Building larger technology companies is critical for our future economic well being, yet somehow we seem to pay more attention to the seed and startup phase. This post and a subsequent missive, Wisdom from Recent Waterloo Technology Acquisitions, aim to analyze some recipes for building technology businesses to scale first from the perspective of recent companies and then specifically through the lens of local acquisitions. This pair of posts will be based on extensive data, but the findings are intended to start discussion rather than be the last word.
The importance of building new, innovative, and large, companies can’t be underestimated regionally, provincially and nationally. Here in Waterloo, with perhaps 10 000 jobs at a single behemoth, Research in Motion, the notion of job creation is particularly topical simply to lessen our dependency on such a large company.
My sense is that, of late, most of the focus centres around making startups: small, energetic and entrepreneurial software, web and mobile companies, some simply building a mobile application. And, even with the current notion of Lean Startups or our Venture 2.0approach, there is no question that building such early stage companies is probably an order of magnitude cheaper than it was back in the 1990’s While undoubtedly a good thing for all concerned – founders, investors and consumers all have so much more choice – has this led to a corresponding increase in new major businesses in the technology sector?
I see this as more of a discussion than a simple answer, and thus to start, I include the following table of my sense of how the numbers have changed over time. The following table provides some idea of how company formation has trended over the last 25 years, through the lens of scale rather than acquisitions:
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NOTES ON DATA:
Sources: public records, internet, personal recollections and interviews with 20 key ecosystem participants.
The definition of “big” is purposely somewhat arbitrary (and perhaps vague). I am using a threshold of 50 employees or $10 million in revenues, which is probably more indicative of these startups becoming mid-sized businesses.
INITIAL INSIGHTS:
This data, while helpful, can never provide a complete answer. However, it can guide the conversation around what I see to be an important economic mission for our region and country – that is, building more significant technology businesses. I’m sure there are no easy answers, but in shaping policy, it is important to base decisions on informed debate and research.
To that end, I would offer the following thoughts:
The current plethora of “lean startups” does not (necessarily) represent a clear path to growing those startups into larger businesses.
I suspect that, in some ways, multiplying small startups can retard the growth of larger companies. That said, the data are insufficient to prove cause and effect.
At the ecosystem level, we need to focus resource allocation beyond simple startup creation to include building more long term, and larger, technology businesses. Instead of spreading talent and other resources thinly, key gaps in senior management talent (especially marketing) and access to capital (B rounds and beyond) need to be resolved.
Even in day to day discussion, the narrative must shift so that entrepreneurism isn’t just about startups, to make company building cool again.
Canada holds many smart, creative and hardworking entrepreneurs who will undoubtedly rise to the challenge of building our next generation economy. Meanwhile, I’d welcome comments, suggestions and feedback on how we can build dozens or more, instead of a handful, of larger technology companies in our region.
Today was a banner day for announcements involving a reset of the technology funding ecosystem in Canada.
For a long time, the slow demise of Canadian Venture Capital has concerned me deeply, putting us at an international disadvantage in regards to funding and building our next generation of innovative businesses. You may recall my 2009 post Who Killed Canadian Venture Capital? A Peculiarly Canadian Implosion? which recounts the extinction of almost all of the A round investors working in Ontario.
Since then, many of us have worked to bridge the gap by building Angel Networks, including Golden Triangle AngelNet (GTAN), where I chair the Selection process and using extreme syndication and leverage to replace a portion of the missing A rounds.
Today, the launch of Round 13 Capital revealed a new model for venture finance centred around a strong Founder Board whose members are also LPs, each with a “meaningful” investment in the fund. My decision to get involved was based both on this strongly aligned wealth of operating wisdom coupled with the clear strength of the core team.
The launch was widely covered by a range of tech savvy media, including:
To illustrate the both the differentiation of Round 13 and show the depth of founder experience, Bruce Croxon, indicated that the founders board has, measured by aggregate exit value, built over $2.5 billion of wealth in Canada. It is this kind of vision and operational experience that directly addresses the second of my three points that Canadian Venture Capital needs to solve.
It is exciting to be involved with the unfolding next generation funding ecosystem for technology companies of the future. Time will tell the ultimate outcome, but I’m certainly bullish on Round 13.
It is notable that much of the recent trend towards Social Innovation has come from people who began their careers in technology startups, in Silicon Valley or other technology clusters. Some notable examples include:
Bill Gates, partly at the instigation of Warren Buffet who added his personal fortune to that of Gates, left Microsoft, the company he built, to dedicate his life to innovative solutions to large world issues such as global health and world literacy through the Bill and Melinda Gates Foundation
Started by Paul Brainerd, Seattle-based Social Venture Partners International is innovating at the intersection of technology and venture capital, with Venture Philanthropy. Paul sold Aldus Corporation (an innovator in desktop publishing applications, including Pagemaker) to Adobe in the mid 1990s. In his mid-40’s at the time of the Adobe acquisition, he was young enough to seek a significant and active social purpose in his life.
Waterloo’s own Mike Lazaridis aims to transform our understanding of the universe itself by investing hundreds of millions of dollars into Perimeter Institute for Theoretical Physicsn and Institute for Quantum Computing, effectively innovating a new mechanism of education and discovery. Notable is that this area of investment is one that may well take years, possibly decades, to show what breakthroughs, if any, are discovered.
Whether or not always attributtable to this connection with technology entrepreneurs, increasingly Social Sector organizations are starting to become much more like the entrepreneurial startups so familiar in the world of high technology. I’ve personally witnessed some of this change, and would like to suggest, that while there remain big differences, the parallels are strengthening over time. The following concepts represent just a small sampling of the key areas of similarity:
1. Founders Versus Artists
Stories are legion of smart, brash (and even mercurial) technology company founders who transform a business sector through the sheer strength of their wills. Many of these founders are “control freaks” and might find employment in conventional jobs a difficult proposition. Venture capital and angel investors have learned to be wary of such founders, citing numerous examples of founderitis – in which uncoachable founders, in a case of “my way or the highway” would rather maintain control than bend to ideas from often more experienced mentors, board members and investors.
