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Capital Losses
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 23rd, 2004

By Brent Holliday
Greenstone Venture Partners

"We're dug in the deep, the price is steep.
The auctioneer is such a creep.
The lights went out, the oil ran dry
We blamed it on the other guy
It's been a bad day, please don't take a picture
It's been a bad day." - R.E.M., Bad Day

Maybe it's me. Monday night, I'm here in Vancouver and we lose a heartbreaker in Game 7 to the stinking Flames. Tuesday night, I'm in Ottawa and, well, they lost a game 7 to the stinking Leafs. Ottawa fans wished I had gone to Toronto, I think. On Wednesday the Ottawa capital region was in a big blue funk. I drove around to a series of meetings and saw the empty buildings where exciting technology companies used to be. They still don't have green grass, flowers or many leaves on the trees this late in April, so the spirit and the visual affect was bleak. What happened to the hotbed of Canadian technology?

The Ottawa technology region has been touted by many, including this columnist, as the most advanced region in our country and probably the one region to hit "critical mass" in terms of creating, nurturing and growing technology companies. The sophistication of its angels, VCs, lawyers and other service providers is like no other region. But, as I argued in this space two years ago, its dependence on telecom and networking sectors exposed it to the success and failures of that industry. The last three years have not been kind to Ottawa leading to the most spectacular flame-outs in Canadian start-up history.

Zenastra Photonics US$45 M raised over 2 years... defunct in 2001.
Ceyba Networks US$108 M raised over 3 years... defunct in 2003.
Innovance Networks US$158M raised over 3 years... defunct in 2004.

Name a start-up in BC that has received anywhere near that kind of money...

Since January 1999, the Ottawa capital region received $3.72B in VC financing, taking in a staggering 27% of the Canadian total over that time (for a population base of <3% of Canada). These gobs of money have led to the aforementioned flame-outs and others that raised tons continue to operate (MetroPhotonics, raised US$44M) while at least one had a modest exit, given the amount of money that went into it (Catena, raised US$175M, exited for US$487M). So, clearly other VCs were thinking like me and assumed that the "critical mass" meant great opportunities and the money has poured in since 1999.

Was the money justified based on the ability to create great companies? If you forget the money and focus on just individual companies, whether they raised $5M or $50M, to see how many grow up and become bigger companies that go public or get purchased, presumably because they created value, an interesting picture appears. Let's look at some data: In the period 1994-1999, Ottawa companies made up 10% of the 1700+ technology (including life sciences and alternative energy) companies receiving venture capital in Canada. It takes, on average 6-7 years for a start-up to "exit", so in a study done recently, I tried to map the funded companies of 1994-1999 with the exits in the period from 1999-today. That study found that 11% of the successful "exits" of companies in Canada in the 1999-2004 period were Ottawa companies (successful is defined as IPO raising more than $15M CDN or acquisition of more than $25M CDN in enterprise value). Wait a second, 11%? For the "hottest" region in the country that had reached "critical mass"? Doesn't sound like they have any huge margin over other regions in Canada, does it?

To compare with our locale, BC companies made up 11% of the companies funded in Canada between 1994 and 1999, but make up 27% of the successful exits in the 1999-2004 period. Holy cow! Toronto (excluding Waterloo), had 23% of the companies that were funded in the 94-99 period and 34% of the successful exits from 99-today. Not bad! This slice of data, mapping invested companies to successful exits doesn't really show that Ottawa has been all that hot. The data says, that over that time period, you had a better chance of getting a successful exit as an entrepreneur or an investor in BC or Toronto than in Ottawa. Hot indeed.

Surely one slice of data doesn't "prove" anything. What about the average exit value of the companies in the past six years? This will give us a sense for how big Ottawa companies are getting compared to BC and Toronto. Perhaps these fewer exits in Ottawa were making more money for their shareholders. If you include the largest technology M&A deal done in Canadian history, Alcatel buying Newbridge, then Ottawa's average exit size is whopping US$777M in the 99-04 time. However, if you leave it out, the average exit is a more modest US$145M in the same period. Obviously quite a difference when you include Newbridge (already public when it was acquired), which distorts the numbers a lot. Put the US$145M against the others... Toronto: US$210M per exit BC: US$273M per exit. I'm not making this up. This is IPO market price and M&A closing price on all of the exits in Canada in the last 6 years, up to last week's pricing of Q9 Networks IPO. Ottawa does not appear to be creating the value, at least not lately.

Wait a minute. Before we dump on Ottawa any further, let's consider that my data only points to the last six years (which includes two bubble years and three disastrous years). While it's true that Ottawa has received the lion's share of venture capital in this time, and the exits and values haven't been there, it might be the next few years that start to bear fruit for Ottawa vs. the rest of Canada. After all, this is the region that created JDSU, Cognos and Newbridge, all going public long before 1999. While BC and Toronto have done well lately, Ottawa had its first surge of success in the early 1990s and looks prepared to surge again, despite the flameouts and trouble in the telecom sector, leading to its poor performance over the past few years. Here's why:

The "greying" of the workforce - Ottawa has an abundance of 15-25 year veterans of telecom, networking and semiconductor experience. By abundance, I don't mean a few hundred like we have here in Vancouver left over from the MPR days. I mean thousands. These are the men and women that created Mitel, Newbridge, JDSU, Mosaid and Tundra. They worked at Bell Northern Research, Nortel or the NRC solving problems and creating products that led us to the Internet revolution of the mid to late 90's. Heck, our most successful local entrepreneurs came from Ottawa (Paul Terry and Adam Lorant). I was at the Ottawa Networking Forum this week and was struck by the demographic of the crowd. These are grizzled vets. They have scars and successes. They are still keen in their late 40's and 50's to get another start-up under way. Which leads me to my next point...

The entrepreneurial DNA - Combine the experience with the culture of the Ottawa tech community and you get a "can-do" attitude for innovation. The roots of the community are flamboyant/eccentric technology rock stars that, for better and sometimes worse, created a daring, dare I say, swashbuckling, style for others to follow. Terrence Matthews, whose stamp is everywhere in Kanata, Michael Cowpland, Joseph Straus and Michael Potter were all inspiring leaders that took huge risks. This is as close to a California attitude that exists anywhere. The combination of experience and true risk taking means that a start-up in Ottawa is loaded with people that know how to reach decision makers in their potential customer base and define a product based on real needs. They also have the attitude to take the risks to get there.

The telecom industry is coming back - First it was wireless, now broadband access and soon, the WAN. A "broken" industry is in the first throes of a rebound that should last a few years. The first rays of sunshine in that industry are welcome in a place with a 60% occupancy rate. Many of the grizzled vets are still on the sidelines or working for the Department of Defense or CSIS (thanks to the new global threats). They want to be back where the fun is and their opportunity will come soon.

So Ottawa has not done well, compared to BC and Toronto, over the past number of years. But it will reap the benefits of its tight focus on a recovering industry sector. It should do much better over the next 6 years as the 2nd generation of entrepreneurs latch on to new opportunities and use their experience to get to a successful exit faster and at higher values. Perhaps the Senators will start beating the Leafs too...

BC is clearly through its first generation and is looking to build on its successes. Clearly, the industry here has fared quite well in the past six years relative to the rest of Canada. In order to keep that lead, the experience learned on the first successes needs to be shared and built upon. We need our grizzled veterans to take the risks like their Ottawa brethren. We could also import a few of them… perhaps a few more swashbucklers are looking for a West Coast opportunity?

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).

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