Last chance for high-tech?
In the past four years, the national capital region has lost tens of thousands of tech-sector jobs. In part two of a three-part series, JAMES BAGNALL looks at some entrepreneurs in Ottawa who could pull the industry out of a very deep hole.
The spark for a high-tech recovery in Ottawa-gatineau could well be struck by a software company you’ve never heard of, in a place you wouldn’t expect.
For the moment, Shopify is headquartered in the Byward Market, across from the Fish Market restaurant. The firm is only five years old, yet sells electronic commerce software to 16,000 startups and other online retailers around the world — and expects to add another 6,000 to 8,000 in the coming year.
It’s not so much its torrid growth that makes Shopify worth watching. It’s what the firm represents. Shopify is physically and psychologically distant from the region’s traditional high-tech roots in Kanata and telecommunications. The operation is run by Tobias Lütke, a 31-yearold native of Germany with bold ideas about how a business should be run, to say nothing of his ambition.
“I want to build one of Canada’s greatest success stories,” he says. “That’s been my goal for a very long time.”
After four years that have seen the region’s tech workforce shrink nearly 40 per cent, it’s refreshing to see a little hubris.
But there really is something different about Shopify and its 80-employee-strong operation. Its quick surge to profitability is part of it. So is the fact the firm did nearly all its hiring when the region’s tech sector was moving in the opposite direction.
Shopify raised $22 million recently to accelerate its growth and gain access to U.S. venture firms’ networks of experts. This, too, when venture financing trends were moving in reverse. Shopify’s most recent deal valued the firm at a minimum of $100 million, offering a hint of its future potential.
But make no mistake — Ottawa boosters shouldn’t see this as a sign that the city’s natural charm and talent are enough to seed a high-tech recovery on their own.
The fact that Shopify set up here is very much an accident. Lütke followed his girlfriend, now wife, here. Chief technology officer Cody Fauser moved to Ottawa from B.C. because his wife got a job with the government. Not only that, the city would have lost this startup to California had Shopify not been so successful early on that moving became problematic.
“I always thought of Shopify as this San Francisco company that took a wrong turn and ended up in Ottawa,” says Lütke. Even now, for two weeks every quarter, Lütke travels to California’s Silicon Valley to “recharge my battery of thinking big.”
A decade ago, he wouldn’t have had to go anywhere. That was when Ottawa was the epicentre of a global telecom boom. Since then, of course, more than 100 of the city’s venture-financed startups have either folded or were acquired for a small fraction of the money invested in them.
Despite the remarkable corporate devastation, the region remains home to a sizable contingent of entrepreneurs who could — along with Shopify — be laying the foundation for a high-tech recovery. While some have backgrounds in the region’s traditional strength of telecommunications, others specialize in corporate software, web development, high-tech sewers and data storage. One thing they all share is outsized ambition. Here’s a sampling: ❚ Douglas Colbeth, the CEO of Kinaxis, a 16-year-old Kanata firm that develops software that allows firms to manage their supply chains. Colbeth is the former CEO of Spyglass, the U.S. pioneer whose technology underpins Internet Explorer, the search engine owned by Microsoft. Colbeth took the reins at Kinaxis in 2003 and is being advised by board member Alan Rottenberg, the Cognos executive who developed the product line that transformed that firm into a billion-dollar-a-year software giant. ❚ Martin Horne, the CEO of ipeak Networks, a four-year-old Kanata company that is developing software for high-quality video conferencing over the Internet. A former materials manager for DY 4 Systems, a maker of computer boards for the military, Horne created software for tracking what was on the shelves and adapted it for his first startup, Promira. He sold it for $110 million in 1998 to Manugistics of Rockville, Maryland, and has been involved in a succession of startups ever since. ❚ Jim Hjartarson, the CEO and founder of Onechip Photonics. Hjartarson launched Onechip in 2005 to create technology that will make it cheaper for phone companies to deliver high-speed fibre into people’s homes. He’s raised more than $50 million, thanks to a stellar track record. Hjartarson was co-founder of Catena Networks, which made technology for turning ordinary copper wires into high-speed conduits for Internet services. He and his fellow co-founders — all ex-nortel — sold Catena in 2004 for $487 million U.S. to Ciena of Maryland. ❚ Andrew Waitman, chief executive of Pythian, a 14-year-old firm that looks after other companies’ data networks for a fee. Waitman ran the Ottawa-based venture capital firm Celtic House Venture Partners until 2008, when he joined Pythian, then a $9-million-a-year company. He set himself the goal of boosting Pythian’s revenues at least 30 per cent annually and has more than met it — last month the firm was generating revenues at an annual rate of more than $20 million. Staff levels by year-end will be about 150 compared to 90-plus a year ago. ❚ Craig Betts, CEO and founder of Solace Systems, which makes hardware for speeding the flow of data in corporate networks. Betts founded the firm in 2001 — Kanata billionaire Terence Matthews was an early investor — and has quietly assembled a set of first-class managers. He has also raised more than $80 million in venture financing, which means at some point he will feel pressure to do an initial public offering.
‘Older sewer systems were already in place and few people felt it was necessary to replace them. So we decided to market our technology where it was really needed.’
BRUCE LINTON CEO, Clearford Industries, who expects to announce a landmark deal with a private-sector client on the subcontinent
Many other entrepreneurs in the Ottawa area are capable of delivering exceptional results. Some of the more inspiring are those who have suffered stinging setbacks and continue to swing for the fences.
Consider the examples of Bruce Linton and Rod Bryden — the chief executives, respectively, of Clearford Industries and Plasco Energy Group.
