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Zero To A Billion In 800 Days
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

 

Something Ventured:
August 4th, 2000


By Brent Holliday

"Well I just heard,
The news today,
I think my life,
Is gonna change. "
Creed - Arms Wide Open

A year ago, a small company of some 60 people was bought by a US technology juggernaut and I gushed about how it was the deal that put BC on the map. HotHaus was bought for US$280 M by Broadcom, making it the largest private technology company purchase in Canada to that point. A few months later, the Albertan pig farmers at docSpace trumped HotHaus with a US$562 M purchase by Critical Path. If you are keeping score at home, we have a new leader: Abatis Systems of Burnaby, bought for US$636 M on Monday by Redback Networks. That's almost a billion (with a B) US greenbacks spent acquiring just two companies in the Vancouver area in 12 months. If BC made the map last year, this deal helps solidify its presence as a "place to be". Batten down the hatches, Martha, this place is about to get crazy...

I told you last column that this was about to happen, didn't I? {Authour with smug grin}

How did a company with 126 employees, zero revenues and really tough name to pronounce get to a billion (OK, $944M if we're splitting hairs) Canadian dollars in value in just 2 years?

In June 1998, Abatis opened its doors, but the idea for their core technology had already been planned in the heads of two Newbridge employees, Adam Lorant and Paul Terry. Paul and Adam had been sent west from Ottawa a couple of years earlier when Newbridge bought part of MPR Teltech's fire sale. The ATM Access division of Newbridge (now Alcatel) grew rapidly and was wrapped into a joint venture with Siemens AG. Paul and Adam were free to return to Ottawa after the Siemens transaction, (indeed, Terry Matthews wanted them to come back) but they decided to stay and work on an idea they had. The fates were smiling on our community with that decision.

If you planned to build a billion dollar company, what would you do? Pick a leading edge technology that has the ability to create a brand new market category? Definitely. Choose a market space that will be red hot when you come to market? Absolutely. Have an unfailing belief in your ability to execute a plan? You better. Be absolutely sure that you can build the team of people to win? You bet. Have sufficient cash and little trouble in raising it, if needed? In a perfect world. Paul and Adam read that script and acted it out beautifully.

It is the dream of every VC to find a company like Abatis. One that can truly deliver on the billion dollar promise. In October 1998, Terry Matthews pronounced to the world that Newbridge had achieved what every one in data networking was chasing at that point. He stated that they had developed a way to determine what an Internet protocol (IP) packet was, in real time, without adding any overhead to the process. In application terms, it meant that he was claiming that Newbridge could tell if a packet was data, video or voice and then, presumably route it according to priorities. There was a big cafuffle after the announcement, as some people assumed Terry was trying to inflate a sagging stock with outrageous claims (something his former cohort at Mitel, Michael Cowpland, had made into an art form at Corel). A curious young VC in Vancouver decided to find out a little bit more and did some digging. A phone call to a co-worker in Ottawa and an on-line Ottawa Citizen article a few weeks later both pointed to a new Newbridge affiliate company in Burnaby as the source of Terry's claims. Turns out that Terry, through his VC fund Celtic House, and Newbridge had invested in Adam and Paul's little company and it was already bearing fruit.

I first met Adam and Paul in January 1999 after tracking them down in MPR's old building on the SFU mountain. They were already at 50 people. As I toured the floor and met some of the staff, I was struck by the efficiency of the place. Everyone seemed to be moving together like a machine. They had that "I know something really cool and you don't" look to them. They looked like they were on the edge of something really big. Paul and Adam explained that they had the idea for the algorithms to "sniff" packets and then prioritize them, but that algorithms alone don't create billion dollar companies. So, they started with 5 different business plans on how to monetize their discovery. If you ask Paul today, he will not regale you with a Eureka moment story. He downplays the discovery part. For him, the exciting story is how the executed the plan, once they decided on it. With Terry's help, they settled on a plan to make devices, embed the algorithms and be able to guarantee end-to-end quality of service (QoS) for things like voice over IP (VoIP). Today, it is still impossible to guarantee that a voice or video packet will get from your premise to one across the country, via the Internet, in such a way that it doesn't degrade the quality. The plan said that if you had an Abatis device at each end, you could guarantee five 9's (99.999%), which is what the plain old telephone service delivers today.

