becoming an anathema due to the explosion of the Internet and its “free” capacity.  ATM was starting to lose momentum to straight IP routing with bigger bandwidth thanks to companies like Cisco.  But most importantly, medicine and education were tough markets that were not really ready for dramatic technology shifts like operating remotely on a patient. The company nearly came apart altogether when it failed to raise outside money.  Peter persevered.  He became the CEO.  He shrunk the company, re-focused the engineering on the emerging VoIP market and renamed it Convedia.  He raised money from the existing investors in a painful re-capitalization.  During this very difficult time for his company, he no doubt felt some chagrin and envy as he went up the elevator every day on Still Creek Drive in Burnaby.  Right in front of his eyes Abatis had its enormous success and he and his staff were watching newly minted millionaires from the other management team leave the same parking lot every day.  Worse still, his old colleagues didn’t do too badly when Alcatel bought Newbridge (all of them located in the building next door).  But Peter was about to find some success of his own. In October of 2001, Peter and his team raised money from new investors Mayfield Fund and Ventures West.  This was US$20M in re-start money that really helped the company to its current successful exit.  The media server products were built and some sales were starting to happen.  The VoIP market was becoming real and Convedia helped build the sophistication that the packet voice network required to deliver what we all expect from traditional phone service.  It is no small feat to get the Internet to do things with voice like call display, voicemail, conferencing and the myriad of signaling protocols that make a voice network function.  Convedia built their IP media servers to help make it all work and by 2004 they had achieved leadership in their market worldwide. Some would argue that the momentum for Convedia’s market is not fully realized yet and that there is still tremendous growth possible.  Certainly Radisys management thinks that there is upside.  But after 11 years, give Peter and his team some well earned credit… they made it to the top of their mountain. Some lessons and observations about this story: First and foremost – persevere when you believe in you and your team’s capabilities.  As one peer put it today, “This company nearly died three times”.  But it didn’t and success eventually came.   Networking hardware is, well, hard – The company raised US$50M to make it to a profitable company.  That is about the going rate for any telco grade gear company.  Maybe half that for an edge device or appliance.  It is expensive and clearly the initial investors get very little when it sells for a slightly more than 2x what went in.  Comparables in VoIP?  Kagoor Networks sold to Juniper for US$67M and raised US$40M.    Newbridge Affiliates – it worked.  Their success rate was better than any other VC fund in Canada, mostly due to the connections to people and resources back at Newbridge.  Where is the next technology company big enough and smart enough to do it?   Exchange rates suck – The investment returns of the past five years have been hammered by the CDN dollar.  The Canadian investors in 2001 paid CDN$1,600,000 for every US$1M they invested.  They received CDN$1,100,000 for every US$1M on the sale in 2006. That’s a 32% hit that you really can’t do much about. Congratulations to Peter.  He can now stroll out of his office knowing that someone else may be jealous of his success.  He persevered and it paid off.  And he may also tip the champagne glass as the last of the old Affiliates to reach its exit.  I’m sure Terry Matthews will do the same thing.  Well done. What Do You Think? Talk Back To Brent Holliday   Something Ventured is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks). Something Ventured Archive Printable edition