Such personalities also exist in the Social Sector. For example, many arts organizations are founded by bright and innovative artistic directors. And yet, many of these same organizations come unravelled by the same mercurial nature that prevents the organization from being properly governed and accountable to funders (investors). With my background on both sides of this divide, the parallels are hauntingly striking.
Since such founders strengths can also be their undoing (or that of their organization), a conscious Board level assessment of such situations is always wise.
2. Running on Empty
Notwithstanding the media coverage of a few lucky technology startups such as Facebook orGoogle, most technology startups run of little or no significant funding. Many seek to change the world with very small amounts of capital, sometimes no more than several million dollars. The recent trend towards building such small capitalization organizations is called the Lean Startup movement. The challenges inherent in their undercapitalization is often the top complaint of such startups. However, Sergy Brin, the Google co-founder has insightfully observed that “constraints breed creativity” to describe how an underfunded state has led to the discovery of innovative ways to build companies and deliver their products.
Likewise, from my experience the vast majority of charities and nonprofits complain about being undercapitalized, and the reality is that most are. It is a fact of life in the social sector. Only now are we starting to see the emergence of social ventures, which by stealing a page from underfunded technology startups are exploring new business models and ways to deliver social change, often leveraging IT or a different process to vastly reduce costs of program delivery.
3. Technology Changes Everything
We’ve seen the emergence of a world where all information is stored in digital form and people are connected, even while mobile, the role of the web and technology can’t be underestimated. Technology-based startups, because they are small and start from scratch, often approach traditional problems in very non-traditional ways. Revenue and funding models change, as do fundamental ways to organize a business or social enterprise. Social media allows ideas to spread in a viral fashion. We have already seen how organizations like Avaaz can mobilize hundreds of thousands or even millions of supporters globally for both local and international issues of social injustices and poverty. This is a direct analogue to how many people now rely on Twitter or Facebook, rather than a printed newspaper, for much of their news and information.
4. Mission Creep – or the path forward
Technology startups have come to learn that success depends on laser sharp focus, attention to detail and execution of a “pure play” strategy (ie. only do one thing well). Thatparticular discipline has time and time again proven to be effective in a sector where technology change is moving rapidly and most startups are generally considered to be underfunded.
Likewise, Social Enterprisesmust adopt similar approaches to deal with underfunding and change. Even in today’s more fluid and fast-changing environment, to avoid deadly Mission Creep, Board and management must have developed a complete Theory of Change roadmap to enable Manage to Outcomes.
First of all, I would like to congratulate Phil Deck, Michael Harris and the entire team for finding both a fabulous new home for MKS, but also one which represents a significant strategic financial transaction, valuing MKS at just over 4 times estimated FY2011 sales.
Many people have asked for my perspective. In short, I continue to view the acquisition as favourable to customers, employees, Waterloo and its shareholders. To delve further, this article, written from my own perspective, gives both background and some lasting observations and universal lessons from MKS.
Over the last decade, MKS largely sat out the wave of consolidations in Applications Lifecycle Management (ALM, that builds on the earlier category of Software Configuration Management), for example:
IBM acquiring Rational Software for $2.1 billion on 6 December, 2002,
Mercury Interactive acquiring Kintana for $225 million on 10 December, 2003,
Serena Software acquiring Merant on 3 March, 2004 for $380 million, followed by
Silver Lake Partners, a private equity firm, acquiring Serena Software for $1.2 billion on 11 November, 2005,
IBM acquiring Telelogic (which had earlier bought MKS competitor Continuus Software) for $745 million during April 2008
The aforementioned almost $5 billion acquisition binge represented a huge shift in the ALM market dynamics. By 2011, a new driver for acquisitions had emerged. As engineered products start to contain more software value than traditional hardware, customers requirements in the Product Lifecycle Management space started to converge with the Application Lifecycle Management space. This blending and merging of categories, fuelled by the trend to software being the dominant product differentiator, led to the acquisition of MKS by PTC and may portend more activity as these spaces continue to consolidate. Because PTC is moving into a new, but adjacent market category, that means that the domain expertise from the MKS product teams will be critical to PTC‘s long term success.
Could MKS have remained independent? My sense is, in the longer term, no. In the 1990s, a company could IPO on the NASDAQ at around $20 million revenues. Today, that number is over $100 million, and MKS at acquisition had about $75 million revenues. Perhaps further acquisitions might have accelerated getting to scale, but without a NASDAQ public currency that would have been difficult. Therefore, that’s a key reason why the PTC acquisition is such a home run win for MKS.
MKS built great value as a significant global software business over its 27 years of pre-acquisition existence. I’m very pleased that, unlike some early stage start up acquisitions, this likely means that PTC will continue to see Waterloo as a base for further expansion based around the solid product R&D team. In that sense, it’s great news for the region’s economy and something I’m very happy to see.
I wanted to reflect on a few themes that I’ve seen play out over MKS‘ long history – both lessons learned and some principles that might help some of the current crop of start ups grow into global businesses headquartered in Waterloo.
PIVOTS
MKS definitely was a company that had the proverbial “9 lives”. Using the au courant start up lingo, these were critical “pivots”. The number of pivots arises partly because MKS was a multi-product company and even more so because MKS was a first generation of software company in Canada, before clear rules to build such a knowledge based business had been formulated. Achieving company growth means many battles fought (and not all successfully) to win the war of business success. I’ve also come to learn that timing can trump even the most gifted product strategy work or execution attempts. As a result, ultimate success can be seasoned by many failures along the way to that success.
