In the News...

James Bagnall

High-tech firms that cross the $100-million-a-year revenue threshold are a rare breed. In Ottawa, you can count them on your fingers -- Newbridge, Mitel, Corel, Cognos, JDS Uniphase, Entrust and Lumonics. Getting there involves supreme ambition, discipline, good timing and no small measure of luck.

Over the past three years, venture capitalists have invested more than $3 billion in 100 or so Ottawa startups in the expectation that some will grow very large indeed. The city's tech economy would benefit enormously if a handful of these could transform themselves into winners -- which is why half-a-dozen of the city's research and economic agencies, led by the Ottawa Centre for Research and Innovation, recently created a task force to help create the right conditions for takeoff.

To provide some insight into what it would take for this to happen, The Citizen has examined the game plans of five startups that are showing exceptional promise. This is not to say that they will all surpass $100 million in sales one day; in fact, the odds are that one or two will fall short. The virtue of these firms is that each has already landed significant customers. They also offer examples of business plans that are ''non-linear'' -- they have the potential to grow very quickly.

For one thing, all are aiming at substantial business sectors. If there is a knock against Ottawa's entrepreneurs, it is that too many limit themselves to smaller niches. Atsana has no such modesty; it wants to be the world's leading supplier of multimedia processing chips for cellphones. Catena Networks hopes to give Alcatel -- the No. 1 player in digital subscriber line technology -- a run for its money by changing its industry's rules.

In keeping with such hefty ambitions, each of the five firms featured here has constructed an international sales network capable of handling dramatic increases in the number of customers.

N-able, a virtually unknown software developer, is rushing to fill the void in a multi-billion-dollar-a-year opportunity for supplying special software tools to outsourcers -- companies that operate networks on behalf of others. Databeacon, another software developer with high ambitions, has increased the number of its worldwide sales partners during the past two years from five to 82.
Without exception, the leaders of the five firms have loads of relevant experience. Ceyba CEO Scott Marshall was a key executive at Newbridge from its founding in 1986 to 1999. Alex Leupp, the top gun at Atsana, has run startups before, as well as large units within high-tech multinationals.

All these characteristics -- ambition, sales leverage, experience -- are probably essential for success, but not necessarily sufficient. Achieving the kinds of breakthroughs that can produce large firms requires a confluence of events whose impact often can't be predicted. These can include anything from wrong-headed moves by competitors to changes in national regulations or laws.
Indeed, it's likely some of the fastest-growing firms in Ottawa by the end of this decade will emerge from a group of well-run startups not included in our sample -- chip designers, metro-optical firms, optical component startups, wireless outfits, networking companies, among others which have yet to post revenues. Plenty of technology bets have been made, increasing the odds that hits will emerge from Ottawa.

It's also worth noting that Ottawa's earliest champions got large using different routes. Newbridge experienced explosive growth almost immediately, while Mitel, Corel and Entrust took a few years to warm up. JDS and Cognos, for their part, grew slowly and quietly for many years before reaching the take-off point.

Of course, the champions of Ottawa's tech industry -- including Eli Fathi, chairman of the newly built task force -- don't particularly care how the next wave of startups gets big; just that it does. The five leaders pictured on these two pages are trying to make it happen by just getting on with the job.

Semiconductors
Atsana
Founded: 1998
CEO: Alex Leupp
Product: Multi-media chips for cellphones
Venture capital: $16 million U.S.
Employees: 40

When venture capitalists talk about startups with prospects for rapid growth they often use the term "non-linear potential.'' Ottawa-based Atsana Semiconductor has it in spades.

The odd thing is, most people have never heard of this chip firm. Partly, this is the result of a recent name change -- it used to be called Lumic Electronics and run by Ottawa entrepreneur Luc Lussier. But mostly the firm's quiet ways are by design. When Alex Leupp took over as CEO about a year ago, he could see that Atsana "was running out of money and didn't have a product.'' The priority was to complete what he saw as an intriguing R&D program and then convince customers to test the product. Getting the Atsana name known was last on his list of priorities.

That's starting to change. Atsana is in the business of making low-power chips that can transform cellular phones into cameras -- capable of taking high-resolution photographs or offering full-motion video. It's the sort of niche that can grow very quickly or not at all. Cellular handset manufacturers clearly seem interested.

Atsana has already landed a contract to supply its chips to one of Europe's top three cellular manufacturers -- meaning Nokia, Siemens or Sony Ericsson. Given Leupp's previous role as head of Siemens' $1-billion-a-year components unit in the U.S., Siemens is probably not a bad bet. But Leupp declined to identify the customer, citing confidentiality agreements.