Linton, a boyish-looking 45, once received a cheque for $1 million after simply expressing interest in doing a startup. The investor was the late Don Mills, who grew wealthy through his shares in Newbridge Networks, the data networking firm founded by Matthews. “If you want to start a company,” Mills told Linton in the late 1990s, “I’ll back you.”
At the time, Linton was working for Crosskeys, a Newbridge-affiliated firm, but wanted to run his own show. The Mills-backed venture, Webhancer, failed, thanks in part to a funding proposal that unhappily coincided with the 2001 attack on the World Trade Center. For much of the past eight years, Linton has been selling high-tech sewers — technology that minimizes the amount of sludge, thereby reducing the amount of water required to move it down pipes.
It’s been stressful. Rarely does Linton have more than two months’ financing available. Clearford’s dayto-day bills are being paid by key investors — a group of Europeans owns close to one-quarter of Clearford and a Chinese investor owns about 10 per cent. They contribute cash by buying share options. Two years ago, Clearford’s board of directors, which is chaired by Bryden, decided the firm was getting nowhere selling its sewer systems in North America.
“Older sewer systems were already in place and few people felt it was necessary to replace them,” says Linton. “So we decided to market our technology where it was really needed.”
These days Linton is nearly poetic when he describes the intricacies of removing sewage from the slums of India, which he visits frequently. Indeed, before year-end, Linton expects to announce a landmark deal with a private-sector client on the subcontinent. He reckons that reference will give him significant leverage with local governments all across the subcontinent. Clearford is also targeting customers in Africa and other parts of Asia.
The idea of going global at Clearford was vintage Bryden, a born entrepreneur who seems comfortable with very high levels of risk. His past ventures have included Paperboard Industries (Canada’s largest maker of paper from recycled paper), SHL Systemhouse (computer systems), the Ottawa Senators, World Heart Corp. (artificial hearts) and, since 2005, Plasco Energy, the Ottawa-based firm that converts solid waste into energy.
Bryden’s operating style has been to shoot for the moon after taking on enormous debt. His stint at World Heart destroyed most of his wealth. Now in his late 60s, Bryden has lost none of his enthusiasm for the big play. Plasco, for instance, is funding demonstration projects in the U.S., Europe, the Caribbean and China. However, this time around Bryden has convinced some seriously wealthy players to take on the lion’s share of the risk. Earlier this year, a fund controlled by billionaire George Soros bought $140 million in Plasco equity. This followed a $110-million equity commitment made last year by Ares Management.
The big question is whether these entrepreneurs will be able to create significant, Ottawa-based companies, capable of withstanding the pressures that have recently pushed so many firms — from Zarlink to Bridgewater — to sell out. The answer, of course, is unknowable. What we do know is that if Ottawa’s entrepreneurs stop trying, the tech sector really will hollow out.
Fortunately, there is little sign of capitulation in key parts of the industry. Interestingly, two very different models of company-building are emerging, best represented by a cluster of firms surrounding Terence Matthews, and the new kids on the block at Shopify.
In the past few years, Matthews has seeded more than a dozen new firms through his holding company, Wesley Clover. It is too early to tell if they will succeed, though his managers have high hopes for Magor (video conferencing for small businesses) and Benbria (broadcasting software).
Matthews relies heavily on experienced hands — former executives such as Mike Pascoe and Andrea Baptiste, or software gurus such as Pat Beirne — to get the startups up and running. He hires graduates straight out of school, and trains them to be entrepreneurial. Everyone strikes a fateful bargain from Day 1. They exchange most or all of their salaries for shares in the startups.
There’s a sliding scale that varies by company. If an executive is wealthy, thanks to cashing in shares from an earlier high-tech success, he or she will receive no salary or a token $1 a year. Other experienced, but less wealthy, managers accept substantial pay cuts. The recent grads, some of whom play the role of company founders, are only paid between $30,000 and $50,000 annually, but receive plenty of share options.
“It’s really important that people take some kind of hit or sacrifice when joining a startup,” says an executive with one of Matthews’ startups. “I don’t like people who want fat paycheques with little risk. This is 100-per-cent risk. Everyone sweats and must feel the pressure.”
Lütke doesn’t like Matthews’ approach, which he believes places too much risk on the shoulders of the young employees. Nor does he like the practice that sees Wesley Clover take a large piece of the equity upfront — more than 30 per cent — in exchange for coming up with the idea for the startup.
“People in Ottawa need to get over the notion that ideas are worth anything,” Lütke says. “It’s all about execution. No one deserves a significant equity stake for supplying an idea when other people put in 16-hour days for years to make it a reality.”
Lütke not only pays his workers the going rate for programming or whatever, he has also convinced the board of directors to set aside an unusually large 35 per cent of Shopify’s shares for the workers — nearly half of whom are recent graduates from Ottawa’s two universities or Algonquin College.
“There’s an amazing environment here in terms of hiring,” says Lütke. “We’ve been recruiting some very strong people locally.”
This suggests that if Shopify actually does succeed, it could seed another, rather large generation of homegrown entrepreneurs. But we’re getting ahead of ourselves. Ottawa’s tech sector needs a few winners first. To make up for the loss of tech jobs since 2007, we’ll need more than 100. Then we can start debating the best models for producing new ones.
Tobias Lütke, co-founder and CEO of Shopify, has ambition and bold ideas about how a business should be run. He pays his workers — many of them area graduates — the going rate for their skills, and he convinced the software company’s board to set aside...