The following summarizes some of those 9 lives inside MKS:
The original name of MKS Inc. was MorticeKern Systems Inc. – not taken, as often supposed from an aging and curmudgeonly New York accountant, but rather inspired by two typesetting terms that connote a sort of Zen in the ancient arta of hot lead typesetting. The pre-incorporation business plan for MKS to be the first to develop and commercialize the then state of the art, full page desktop publishing. When the US technique seeking venture capital to fund this exposed that venture capital hadn’t yet begun in Canada, the company moved on to a bootstrap mode (which is oddly similar to the state of many startups and financing today).
As mentioned, to have the resources to develop products, we put out a shingle to do contract development work for such major companies as Imperial Oil, Westinghouse, Ontario Ministry of Education and Commodore. Using a portion of the millions of revenues this generated, and with learnings from development and cross-development on the naked IBM PC and MS-DOS, we started to create our first product.
MKS Toolkit was, as mentioned, directly inspired by a gap in the market, and by 1985 was shipping its first products. MKS Toolkit thrives, in morphed form, to this day, and more important has spawned many of the later product directions over the next 25 years.
InterOpen emerged from my recognition that POSIX (and later x/OPEN) was being cast as Federal Information Processing Standards (FIPS, from National Institute of Standards and Technology) that meant that all existing, non-UNIX systems (we called them proprietary back then) must adopt POSIX compliant interfaces and tools. InterOpen ultimately, over many years, generated $50 million or more of OEM licensing revenues for MKS. InterOpen technology instrumental in IBM Open Edition MVS, HP MPE/ix, DEC VAX/VMS, Fujitsu SureSystem and many others.
By 1988, we had taken an add-0n to MKS Toolkit, and named it MKS RCS which was the first generation software management system product, built around revision (version) control for software development projects.
In 1992, another tool arising from MKS Toolkit (uucp), along with an innovation proposal from Dale Gass, led to the creation of MKS Internet Anywhere. Prior to Windows 95, with no TCP/IP stack or internet functionality, this was a consumer-grade suite bundling everything from browser, FTP, email client with the necessary stack for the market. With the battle by Microsoft to kill Netscape still in the future, this division along with a dozen including some of our most talented staff, was sold off to Open Text Corporation in 1994.
By 1993, MKS had re-built from scratch the original MKS RCS into its first enterprise-grade product – a suite now branded as MKS Source Integrity. From then on, this was the highest growth key focus for the company, although it took some time to be profitable, being cross-subsidized by the high margin successes of MKS Toolkit and InterOpen.
By 1995, another key MKS employee, David Rowley, drove the creation of MKS Web Integrity, which I believe to be the first ever enterprise web content management system. Although licensed into the Netscape SuiteSpot Server, along withInformixdatablades and Verity search technology, perhaps the focus (and Venture Capital financing) of a pure play strategy might have given it more ammunition against early competitors like Interwoven and Vignette.
Eventually, the need to clearly position the enterprise software management products as the sole focus of the company, and to distance from some confusion with the tools and developer-based MKS Toolkit product line, an attempt was made to separate and brand as Vertical Sky. Whether or not this might have worked at a different time, the Dot Com meltdown of 2000 meant that it was impossible to raise investment to finance such a roll out. Ultimately, Phil Deck and the new management did continue the separation and promotion of MKS Source Integrity to full enterprise grade, but without the added costs of the Vertical Sky rebranding.
Although there were many more than the above sample 9 lives, I think that the twists and turns to build a real business are a critical lesson for today’s companies. At Verdexus we today ascribe to the pure play strategy for startups (less capital required, more focus and easier to explain to investors). Nonetheless, there is much to be said for building a strong base around multiple product innovation.
WORLD CLASS TEAM
While the players have changed over the years, MKS has been blessed by an amazing group of employees, and not just in senior management. For example, at the time of our proposed NASDAQ IPO in early 1997, the investment bankers from Hambrecht & Quist in San Francisco mentioned, upon meeting our senior team, that this was amongst the strongest they have ever seen. Part of this came from hiring both from US and Canada (See GLOBAL APPROACH below) and that includes non-Canadian executives such as Tobi Moriarty, Mike Day, Holger Schmeidefeldt and Frank Schröder. We really did take to heart the maxim that great leadership came from a strong team, as I discussed in “The Power of Two (Or Three)“.
A positive environment led to better gender balance and better results. For example, in 1996 the senior management team of 7, included 3 women. Such a balance, sadly rare even today, led to enhanced results and sense of opportunity across the entire staff.
(l->r) Ralph Deiterding, Eric Palmer, Ruth Songhurst, [TSX VP], Randall Howard, Tobi Moriarty, Mike Day, David Rowley
I am most pleased by the many talented employees at MKS, from co-op students onwards, who have gone on to incredible heights of achievement. I am continually discovering another company that has been built by talent that got its first state of the software business at MKS. I think one approach that has real merit, was the notion to bring top global talent into the business, in part for the mentoring effect this has on other employees. Considering the Waterloo ecosystem in the 1990s, this was particularly helpful in building previously thin functional areas such as marketing and product management.
MKS Team (circa 1992) – Old Post Office, Waterloo
Finally, given recent media attention to weak and/or non-independent boards, I was pleased to have a board that was both global and always able to hold management accountable. As CEO, I can remember many uncomfortable moments when I, or other management team members, were seriously challenged, and that is exactly how it should be.
GLOBAL APPROACH
Perhaps because I had my first software start up experience in the US (building Coherent), it only seemed natural to focus on the entire North American market, and ignore conventional advice to start with the local region, province or country. Even in the very earliest days of MKS Toolkit, when products were shipped by mail and advertised in physical magazines, we realized that every promotional dollar went much farther in the US versus just focusing on Canada. The led to perhaps the first customer of MKS Toolkit being AT&T Bell Labs, which I believe contributed to MKS becoming known across North America in developer circles. The use of 800 toll free numbers across US and Canada, coupled with email, allowed us to work and act like a US company. To me, it always felt similar to the Israeli model for tech companies.
