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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