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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