By the 1990s, although we had distributors in Europe (and a small few in Asia), we decided invest heavily in the European market, first from a beachhead in Germany and then the UK. By 2000, Europe represented about 35% of the company’s revenues which later proved a strong hedge to the US-centric meltdown that started in 2000.
CAPITAL
Although MKS pre-dated Canadian venture capital, it did access the capital markets through various vehicles, such as the Special Warrant and IPO, that were common in the 1990s. During my tenure, about $40 million was raised, and I believe that the whole lifecycle raise was in excess of $50 million. During the 1990s, this was the normal cost to build a major entrprise software company to full scale. Today, while our Venture 2.0 methodology and the Lean Startup approach lessens the capital requirements, I still believe that, over the longer term, building a significant business takes much more capital than people realize.
One consequence of this, coupled with the more limited capital available in Canada (at least Ontario), is the tendency of technology companies to exit early – when they are partly built start ups rather than full businesses. In a way, this means that acquiring companies are really only getting a product and development team in a form of outsourced innovation. The downside of this model would seem to me to be the creation and maintenance of far fewer jobs in our region. I would love to see a rigorous study of this effect. In fact, my next post will explore the stage and timing of significant Waterloo region technology company acquisitions.
GROWTH BY ACQUISITIONS
Although MKS never had the NASDAQ public currency, being public on the TSX enabled the 7 acquisitions I was involved in. I would say that acquiring companies was a real learning curve. On balance, we managed to increase our acquisition capabilities over time, but always the results took longer than expected. For example, the acquisition of the AS/400 business from Silvon brought MKS many of today’s largest customers (e.g. HSBC), but the anticipated synergies took 2-3 years or more rather than the predicted 18 months to materialize.
The bigger issue, beyond building M&A expertise, is that today it is harder for companies to go public and have market liquidity for acquisitions than in the 1990s. I’m not sure if 21st century capital markets will ever return to a state where that is again possible.
FUN AND CAMARADERIE
Last, but definitely not least, most days whether travelling to engage the world or back in the office, people had a lot of fun while building a great business. The right mix of “work hard, play hard” can lead to a better overall experience that, in so many ways, enhances overall performance. And, we had some pretty great parties, whether at product launches in California or Europe or simply back home celebrating key milestones for MKS.
SUMMARY
The above observations represent but a small taste of my thoughts regarding the recent MKS acquisition. My hope is that the Waterloo tech ecosystem will witness many more companies being able to transcend the start up phase to become globally leading businesses. The future of our country and region depends on it.
“Nature is by and large to be found out of doors, a location where, it cannot be argued, there are never enough comfortable chairs.” – Fran Lebowitz
I’m a believer that Location Based Services (LBS), coupled with the latest smartphones, will evolve a number of indispensible, and unexpected, killer applications.
That said, it’s pretty clear that those mission critical applications remain to be found. Essentially, the whole LBS opportunity, is a social experiment that early adopters are collaboratively helping to clarify.
It was with those thoughts in mind when I decided to start using some of the popular LBS social media applications, or should I say social games? These included FourSquare, Yelp and Gowalla.
Let me put this in context of other social media applications with which I’ve experimented. Back in 2007, I decided to try microblogging service Twitter, that was then in its infancy, I had low expectations. In fact, I expected to hate it, but mentally committed to give it a two week trial just for the purposes of self education. Over 3 years later, I’m still using it, love it and have found many applications which Twitter excels at – personal clipping service, early information and a sense of what my universe of followees is up to are among them.
FourSquare, although popular, hasn’t (yet) passed my personal usefulness test. And, I suspect most others still consider it more a game than a mission critical application. While there is an element of fun, it seems to be the sort of thing you could easily drop without much loss.
In that context, it surprises me that FourSquare recently pushed a new version (1.7.1) to my iPhone that checked my actual proximity to locations Since then, almost half of my check ins fail to pass this new proximity test, even though I was physically at the location in question. Below, I have re-posted my support request that gives more background.
But, suffice it to say, an application change that, on the surface, seemed sensible, made the application way less attractive to me. That’s doubly deadly in a space which is still finding it’s spot. I’m interested in comments on both the major issue (startups alienating early adopters) and even the specific issue.
I’m surprised the FourSquare has re-written the rules of an emerging LBS service without any notification. I am referring, of course, to the latest upgrade on my iPhone on which checkins deemed too distant from the intended location (by an undocumented and new algorithm) are suddenly deemed ineligible to accumulated points or badges. Because it is so fundamental, I’ve also decided to re-blog this as well, because it illustrates how the law of unintended consequenes can have a huge impact on a young service’s future prospect. Translation: this wasn’t a well thought out change in so many ways.
Why do I saw this? Here are just a few reasons: 1. For those of us who live in rural areas where cellular tower infrastructure is typically much more widely spaced (and often in the 850MHz band vs. the 1900 MHz band for broader coverage at lower densities), the inherent accuracy of locations reported by mobile devices is much lower. For example, at locations near to me, it is not uncommon to have the phone’s margin of error be as much as 4500 m to 6000 m. Although FourSquare doesn’t divulge their required closeness, I think it may be something like 500 m. With that in mind, it is almost by definition that most rural “check ins” will be, starting this week, flagged as ineligible. And, that’s the behaviour I’m seeing. Of course, in many instances GPS lowers this error, but it is surprising how many locations don’t have great GPS reception, such as indoors or in an automobile. 2. By changing the rules of the game on the fly, FourSquare has penalized those checking into locations that weren’t located that accurately in the first place – whether because of the reasons in #1 or because people weren’t told they had to define the location within a certain minimum delta of the actual location. For example, I suspect that people actually defined the location as they were walking toward the actual location, knowing that FourSquare didn’t care where the real actual location physically was. I find this behaviour in about 30-50% of the check ins I’m doing since the change.
