MONEY TALKS by Andrew Waitman

Few cities in Canada have the required size, resources, gene pool and experience base to build venture scale companies.

WaitmanHighEdit-111X196.jpgWhere is the scale?
From SCAN's Print Edition

No, I’m not suggesting we measure obesity in Ottawa’s technology sector. The scale I mean is the size-of-success scale, measured for startups in two ways, by revenue and market capitalization. They are of course related. Last column I put forward the thought that Ottawa could reinvigorate venture investment interest if we improved the risk/return perceptions of investors by demonstrating consistent and substantial (scale) success. I use $100 million in revenue as a benchmark for venture scale success. Ten startups of this scale in ten years would be a good indicator of consistency of returns from any region. Before evaluating the challenge of meeting these targets, consider this question. What high tech company (including life sciences) founded in the greater Ottawa area (including Gatineau) during the past decade has reached $100 million or more in revenue. Exclude companies such as Cognos, Newbridge and Corel, which are vintage 1980s. The answer, as far as I’m aware, is none. Do this exercise for any major city in Canada. It’s a short list. Why?

I will separate the two issues: scale and consistency. To reach $100 million in revenue, a startup requires sufficient time to build scale. It is rare for a company to reach that revenue milestone in less than five years, more likely closer to the ten year time frame.

Second, the startup must be positioned in a market that is substantial enough in size and growth to support multiple significant competitors. Far too many Ottawa startups are pursuing niche markets. My message to many is that though their business seems interesting, its scale opportunity lacks venture requirements.

Third, startups must have sufficiently ambitious executives who pursue the growth goal in the face of competitive intensity, acquisition interest and execution challenges. Few Ottawa executive teams have demonstrated this tenacity, often choosing to sell early. The billionaires of the technology world are those who said no to selling out and particularly to early offers.

Fourth and possibly most important, the startup must have sufficient resources (cash, management expertise) at the critical market growth phase to pursue the opportunity as robustly and intelligently as any startup in the United States. There is no point going to a gun fight with a knife. Finally, fortune (I dislike the word luck) plays some role in aligning the timing of large scale market opportunity with resource capability and team tenacity. Think Sandvine and RIM in Canada (both based in Waterloo).

In order to have consistent success in a region to demonstrate to investors that success is more than a one-off fluke (which it often is), a number of ecosystem economic conditions are required. First, the region must be of sufficient economic size to support a pool of technical and managerial talent. The pool has to be deep and wide, sufficient to float enough ambitious startups, all pursuing scale opportunities, that the odds of a few achieving the uber goal become positive. Few cities in Canada have the required size, resources, gene pool and experience base to build venture scale companies.

Expertise, insight and other advantages (fair and unfair) are often derived from regional conditions, such as customer proximity, vertical market clustering or unusual talent. Furthermore, a critical mass of experienced executives who have grown startups to the venture scale is a necessary condition. The Peter principle is germane here. If the region has few executives experienced or capable at running a $50 million or $100 million startups, then the odds of success diminish sharply.

Finally, diversity is crucial. In high technology and life sciences, market opportunities that support rapid scale growth change constantly. Think semiconductors, optics, enterprise software, Web 1.0 and now Web 2.0. Ottawa did particularly well during the telecom surge, but suffered disproportionably as a result of its lack of diversity when the telecom market imploded. Ottawa’s diversity has improved markedly during the past ten years.

One last point on scale and consistency. Bull markets are usually those that provide relatively easy cash to the technology or life sciences sector. They occur in cycles. We are in one now and valuations for technology companies are high. Money is flowing into the sector and both consumer and corporate buyers are spending. Startup that hung on and survived the difficulties of the past five years are poised to enjoy a surge of growth in business today. Persistence matters.

Next column I will explore some of the things that Ottawa could do to improve its odds of achieving the scale and consistency that can lead to more venture investment.
Andrew Waitman is managing partner of Celtic House Venture Partners, specializing in early stage investments in high technology companies.

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