Tech sector’s turn to close the job gap
For the third time in 20 years, the region’s largest employer — the federal government — is trimming staff. Unlike previous downsizings, it’s not yet clear if high-tech firms can pick up the slack. But as JAMES BAGNALL writes, the early signs are encourag
James Bagnall tracks the ups and downs of employment and asks if startups can make up for
government downsizing.
Few of this region’s hightech entrepreneurs understand the difference between then and now as viscerally as Bruce Gregory, the co-founder of twoyear-old startup Corsa Technology. He and his three co-founders are expected to announce Saturday they have secured $4.2 million in venture financing from Celtic House Venture Partners of Ottawa.
Compared to Gregory’s last goround in 2000, this is a pittance that took an absurdly long time to raise.
Thirteen years ago Gregory was the CEO and pilot of a spaceship called Extreme Packet Devices, then in the business of designing chips to expedite data traffic. Toward the end of its first year, Extreme Packet was snapped up for $600 million by PMC-Sierra — a Vancouver chipmaker.
The four founders of Extreme Packet did very well but Gregory — like the firm’s other 60 employees — was a hired gun, not a founder. His stake in the firm consisted of stock options he would earn over four years. At the time of the sale, he was entitled to exercise only 25 per cent of them.
The tech bubble burst one week after the PMC-Sierra purchase was announced — and much of the value of the shares used to acquire Extreme Packet vanished like so much pixie dust. Gregory did OK — well, more than OK. He owned a sufficient number of stock options to allow him to quit the firm and indulge his enthusiasm for racing cars. He co-founded Calabogie Motorsports Park, a racing circuit outside Ottawa. He also invested in a couple of tech startups.
Gregory was 40 then with young children. He’s in his early 50s now and the children are grown. He’s decided to re-enlist in the high-tech wars. “I’ve been asked a lot ‘ Why are you doing this?’” he says over breakfast in the stylish Alice’s Village Café in Carp. “My answer is ‘This is just something I have to do now.’”
The region needs him — and many other entrepreneurs besides — to succeed. The high-tech sector has recovered smartly from a low of 40,200 workers last December to 50,400 in June. But that’s only enough to make up for a portion of the 22,000 federal government employees who have left the civil service during the past two-and-a-half years. Is tech strong enough to add another 12,000 and close the gap? It’s possible.
If tech continues its recovery, it would confirm a rather freakish 20-year pattern that has seen hiring patterns in high-tech and government consistently move in opposite directions. It’s an odd pattern, because there is no obvious causal link for the relationship.
Federal government layoffs in the mid-1990s were triggered by Liberal finance minister Paul Martin’s deep spending cuts that were prompted by large federal spending deficits. The local hightech hiring boom during the same period was stimulated by unprecedented spending on the Internet and telecom networks.
When the tech bubble burst in 2001, the Liberals stepped up their public service hiring — but this owed much to the fact the federal government had balanced its books.
That, and the reality that the downsizing had left many departments understaffed.
The offsetting trends continued after Martin became prime minister in 2003. Martin, believing the Liberals had overdone civil service hiring, trimmed spending again.
At the same time, the region’s high-tech firms upped their head count in response to increased orders from telecommunications carriers, among other customers.
Tech employment peaked at 70,400 in October 2007 — very nearly matching the heights achieved during the 2000 boom.
Then government and tech job trends broke sharply in different directions once again, shaking the Ottawa-Gatineau labour market to its core. The Conservative government launched an unprecedented public service hiring spree, partly in response to the 2008 recession.
‘There is a whole group of technology workers in this town with more than one job. They pick up government contracts when they need money, and use it to finance their projects.’
DEBORAH WEINSTEIN, founding partner with LaBarge Weinstein
The federal government workforce in the region ballooned to about 155,000 by October 2010 — up roughly 25,000 in just two years.
With the immediate financial crisis over, Finance Minister Jim Flaherty returned his attention to eliminating the federal spending deficit — and clawed back nearly all the staff positions the government had added after the onset of the recession.
As of June, there were 133,100 federal government workers in the National Capital Region — 19.2 per cent of total employment — roughly in line with pre-recession levels.
For tech, it’s been a much different story. The double whammy of Nortel’s implosion and collapsed credit markets pushed the region’s tech employment down 30,000 to reach 40,200 last December, a depth the sector had not plumbed since December 1996. Back then, tech workers made up eight per cent of the city’s workforce and the percentage would rise swiftly until it reached an intensity of 13 per cent in mid-2000. Thirteen years later, tech employment constitutes slightly more than seven per cent of the jobs in OttawaGatineau.
There is no magic formula for what percentage of the workforce should be high-tech. All that’s required is sufficient scale and skill to be able to conquer global niches. A successful tech hub would do much to keep the overall economy vital, and more interesting. The best tech firms export the vast majority of their products, and do their work according to a much different rhythm than government. They also pull in investment from the outside world.
And, not least, they offer the prospect of growth at a time when the labour force of Ottawa-Gatineau has been shrinking. Since last December, the number of people counted in the workforce (which includes those with jobs as well as those seeking them) has tumbled by 29,000 — nearly 4 per cent. A significant number of these — it’s not clear how many — are government workers who have retired from the civil service and may have left the city.
Indeed, had it not been for the reduction in the workforce, the region’s jobless rate would likely have been higher than the 6.3 per cent recorded by Statistics Canada for June — perhaps topping the national unemployment rate (7.1 per cent) for the first time in eight years. That’s because the pool of jobs in OttawaGatineau shrank by 25,000 over the same six-month period.
Anyway you cut it, the value of strong tech sector locally is obvious. What may surprise some is the extent to which the current group of tech firms — small as they are — are ready to play their traditional role of a countervailing a shrinking government.