FourSquare was an experiment for me, but given these new rules which appear to not have been well thought out for large swathes of geography, I’m considering shutting down my personal FourSquare use.. For something that still provides no direct utility, I really don’t want to have to go back to re-enter all locations information from scratch.
This week I had the pleasure to be the luncheon speaker during the Ignite Entrepreneurship course put on by Guelph Partnership for Innovation, aimed at University of Guelph graduate students from various technical fields including biology, life sciences, materials, agribusiness, etc.
It’s always a thrill to get into a room with 40 or so energetic and bright grad students who are considering going into business. And, kudos to GPI for hosting this.
As an experiment, I broadcast the 3 questions out into social media-verse (Facebook, LinkedIn, Twitter) and got some great UGC that I factored into the presentation.
Here are the questions regarding Money and Startups that I attempted to address:
Do you really need it?
Where will it come from? and
What will you do with it?
I’d be delighted if any of you could comment on the topic as well. It’s an extraordinarily challenging time to startups to find funding right now, and the importance of a healthy pipeline of new companies to our future well being, has led me to dedicate a fair portfion of my social enterprise/sharing time to the issue of the serious funding gap for startups.
Note that while much of this is of global relevance, part of the advice is very specific to the startup funding landscape in Ontario.
Through the 1960’s, 1970’s and into the early 1980’s, Canada leveraged many of its best minds to develop technology solutions that span the great distances and empty spaces in our vast country to position Canada as a world leader in Telecommunications. Today, numerous examples from world leading companies like Blackberry to startups like Viigo or Iotum continue to show world leadership.
Notwithstanding these points of strength, in the early 21st Century, there are surprising gaps in our global ability to compete, given our early leadership. The causes are many from regulation, standards, finance and even investment decisions of major carrier players. While there are individual success stories, like the Blackberry, there are also numerous structural issues that dampen our natural competitive position in this all important industry.
We’ve assembled a diverse team of some of the top players shaping our mobile futureo help us understand Canada’s position in the global mobile industry, where the opportunities lie and changes in policy and investment that might allow us to maximize our footprint in the future mobile industry:
Bob Ferchat – a Canadian mobile pioneer at the epicentre of the aforementioned world class Canadian telecom and mobile industry. Bob was CEO of Nortel Networks and later of Bell Mobility. Now retired, he has maintained a passion to continue Canadian mobile leadership. Most notably, a few months ago, he led a group of investors that tried to buy back Nortel to keep that treasure trove of technology intellectual property in Canadian hands Ottawa Citizen – Fight for Nortel Wireless in Full Swing.
Karna Gupta – From an early career in various senior executive positions at Bell Canada, Karna has held numerous and diverse C-level positions in global mobile and enterprise software companies, including Comverse, Sitraka Mobile and OSS Solutions. Most recently, he was CEO of Certicom through their recent acquisition by RIM, that also included fighting a hostile takeover bid. Karna brings a great international perspective from a diverse set of predominantly software-based initiatives.
Steven Woods – Currently heading up Google’s Waterloo site, which has a significant mobile product mandate including search and GMail, Steve recently returned to Canada from a decade in the Silicon Valley. He was founder of NeoEdge Networks and co-founder of Quack.com (acquired by AOL), both Silicon Valley-Ontario operations. It would appear that Steve and his team are in the centre of the new web-based mobile world that Google is helping to shape.
There is a huge opportunity for Canadian companies, and our entire economy, but to seize that opportunity good policy and well informed decision makers is important. To that end, we’ll answer questions about the mobile tech company ecosystem like:
How did we get where we we are today?
How do we compare with the world?
What policies and initiatives might improve our competitive position?
What are some of the major gaps that Canada might be well positioned to fill?
I’d be very interested if people would comment on any topics or issues you wish to have raised. Even better, come out and ask those questions yourself. It promises to be an insightful evening.
Way back in the early 1990’s, I had the pleasure to be Maplesoft’s first independent, outside Director. At the time, I agreed to join that Board and committed to invest my time based on the strength of the team and the great product opportunity. Their intellectual property was embodied in a breakthrough symbolic computation engine, spun out of University of Waterloo, that had the potential to revolutionize, through automation, many mathematical, scientific and engineering activities.
Sadly, I had the chance to experience first hand how one of the most promising Waterloo technology companies could become embroiled in, and ultimately paralyzed by, a bad case of founderitis. Put simply, otherwise intelligent founders who have launched a great business, sometimes allow ego and personal agenda to get in the way of the long term interests of the business (and ultimately impede value formation for its shareholders). Usually, this involves blindness to what the real needs of the company are, as well as valuing personal control over business success .
The startup world is littered with cases of founderitis, and sadly some of the worst cases involve university professors. It is ironic that the brightest people in the world can be so colour blind to issues outside their area of academic speciality. At Verdexus, many such experiences have taught us that backing the right team of founders as the most important investment criterion of all. It is interesting that the lessons learned at Maplesoft allowed Open Text Corporation, which shared the same founder, to more easily overcome the founderitis problem, and the value creation there since the 1990’s has been impressive.
While the media have minutely documented how years of stalemate and litigation (both threatened and actual) kept this business in a status quo, it is also notable that a new team of investors and management ultimately triumphed, leading to this very successful exit. They, especially Jim Cooper the current CEO and major investor, are to be commended for persevering, in spite of the founder situation, to turn that around and deliver value to all from a great Waterloo-based technology story.
