SOCIETY

HOW THEY DO IT IN...

January 9 2006
SOCIETY

HOW THEY DO IT IN...

January 9 2006

TECH SURVIVORS—OLDER, WISER, BACK IN ACTION

BUSINESS

Ottawa’s technology industry has learned some hard lessons from the go-go years of the boom. A new wave of entrepreneurs is securing venture capital, creating jobs and making money.

BY MICHAEL SNIDER • When Brian Hurley got his management group together at his house a week before Christmas 2003, it was to make the toughest decision any entrepreneurs can face: whether to kill their nascent tech company. Hurley, the CEO of Ottawa-based Liquid Computing Corp., unplugged the blinking lights of the Christmas tree, plugged in a borrowed digital projector, and shone a handdrawn “mind map” onto the dining room wall. Looking like a spider web, the map was supposed to depict the myriad paths of a successful business plan. Trouble was, most of the paths had turned out to be dead ends.

Joining Hurley at the table was Mike Kemp, Liquid’s co-founder and chief technology officer, and Sylvio Bisson and Willi Lotz, experts in digital and mechanical system design. To a man, they were casualties of big Ottawa tech cutbacks in the wake of the dotcom implosion. Hurley, from North Bay, Ont., had spent 18 years with Nortel Networks Corp. Kemp, a Londoner, was a 20-year Nortel veteran and Bisson, an 18-year one. Lotz, the odd man out, spent 20 years with Mitel Networks Corp. before a stint with Newbridge Networks Inc. None of them had expected that after years of service to some of the country’s most highly touted companies, they’d find themselves in Hurley’s Hunt Club home trying to ing to the Ottawa Centre for Research and Innovation (OCRI), a local business development group.

breathe life into a start-up. Their idea was to build supercomputers, and they had a radical plan to revolutionize the business, too. But even revolutionary ideas need funding, and in the throes of the meltdown, investors were scarce.

‘THEY’RE SATISFYING THE NEEDS OF THEIR CUSTOMERS AND INVESTORSTHINGS THAT WEREN’T NECESSARILY ALIGNED BACK IN THE TECH BOOM’

meltdown, were scarce. Such was life in the Ottawa area’s high-tech sector in 2003. The burst bubble and subsequent crash had knocked the city for a loop. Multinationals like Nortel, JDS Uniphase, Alcatel and Mitel—which combined had employed nearly half of the region’s 80,000 hightech workers—shed bodies faster than a plague ship. In all, 30,000 people found themselves out of work between 2001 and 2004, accord-

But a funny thing happened on the way to the unemployment line. Talented and wellconnected professionals like Hurley and Kemp turned their misfortune into opportunity by launching start-ups with their pick of some of the smartest minds in the business. Many of the city’s new firms filled their rosters with proven all-stars, dumped by industry heavyweights when the bubble burst. “I look at the people I have and there’s no way I could have brought them together at any other time,” says Hurley. “They would be the key guys on 10 different teams. There’s no way in 1999 we’d even get these guys to listen to us.”

The net result is, Ottawa has become a city of entrepreneurs, where those small and medium-sized businesses have led a resurgence in the high-tech sector. The entire tech economy, in fact, has restructured itself over the past five years, rebuilding on a firmer foundation. As a result, the total number of Ottawa tech companies has grown from 1,000 at the beginning of the decade to more than 1,700 today, and they are hiring. Employment is nearing its 2001 peak of 79,000. Equally important, venture capital is also picking up. Since the crash, each year has seen a decline in investment, from $1.26 billion in 2000 to $190 million in 2004. But last year witnessed a turnaround, with deals topping $284 million.

Thinking about it now in his company’s slick offices on March Road overlooking the Marshes golf course—Liquid has some 75 employees and more than $20 million in raised financing—Hurley seems well removed from the doom and gloom of 2003. After nearly a year of nothing but nibbles from investors, the group met on that pivotal night before Christmas and agreed to take one more shot at finding local investors for seed funding. It worked, and since then, they’ve been running flat out. “The amount of blood and guts they expended is remarkable,” says Pat DiPietro, a managing partner with VenGrowth private equity partners, one of the first firms to invest in Liquid. “Especially in the early days when there was no money. It was very arduous.” Today’s Ottawa has learned some hard lessons from the go-go years of the tech boom. Back then, the boneheaded belief that the New Economy operated by different rules had investors lusting after tech stocks. Companies marvelled at the bottomless well of venture capital, flowing like so much champagne at an IPO. At industry fairs, companies with flimsy

business plans asked for $50 million or $100 million in seed financing—and got it. Newbridge Networks was sold to France-based Alcatel SA for $10.4 billion; the Nasdaq hit 5,000; Nortel hit $124.50 a share. The bubble grew and Ottawa became Canada’s high-tech wonderland.

tawa high-tech

The gold-rush mentality made a few Ottawa companies the equivalent of overnight rock stars, and executives behaved as such. Mac Brown, majority owner of Rebel.com, which built computer hardware and went from $1 million in annual revenue to $40 million in a few years, would entertain hundreds at his 12,000-sq.-foot Manotick, Ont., mansion. It was not unknown for the big-spending Brown to host afternoon parties at which certain exotic guests would strip and frolic in the indoor pool, much to the shock of tech executives and other guests.

