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).
Something Ventured Archive
Online Venture Capital Guide
Printable
edition
© 2013 T-Net. All Rights Reserved. |