Some of the key lessons are
Founderitis (and the even more insidious variant known as Professor Founderitis) can be hard to overcome. This clearly speaks to the length of time for the great Maplesoft opportunity to reach the level today. Too many years were locked up in battles with people who, instead of focusing on building business and market value for shareholders, including themselves, would seem to rather have control even if it meant “going down with the ship.”.
Strategic value can be achieved even in tough economic situations. Although the current investment and exit climate is probably the worst in decades, the company managed to get (assuming completion of earn-out inducements) somehwere around three times LTM revenues. That’s considered a great multiple in normal times, so for 2009 that should be cause for major celebration. In Maplesoft’s case, a long term relationship with Cybernet Systems as a business partner, made it easy for them to see the strategic value in the acquisition. Furthermore, as a distributor, the loss of Mathsoft product distribution rights heightened their awareness of the vulnerability of not owning intellectual property themselves. Hence this is really story of how a great strategic fit, and a strategic valuation, to match made sense. Such a fit is much more independent of the business cycle.
As much as the media lauds the “quick flip” startup stories, and they do happen, the reality is that building a great business takes time. Business plans never quite work out as expected, and, yes, sometimes, interpersonal issues get in the way of great business value creation. What is remarkable here is that, while undoubtedly Maplesoft lost market share during the period of stalemate to products like Wolfram Research’s Mathematica, the company has managed to forge a strong commercial market, grow market share and ultimately prevail. Clearly this is testament to a great product and a great team of people now driving the Maplesoft opportunity.
Again, congratulations to Jim, his team and the investors who believed in this opportunity. It is rewarding to see, after all these years, this great company deliver a home run.
Bunny: Don’t you think you’d better go? The tortoise has the lead. Max Hare: Say, I’ve lots of time to play. My middle name is speed. SOURCE: Tortoise and the Hare, Walt Disney/United Artists, 1935
While I typically leave reviews of even major new products to others, my personal experience in the much heralded Windows 7 Beta to launch process provides some interesting observations on the difference between large and small companhies in early adopter customer engagement.
Having bought an early Asus eeePC netbook almost 2 years ago and finding that early product both intriguing yet frustrating, I purchased the newly launched HP 2140 HD netbook when it launched in late June. This is a well engineering product that has clearly crossed the useability threshhold for uber mobility.
Like most netbooks, it comes standard with Windows XP Home. This was just fine because I, like the majority of Windows desktop users, wisely passed on the miasma that is also known as Windows Vista.
However, having heard some reports that the Windows 7 Beta was showing some promise and recognizing that running an operating system originally launched in 2003 wasn’t a viable long term strategy, I decided to upgrade to the Windows 7 Beta (now Release Candidate).
Overall, apart from the bugs inherent in any Beta,
problems with Bluetooth headsets that worked flawlessly under XP,
weird security messages when I renamed my user name to correct a typo,
the system has a clean modern design, seems to perform well and certainly is in no way like the Vista fiasco.
Sadly, Microsoft, I quickly learned, made a choice to not provide any upgrade path from XP to Windows 7. Yes, you heard right. In spite of the fact that the majority of users sagely gave Windows Vista the miss, Microsoft chose to provide a seamless upgrade path only for Vista users. While Microsoft perhaps feels that Windows XP is now an obsolete product, remember that most netbook companies are still shipping XP, so XP is truly a current system that people continue to buy. What did this mean to my early adopter experience with Windows 7?
Microsoft documentation proposed a work around called Easy Transfer which really was just a file copy, to another machine or drive, but that process did nothing to smooth the upgrade transition.
Unbelievably, all of my Windows XP applications, settings, configuration, etc. were completely wiped out by the Windows 7 install.
As I mentioned above, things (such as my Bluetooth headset support) that worked before ceased to work properly.
My Outlook Address Book can no longer be accessed, making email composition challenging, because somehow installing Windows 7 RC corrupted my Outlook profile/configuration.
And the list goes on, but this should give you the flavour. What should have been 30 minutes to one hour procedure has turned into weeks of tweaking and general frustration.
So, as one who works with young and hungry startups, I look at this decision through a management decision making lens. Would a startup chose to cause such pain and grief to the majority of their installed base? Not a chance!
However, I have noticed that somehow, and inexorably, nimble startups eventually ossify into larger and more mature enterprises. And the decision making becomes more about risk and ROI and less about the customer. Is this what’s happening at Microsoft?
The history at Microsoft is interesting. Bill Gates, from the earliest days, was paranoid about being eclipsed by the greater resources of companies like IBM. Today, as the desktop operating system become more irrelevant, Microsoft’s paranoia is aimed at other firms like Google, which interesting announced their own OS for Netbooks last week. Perhaps the transition from Bill Gates to Steve Ballmer at the helm, there is less acute customer focus? In any case, no startup would ever even conceive of disenfranchising a customer base so completely.
What do market statistics show us about the size of Microsoft’s problem? A Decmber 2008 report from OneStat indicates that for Operating Systems, Windows Vista has managed a mere 21% compared to Windows XP having a powerful 72% share which is 3 to 4 times larger. The fact the XP is good enough for most customers is a real problem for Microsoft, representing among other things, significant loss of revenue (and relevance).
Is an individual user’s frustrating experience something Microsoft should be looking at? Absolutely. Consider CNET’s recent discussion of respected analyst Garnter’s assertion that Vista probably has put Microsoft into its first major set of layoffs ever: Gartner: Blame Vista for Microsoft Layoffs. This excerpt says it all:
“”Windows Vista didn’t do well. Based on our data, a lot of clients are skipping Windows Vista,” said Neil McDonald, an analyst at Gartner. Indeed, nearly every other major analyst firm found a similar lack of Vista adoption, with Forrester Research likening the (operating system) to the failed New Coke.”
Even a big and market leader like Coke learned from their mistakes. Will Microsoft return to its roots and see the light with Windows 7?
