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.

Ottawa Citizen - - FRONT PAGE -

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.

PHOTO BY DANIEL WEIN

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...

CHRIS MIKULA, THE OT­TAWA CIT­I­ZEN

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