Across town thousands of entrepreneurs are challenging long odds by trying to create a breakout technology success. Circumstances vary. There are a number of firms that, like Corsa, have relied on the wealth of founders to finance the first stages of product development — Graphite Software, for instance, a startup dedicated to solving security issues related to Android smartphones. Other startups, such as computer memory specialist Diablo Technologies, have been patiently developing a family of technologies with the help of multiple rounds of venture financing. And another group — which includes Shopify, the provider of e-commerce platforms — has been steadily profitable, or nearly so, throughout.
Underpinning the sector is an informal network of programmers, engineers and tech evangelists — many of them part-time and cut adrift by the Nortel disaster. Most have remained faithful to the idea that the National Capital Region is a serious player in high-tech. “There is a whole group of technology workers in this town with more than one job,” says Deborah Weinstein, a founding partner with LaBarge Weinstein, the Kanata law firm that handles so many of the region’s corporate dealings in high-tech. “They pick up government contracts when they need money, and use it to finance their projects,” she adds.
So where are the potential winners?
Consider the view from Ottawa’s Little Italy, which now includes the headquarters for Celtic House Venture Partners — moved here recently from Kanata. CHVP, formed in 1994, manages $425 million worth of equity in a wide variety of tech firms here and abroad. Last year it raised $100 million and has been investing exclusively in promising Canadian startups. Three of the fund’s first four venture financings have involved Ottawa companies — including Corsa, Graphite Software
‘The region has tremendous deep wells of talent we want to tap into. There’s enough potential here to support five Celtic Houses.’ TOM VALIS, partner in Celtic House Venture Partners
and Nuvyyo, which provides a way for people to access their personal data from anywhere.
Tom Valis, a Celtic House partner, sees his firm playing a role similar to that of the National Research Council’s original mandate. “The region has tremendous deep wells of talent we want to tap into,” says Valis. “There’s enough potential here to support five Celtic Houses,” he adds with only some hyperbole.
Fellow Celtic House partner David Adderley says the capital region is known worldwide for its expertise in telecom networking and security technology, among other hightech domains. He points out that it was a Kanata firm, Cloakware, that developed the technology to prevent tampering or copying of digital content such as movies offered by iTunes and Netflix. Cloakware was purchased in 2007 by Irdeto of the Netherlands for $72.5 million U.S.
It’s why Adderley and his Celtic House had little trouble justifying a recent $4.4 million investment in Graphite Software — Alec Main, a co-founder, also helped to launch Cloakware.
Adderley and Valis acknowledge the many risks facing their investments and the tech sector here generally. They don’t like the fact Google decided last year to open its major Canadian office in Toronto, not Ottawa. Following the demise of Nortel, the National Capital Region still lacks an anchor tenant. Telecommunications technology specialists DragonWave and Mitel Networks are carrying the flag, but both firms are struggling to regain momentum. Adderley cites Halogen Software’s initial public offering — the talent management software firm raised $55 million in May on the TSX — as a reason for hope.
Many multinationals — from Ericsson to Avaya — have set up shop in Ottawa recently following a wave of acquisitions. Tech lawyer Weinstein says a few of the purchasers have cut staff but, encouragingly, four out of five have not.
And Alcatel — the France-based giant that acquired Newbridge Networks of Kanata for $10 billion in 2000 — recently shifted its global focus towards data networking. This puts the Kanata operation at the core of the French firm’s strategies.
But branch operations only take the region so far. To secure a reputation for global expertise requires having a few very successful tech firms — which, in turn, requires outsized ambition.
“We understand what we have here and we are not operating in some kind of bubble,” says Adderley. “We are connected to (California’s) Silicon Valley and some of its most prominent players.”
He’s making two very important points. The first is that there remains sufficient experience and talent in the National Capital Region to make things happen in high-tech. The second is that people here have developed very extensive ties with people that matter in other hightech centres. Both points are evident at Corsa — which is tackling the difficult issue of how to make cloud networking more efficient and easier to manage. Indeed, many of the Ottawa startups with momentum have been adapting their technologies for cloud computing — which involves the delivery of software and services over the Internet (rather than users owning and maintaining their own hardware and software).
Gregory says Corsa is developing the most efficient way of sending data using a technical standard known as software-defined networks. If the firm succeeds in this, it would be a very big deal.
Gathering the Corsa team was relatively easy. Gregory and Yatish Kumar — the startup’s chief technology officer — did undergraduate studies together at Carleton University. Gregory also worked with Stephen Yee, Corsa’s vice-president of worldwide sales, at LSI Logic in the early 1990s and later that decade at Cadabra. Yatish and Carolyn Raab — the startup’s vice-president of product management — were colleagues at Nortel Networks.
“We’re a tight group with a lot of startup experience,” says Gregory, “and good friends to boot.”
It’s like that in so many parts of the region’s high-tech scene. Hundreds of firms have come and gone — but the experiences and lessons endure. At Graphite Software, the founders had even less difficulty finding each other — most were colleagues at Cloakware.
If the sector fails to replicate its previous successes, Ottawa-Gatineau could, as the Conference Board in Canada predicted recently, fall to near the bottom when it comes to economic growth in the country’s largest cities. The independent think-tank, based in Ottawa, forecast that the region will continue to grow marginally, thus losing ground to many of its peers, especially in the West.
So, on top of the immediate pressures facing Ottawa’s latest startups to justify the investments they’ve received, is another one. On their shoulders rests the region’s hopes for a more balanced jobs market.
After the federal government completes its latest downsizing, a welcome change would be to see the two sectors move ahead in tandem.