“Fortes fortuna adiuvat” – “Fortune favours the bold” – Latin proverb
The current economic meltdown has unleashed brutal forces acting on all aspects of the business world, but certainly innovative startups in fields like software, web, wireless, green technologies and life sciences are at grave risk. In Canada, our startups have generally been world class innovators, but severely underfunded when benchmarked against US and leading European countries.
Not only has the credit crunch forced most Angel Investors to the sidelines, but the supply of Venture Capital (VC) in Canada has contracted almost to the vanishing point.
Having started my first software company in the mid-1980’s, I am well aware that although VC money was available and well established in the Silicon Valley, VC money for knowledge-based startups such as mine was then nonexistent in Canada. Through the 1990’s, however, Canada started to build a cadre of new funds that showed early promise of replicating a US style VC funding ecosystem
In the early millennium when Verdexus investigated raising a institutional fund to fill a gap in the Canadian market with our “hands on” model and accessing global capital sources. It gave our partners a chance to look to VC best practices on a global basis and figure out how to apply to the Canadian context. While we didn’t proceed at that time, I’ve had the good fortune to work on projects with top VCs from the US and several European countries, giving me a global perspective on how Canadian Venture Capital measures up.
Sadly, I believe that the 2000/2001 tech bubble, or dot com meltdown, stopped the maturation of our VC industry in its tracks, a body blow from which the industry has never recovered. It is to this time that the root causes of our current VC meltdown can be traced. A few of the main reasons holding the VC industry back can be summarized as follows:
Impact of the Labour Sponsored Investment Fund model on our VC ecosystem.
Lack of balance between financial and operational skills: The Banker Effect.
Lack of International Funding discipline in our VC industry.
I will explore each of these causes in turn.
1. Labour Sponsored Investment Funds
Labour Sponsored Investment Funds (LSIFs, also known as Retail Venture Capital Funds), have been a particular sore spot, as a 2005 Globe and MailReport on Business article “Labour-sponsored Love Lost” points out. Considered good public policy when launched in the late 1980’s, both Federal and Provincial governments gave individual (retail) investors a significant tax incentive (up to 35%) to invest up to $5 000 with a minimum 8 year hold period. In essence, many funds totalling hundreds of millions of dollars were raised by firms like VenGrowth, Covington and Growthworks as were numerous very small funds.
Lacking the inherent financial discipline imposed by typical venture capital structures, in which several “funds of funds” (legally dsignated as Limited Partners, or LPs) invest in a fund managed by a General Partner (or GP). The LPs in this sense have much leverage, not just in choosing their GPs, but also in ongoing oversight, not to mention the choice to re-invest in the next fund raised by the GPs. This LP/GP structure is the model employed world wide and has generally stood the test of time.
The thousands and thousands of retail investors in a typical LSIF exert no such control and hence we’ve seen Management Expense Ratios (MERs) as high as 4-6% versus the 2% private equity industry norm and Carried Interest (the portion of the investment gains shared by the fund) as high as 30% versus the 20% norm.
More importantly, although at its peak, more than half of Canadian VC money was in LSIF funds, returns were, as Doug Steiner says, “lousy.” How lousy? Studies show that average fund returns, also called Internal Rate of Return (IRR), are negative. The best fund appears to have produced a measly 1% IRR. In the US, funds aim for 30% and there is a long term track record of many funds in the 18-20% range.
Undoubtedly, individual investors didn’t have a lot at stake with those huge tax credits and it can be argued that LSIFs encouraged loads of job creation in the all important knowledge economy. All of that is true. My main concern is that the attraction of the LSIF model impaired the formation of a more mature VC ecosystem based on the normal LP/GP model mentioned above.
2. The Banker Effect
Credit: AIAlex.com
In the US, both in California’s Silicon Valley and in the Route 128 area around Boston, the VC industry has always been populated by a healthy mix of the financially oriented fund managers coupled with serial entrepreneurs who have founded and build technology startups. The composition of the partners at Canadian VC funds has always been different than this international norm, having many more banker types than operators. The experiences Jonathan Geist relates in the Canadian Business article are symptomatic of this difference. Too much focus on the numbers is like looking in the rear view mirror when startups need to be focused on the future – building market share, refining partnerships and developing strong go-to-market execution.
Again, I believe that this gap can be attributed to us being a less mature VC and startup ecosystem. In the late 1980’s and 1990’s finding seasoned technology startup operators would have been almost impossible. Most were still building their first startup. However, had things unfolded as they should have, many of the startup founders from the 1980’s and 1990’s should now be partners at Canadian VC firms. That didn’t happen because the dot com meltdown appeared to remove the ability to the industry to make changes or take risks. Ironically, this exacerbated an already more conservative VC culture here in Canada, and this more risk averse approach actually contributed to the lower IRRs seen when Canadian VCs are compared to their US or European peers.
3. Lack of International Money
The fledgling LP/GP VC industry of the 1990’s was funded by a relatively small ecosystem of LPs, such as OMERs, Caisse de Depot, Teachers, CPP, BDC, etc. Thus every VC fund was essentially not differentiated by its LP composition. In essence, a closed group of Canadian fund of funds all were chasing this same relatively small asset class. Furthermore, the relaxation of Canadian content rules coupled with these aforementioned low IRRs, sent the Canadian LPs looking elsewhere (mostly abroad).
What is the right recipe to change this situation? Quite simply, access to more global sources of money. The thousands of US, European and Gulf institutional fund of funds investors have largely ignored investments in Canadian VC funds. This is partially because of the chicken and egg of lower IRR returns. But, more fundamentally, it is primarily because the Canadian startup and VC ecosystem had low visibility to these international funds. Several years ago, I spoke to a large €6 billion LP fund at EVCA in Barcelona, that had investments in 40 tier 1 VC firms in each of the US and Europe. Ironically, that LP’s sense of the Canadian technology scene was limted to Nortel. Since Nortel hasn’t really been a star for many years. Clearly we have a long way to go market our great technology stories to the world.
