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Ottawa's Lambda Gamble
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
January 19th, 2001

By Brent Holliday
Greenstone Venture Partners

"Come on boys and gamble,
Roll those laughing bones.
Seven come eleven boys,
I'll take your money home"
Grateful Dead, Candyman

I want to start by first stating that our Finance Minister, Paul Martin is right; Canada is the place to be if you want to grow over the next year or two. And the reason we are the best-positioned economy in the G7? The technology industry. Now if I can draw you attention to columns from March 5th, 1999 and November 26th 1999 when I had two particularly bitter rants about how the Feds and Mr. Martin did not get it. Thank God he responded, not just to me but to the powerful lobbying of the bigger tech companies in Canada, organization like CATA and regional groups like our own BC TIA. And maybe, just maybe, he actually looked around in Ottawa and noticed its local economy was smoking hot. A few months ago, I'm sure he thought JDS Uniphase was a medical condition.

But look, he listened! Mr. Martin's speech yesterday focused on 5 reasons why Canada is poised for success:

1. A highly skilled and educated workforce.
2. An entrepreneurial private sector prepared to take on the world.
3. A sophisticated high-tech infrastructure that provides the backbone of the knowledge economy.
4. A focus on basic and applied research.
5. A globally competitive tax system that fosters entrepreneurship.

Taken as a whole, Canada has these five attributes in spades in 2001. We have to yell and scream about it and make pointed attacks on myths that people still harbour about Canada. Tell a Canadian working in the Silicon Valley that she/he is paying more in capital gains tax than anyone in Canada, for gains held less than a year (a US distinction, not a Canadian one) and more than anyone in Alberta or Ontario (for gains held more than a year) and they will laugh and thinks that the cold has frozen your brain. Well, it's true. Bummer, dude, those options you have, even if they were above water, would cost you more there. Hey, surf's up in Halifax, my man.

Because we are such a vast country with pockets of technology, or clusters as the consultants like to say, the five attributes have different weightings in different areas. For instance, Calgary gets five stars for #2 and #5, but scores a little less in the other areas. Vancouver gets high marks in #1, 3 and 4, I think. But Ottawa is easily the highest rated region in Canada right now having all 5 attributes score very high. But Ottawa might have a big Achilles heel, too much focus on one sector.

So here I am about to pick a fight with Ottawa, right when it is steaming along as the best place to invest in early stage companies in North America right now. I prefer to hit 'em when they're up, rather than when they're down.

Ottawa is home to roughly 1,100 "advanced technology" companies (There is an entire sideline here about whether we are comparing apples to apples when we speak of the "high tech" industry in BC, which apparently has 2,000 technology companies. Others will be delving into that definitional morass… not for me thanks). It employs over 70,000 people in these companies, employment that has grown 110% since 1993. In the first 11 days of this year, $140 Million in financings of 5 Ottawa companies were announced. This is on top of the estimated $800 M that went into Ottawa region technology companies in 2000. The place is booming.

Driving the boom in Ottawa is a confluence of history and timing. As any PricewaterhouseCoopers Techmap will tell you, the seeds of a successful regional tech industry come from two things: Smart scientists and an anchor company made successful by a legendary entrepreneur (s). In other words, you need strong basic and applied research facilities and funding and a home run company that puts the place on the map to attract talent and investment. It's like a gold strike. Everyone sets up near the successful one in the hopes that the ore deposit spreads beyond their claim into yours. In Ottawa, you have the National Research Council (NRC), the Communications Research Centre (CRC), Nortel's Bell Northern Labs, the University of Ottawa and Carleton University. Then you had a couple of cowboys, Michael Cowpland and Terry Matthews who created Mitel, Corel and Newbridge. That's the history.

The timing is how the Ottawa technology scene started to show more and more success in data communications companies, everything from optical components companies and communications ICs to fiber transmission systems and network management software. With the glaring exception of Cognos, the business intelligence software behemoth, try and name another major Ottawa company not getting its bread buttered from the communications industry customers. Nortel (with its massive presence there), JDS Uniphase, Mitel, MOSAID, Tundra and the recent companies acquired from Ottawa like Extreme Packet Devices, Innovative Fibres, Cambian, Philsar and Skystone are all communications companies. Recently funded companies like Zenastra, Cogency, Tropic, Trillium Photonics, Zucotto, Solidum, Optenia, etc., etc. are all falling from the same large tree. In 2000 and into 2001, optical networks and more broadly, data communications, were the industries to invest in. The timing for Ottawa was perfect. The inherent strength of Ottawa's R&D and anchor company history met the voracious appetite of the VC community and poof, it became the hottest spot on the planet.

And it's a wonder Mr. Martin got it. He does work in Ottawa, after all. Anyone wanna take a stab at where our taxes we would be today if our nation's capital was in Winnipeg? But I digress...

Let me tell you a side story about a US city that lived the boom of Ottawa, one based largely on a singular sector of the high tech industry. That city would be Portland, OR. In the mid-80's, some very forward thinking government and business types mad a bold move. They saw a withering lumber industry, which was the foundation of the State's economy. There were some fledgling technology companies springing out of the University of Oregon and a flashy new age company called Nike starting to change the economy. They opened the doors widely for high tech and gave lavish tax holidays to the hottest companies in the hottest sectors of the day (late 80's). Intel took the bait and set up a fabrication plant and R&D center. HP set up some facilities. Others followed, but predominantly related to the semiconductor industry. While the economy, as a whole in Oregon, has improved, the state is still subject to the boom and bust cycle of one sector of an industry. They have no diversity in technology and suffer for it. In 1998, Portland slumped badly during the Asian crisis. Lo and behold, this news just in today: Intel postpones expansion plans in Oregon due to weak demand. To wit:

HILLSBORO, Ore. (AP) - Intel has indefinitely postponed construction of a $400-million US research and development campus in Oregon, citing weaker demand for computer chips. Intel's largest division is in the western suburbs of Portland known as the Silicon Forest, employing about 15,000 people. The new site would have added 7,000 workers.

Will Ottawa suffer the same fate? There will be a bubble bursting in the optical networking sector with the vast amount of investment in the space. Ottawa will have its share of consolidations and bankruptcies when that happens. If the communications industry slows (personally I think we are Ok for a few years as the global build out of the Net continues) then Ottawa slows. If a city gets too reliant on one sector and all the second order economic benefactors are making hay on the backs of that sector (think car dealers, real estate agents, contractors, bartenders, Ottawa Senators, and on and on), then when the sector contracts, everyone gets hit hard.

Hey, times are good in Ottawa. A party pooper VC/columnist from BC can't put a damper on their success, right now. But, I would be looking to prop up other sectors of the industry so that the engine does not grind to a complete halt. Sometime soon.

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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