Even at the start of2001, nine months after the meltdown began, headlines still proclaimed the city’s economy safe and secure. In retrospect, that was just an echo of the irrational hype that buoyed the tech bubble through the late 1990s, like a drunk straggler shouting for another round long after the lights have come on. “There was some craziness back then,” says Jeffery Dale, CEO of the OCRE “There was a real buzz that we were seeing a mild setback and things were going to improve. We actually held an event in late 2000after the crash-called TechnoStrut. We had a big ball at the Westin Hotel and celebrated how fantastic the tech sector was.”

That bravado was fuelled in part by the fact that the behemoths behind the boom were still relatively unscathed, including Canada’s New Economy poster boy, Nortel. In the late ’90s, Nortel equipment handled 75 per cent of Internet traffic, and in 2000, it bought 11 companies for more than $19 billion. Even eight months after the crash, then-CEO John Roth declared 2001 would be a year of solid growth. Nortel had become the shining jewel in the Ottawa Valley, where the company’s R & D centre was located.

It took some time for the tech tsunami to travel from the epicentre in California’s Silicon Valley, but when the shock wave hit, it hit hard. By April 2001, a year after the crash, JDS stock had fallen 85 per cent. Nortel had lost $325 billion off its market value and its share price was falling like a stone. The decline dragged the TSE below 8,000 for the first time in more than 15 months, and the system suspended trading six times in early 2001 because it couldn’t handle the volumes.

Ottawa became a mess. The beleaguered companies responded by slashing jobs. Nortel, which at its peak had employed 80,000 people, cut a total of45,000 jobs worldwide, with an estimated 9,000 in Ottawa. “It was a difficult time,” says the OCRI’s Dale.

While venture capitalists might confess that, collectively, they contributed to the feeding frenzy of the Internet bubble, they’ve now learned their lesson and have returned to the practice of funding companies that back up enticing ideas with strong business plans, a quality product, and solid management. Take BelAir Networks Inc., for example. It builds wireless mesh networks—umbrellas of wireless access that allow people with laptops or smart phones access to the Internet from anywhere. BelAir has set up networks along Ottawa’s Elgin Street, at the famous Alamo in San Antonio, Texas, and most recently, the city of Waterloo. But what BelAir does isn’t as impressive as how the company has positioned itself in a very healthy sector of telecommunications. Headed by industry veteran Bernard Herscovic, who worked for Nortel and Newbridge through the midand late ’90s, BelAir managed to grow in an extremely tough environment.

Taking a lesson from the glory days when start-ups would spout off expectations and then fail to meet them, BelAir kept its plan quiet, even after receiving its first injection of capital funding in late 2002. The company kept a low profile for more than a year until it was ready to roll out its first product, and could back up its lofty claims with something tangible. Those efforts have made the company a favourite of industry analysts. “BelAir, I think, is an example of a management team that is well seasoned, in a very interesting technology space, which over the next five years is going to grow rapidly,” says Todd Coupland, an analyst with CIBC World Markets. “They’re doing it in the right way. They’re satisfying the needs of their customers and investors—things that weren’t necessarily aligned back in the tech boom.”

‘WE ACTUALLY HELD A BIG BALL IN LATE 2000—AFTER THE CRASH-CALLED TECHNOSTRUT AND CELEBRATED HOW FANTASTIC THE TECH SECTOR WAS’

aligned back in the tech boom.” BelAir sold 16 networks in 2004 and 100 in 2005. In October, the company announced it had landed US$20 million in new financing from the investment arm of Comcast, the biggest cable company in the U.S., bringing total investment to around US$45 million.

Now, Herscovic says, the company is looking to go public “four or five quarters from now.” And that’s what Ottawa needs to firmly get back onto its feet—a steadily growing number of success stories. One good sign has come from March Networks Inc., a Terry Matthews startup that builds video surveillance equipment. March went public last spring—the first Ottawa IPO since 1999—and has returned impressive results. Certainly, a full recovery will require the healthy participation of the big guys, too. A profitable quarter from Nortel or Mitel would help. But until then, the sector will have to rely on the little guys, and that might not be a bad thing. “These companies have seasoned executives who’ve gone through the boom-bust of the tech bubble and have built a nice list of credible, well-financed and profitable private tech companies that are very likely going to be the next generation of public companies over the next few years,” says CIBC’s Coupland. “It’s all very encouraging.” M