The Way Forward
Unlike this sign, I don’t want to end this piece on a note of doom and gloom. Nor do I want to leave the impression that there aren’t very talented people in the Canadian VC industry. Nothing could be further from the truth – our long term VC gap arises from long term structural challenges, such as a lack of discipline as imposed by global LPs and not having reached the proper banker/operator mix. There are other factors, including the small population and large geography unique to Canada, but all can be and should be overcome with the proper model.
We already have a few outliers in our funding ecosystem. Being optimistic and entrepreneurial, I’m convinced that many talented individuals will find ways to, little by little, to invent and rebuild a healthy network of startup financing alternatives. As I’ve argued in other blog posts, there is a role for governments. However, that role isn’t to pick winners or to enter the VC business directly, rather it is to be a catalyst to the process by streamlining (securities) regulation and taxation.
As a stakeholder in the success of knowledge-based startups, what do you think?
Bill Gates, partly at the instigation of Warren Buffet who added his personal fortune to that of Gates, left Microsoft, the company he built, to dedicate his life to innovative solutions to large world issues such as global health and world literacy through the 
Started by Paul Brainerd, Seattle-based 
Jeffrey Skoll, a Canadian-born billionaire living in Los Angeles and an early employee of 
Waterloo’s own Mike Lazaridis aims to transform our understanding of the universe itself by investing hundreds of millions of dollars into 
(l->r) Ralph Deiterding, Eric Palmer, Ruth Songhurst, [TSX VP], Randall Howard, Tobi Moriarty, Mike Day, David Rowley
MKS Team (circa 1992) – Old Post Office, Waterloo
Bob Ferchat – a Canadian mobile pioneer at the epicentre of the aforementioned world class Canadian telecom and mobile industry. Bob was CEO of Nortel Networks and later of Bell Mobility. Now retired, he has maintained a passion to continue Canadian mobile leadership. Most notably, a few months ago, he led a group of investors that tried to buy back Nortel to keep that treasure trove of technology intellectual property in Canadian hands 
Karna Gupta – From an early career in various senior executive positions at Bell Canada, Karna has held numerous and diverse C-level positions in global mobile and enterprise software companies, including Comverse, Sitraka Mobile and OSS Solutions. Most recently, he was CEO of Certicom through their recent acquisition by RIM, that also included fighting a hostile takeover bid. Karna brings a great international perspective from a diverse set of predominantly software-based initiatives.
Steven Woods – Currently heading up Google’s Waterloo site, which has a significant mobile product mandate including search and GMail, Steve recently returned to Canada from a decade in the Silicon Valley. He was founder of NeoEdge Networks and co-founder of Quack.com (acquired by AOL), both Silicon Valley-Ontario operations. It would appear that Steve and his team are in the centre of the new web-based mobile world that Google is helping to shape.
Founderitis (and the even more insidious variant known as Professor Founderitis) can be hard to overcome. This clearly speaks to the length of time for the great Maplesoft opportunity to reach the level today. Too many years were locked up in battles with people who, instead of focusing on building business and market value for shareholders, including themselves, would seem to rather have control even if it meant “going down with the ship.”.
Credit: AIAlex.com
Unlike this sign, I don’t want to end this piece on a note of doom and gloom. Nor do I want to leave the impression that there aren’t very talented people in the Canadian VC industry. Nothing could be further from the truth – our long term VC gap arises from long term structural challenges, such as a lack of discipline as imposed by global LPs and not having reached the proper banker/operator mix. There are other factors, including the small population and large geography unique to Canada, but all can be and should be overcome with the proper model.
4 Aug 2012
0 CommentsHave Lean Startups Helped Us Scale Larger Technology Companies?
Building larger technology companies is critical for our future economic well being, yet somehow we seem to pay more attention to the seed and startup phase. This post and a subsequent missive, Wisdom from Recent Waterloo Technology Acquisitions, aim to analyze some recipes for building technology businesses to scale first from the perspective of recent companies and then specifically through the lens of local acquisitions. This pair of posts will be based on extensive data, but the findings are intended to start discussion rather than be the last word.
The importance of building new, innovative, and large, companies can’t be underestimated regionally, provincially and nationally. Here in Waterloo, with perhaps 10 000 jobs at a single behemoth, Research in Motion, the notion of job creation is particularly topical simply to lessen our dependency on such a large company.
My sense is that, of late, most of the focus centres around making startups: small, energetic and entrepreneurial software, web and mobile companies, some simply building a mobile application. And, even with the current notion of Lean Startups or our Venture 2.0 approach, there is no question that building such early stage companies is probably an order of magnitude cheaper than it was back in the 1990’s While undoubtedly a good thing for all concerned – founders, investors and consumers all have so much more choice – has this led to a corresponding increase in new major businesses in the technology sector?
I see this as more of a discussion than a simple answer, and thus to start, I include the following table of my sense of how the numbers have changed over time. The following table provides some idea of how company formation has trended over the last 25 years, through the lens of scale rather than acquisitions:
[table “” not found /]NOTES ON DATA:
INITIAL INSIGHTS:
This data, while helpful, can never provide a complete answer. However, it can guide the conversation around what I see to be an important economic mission for our region and country – that is, building more significant technology businesses. I’m sure there are no easy answers, but in shaping policy, it is important to base decisions on informed debate and research.
To that end, I would offer the following thoughts:
Canada holds many smart, creative and hardworking entrepreneurs who will undoubtedly rise to the challenge of building our next generation economy. Meanwhile, I’d welcome comments, suggestions and feedback on how we can build dozens or more, instead of a handful, of larger technology companies in our region.