Still in January, the company was readying their prototype piece of equipment. I was told by Adam that they would have the prototype done by June and field trials would begin in September. As a seasoned VC, I immediately added 6 months in my head because experience has taught that these things always take longer. When did they have their first field trials? September. These guys delivered.

Adam and Paul wanted a seasoned CEO because they knew their plan would evolve with the market and a CEO could help give them a new set of eyes to look at their world. Also, a good CEO attracts money. Last January, the Abatis gang started to look for more money, but they said they would wait until the CEO was hired. Again, VC does the math and figures three to six months to get a good CEO. John Seminerio, a seasoned sales executive in the datacom industry, was hired as CEO in March of 1999. These guys are good.

By the end of 1999, the company was amassing industry awards for their initial hardware product and a buzz was growing about their new positioning as the first IP Services enabling company. They came up with a great marketing term, "Consumable IP", to help define what they were able to deliver for a telecom carrier. You see, bandwidth is rapidly becoming a commodity. Low costs per bit are now commonplace. So a carrier needs to differentiate, i.e. provide services, in order to make more money going forward. Abatis was projecting the ability for a carrier to enable a company, through a web interface, to turn on and off services like videoconferencing or higher quality voice. The carrier would bill according to a metered, pay-as-you-go pricing structure. Need a better quality video? Pay a couple of extra bucks and you have it. Need Multicasting of an annual meeting? Crank up the dollars and the service is yours. Instantly.

In early 2000, the company was looking for strategic VC investors. Many Canadian and US VCs met the company, liked what they saw, but a deal was not struck. With deep-pocketed seed investors like Terry Matthews, the company was able to search for the best partners. They suffered a bit from the "Canadian" syndrome when it comes to US investment. It's funny. Customers or strategic partners in the US are far more willing to deal with a Canadian company than investors. Up until very recently, the US investors came hesitantly to Canada. Just to hammer the point home, Redback, a potential partner and/or competitor, had no problem with Abatis being a Canadian company. With over 100 engineers, Abatis is a gold mine of talent that is cheaper than trying to recruit and pay people in the Valley. I'm sure it was not tough for Redback to get excited about buying them. As soon as they did, all other potential investments were, of course, off.

Paul and Adam were asked this week if they would start lavishing themselves with their newfound wealth. They were incredulous. Paul still wears torn sneakers and a golf shirt half tucked in (kind of like Wayne Gretzky). He is not going to change. They have a mission to complete. The vision of Consumable IP is not done. As John Seminerio said, Redback gives them incredible strength to continue to execute the plan. Sure, there's this fatter bank account triviality, but what drives these guys is finishing what they started. Would you bet against them?

Random Thoughts -

- What A Week! - Trillium Digital was bought by Intel on Tuesday for US$300M. Although headquartered in Los Angeles, 50 or so engineers toil in a Vancouver office and will now be Intel employees. Intel has no plans to move the division. So that means that BC is now home to Canadian development (not sales) subsidiaries of Motorola, Seagate, Intel, IBM, Broadcom, Redback (twice: Abatis and Siara) and JDS Uniphase (through the Victoria based subsidiary of SDL, Inc.). We just need Cisco, HP and a few others to buy up some of our rising stars and we will have everyone at the party.

Letters From Last Week -

Hi Brent, I'm a regular reader of your column on T-Net BC and more often than not I agree with your ideas.

I'm a software developer with 4 yrs of experience. Most of my friends from UBC electrical engineering have left BC to work in the US or in Asia Pacific. I chose to stay because I love the life style in Vancouver, but more recently I've got another reason to stay: The high tech sector in BC is gathering steam and what we've seen so far is just the beginning. As the States gets more expensive in starting a business the talent pool and quality of life here start looking more attractive. Of course, the extent of the network in BC can't compare with that in the Valley, but I think we're starting to have a critical mass of well-known and globally successful companies that will spawn a network of entrepreneurs and VCs.

Alan Chiu

Thank goodness I'm not the only one that thinks this way. Stick around, Alan, it is only going to get better. Call some of your old EE classmates and tell them to get back here.


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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