The value of this deal depends entirely on the marketing prowess of the manufacturer. Leupp says his customer estimates it will sell anywhere from three million to seven million handsets next year. Atsana pockets about $10 U.S. for every handset sold.

The units aren't expected to be offered to consumers until next spring. "The lead time in this industry is 10 months,'' says Leupp. "So if you don't have your chips already designed into a handset, you're not going to sell much in 2004.''

The European customer is just the beginning of Atsana's aspirations. "There are other customers in the pipeline,'' says Leupp. The startup is also developing a broader family of chips aimed at various classes of cellphones. For example, the chip being used in the European manufacturers' products has been designed for handsets with medium-sized visual displays. Others are in the works for displays of various sizes and clarity.

Atsana's success to date is based on some calculated risks that have resulted in a very efficient chip. The engineering team decided early on to base its designs on the latest-generation, 0.13 micron chip-making technology. This involved a significant technical risk but allowed Atsana engineers to develop a product that consumes substantially less power -- always an important consideration for cellphone makers.

Like most other Ottawa-based tech firms, Atsana contracts out the manufacture of its chips to Taiwan Semiconductor and Manufacturing Co., which means the trick is to make sure the design is compatible with manufacturing processes. Atsana's chips worked the first time, allowing its sales people to start showing them to technical evaluators at Nokia, Siemens and Sony Ericsson last fall.

The other key for Leupp was winning an agreement from investors to put in new money if the company could actually put together a workable chip. By last fall, when early versions were in the hands of potential customers, Atsana's backers kicked in another $3 million U.S. to help funding the marketing push.

Optical systems
Ceyba
Founded: May 2000
CEO: Scott Marshall
Product: Long-haul optical systems
Venture capital: $108 million U.S. to date
Employees: 200

It seems like part of another era. When Ceyba revealed in May 2001 that it had landed $93 million U.S. in venture financing -- a record for Canada -- CEO Scott Marshall said he had enough money to last "well into 2003.'' Surely by then, the thinking went, telecom carriers would finally be shelling out money for Ceyba's principal product -- long-haul optical systems.

The thinking was wrong. Ceyba, along with its direct competitors Innovance Networks of Ottawa and Columbia, Md.-based Corvis, have had to content themselves mainly with technical trials. Because these don't usually involve money changing hands, Ceyba and the others have been trimming staff to preserve cash.

However, startups of this high calibre know that if they do succeed in this market, they'll become significant firms. They're in the business of selling complex systems that cost millions of dollars each. Just one large customer -- Sprint, say, or Bell Canada -- and they'll be well on their way towards topping $100 million per year in sales.

The venture money has been betting on Innovance, which has consistently won richer valuations than Ceyba and is considered to be staffed by members of Nortel's former "A'' teams when it comes to senior management and engineering alike.

But Ceyba may be set to deliver a surprise, thanks in part to Marshall, a high-energy engineer and former executive with Cisco Systems and Newbridge Networks.

Marshall was enticed by Ceyba's five founders -- mostly ex-Nortel employees -- to return home and try his hand at another startup. Marshall was one of Newbridge's first employees and played an instrumental role in helping to build a $1.8- billion-a-year company from scratch between 1986 and 1999. After signing on as Ceyba's CEO early in 2001, Marshall convinced several ex-Newbridge colleagues to help him create another winner.

He may be closer than he can let on. Marshall declined to discuss the particulars of Ceyba trial programs, citing non-disclosure agreements. However, The Citizen has learned that a major U.S. carrier has quietly selected Ceyba's technology for final testing in its network. All other contenders have been dropped, which means it's up to Ceyba to demonstrate it can deliver the goods in a "live'' network. Assuming it does, Ceyba could begin recording significant revenues before yearend -- and would be well placed to accelerate sales after that. A significant caveat: it's been common enough in the telecom industry for carriers to ''award'' an exclusive deal, only to back out altogether. It could happen here to Ceyba.

A win by Ceyba would go against conventional wisdom, which holds that large carriers simply won't place orders for key technologies with untried startups. However, this sentiment ignores the potential benefits of new technologies developed by Ceyba as well as the fact that traditional suppliers such as Nortel have virtually halted work on comparable products.
Ceyba, like Innovance, has devised next-generation systems that substantially reduce the number of conversions necessary to speed data between optical and electrical parts of the network. The result, in theory, is a simpler, more elegant network -- and one that's less expensive to operate.

"This is a market that's moving so slowly, the big guys (such as Nortel) have taken their attention off it,'' says Marshall. "That's given us an opportunity to move in.''

For Ceyba, the calculation is stark. If it wins, it wins big; but if Ceyba doesn't pull down its revenue victory soon, then the issue becomes survival.

Access technology
Catena Networks
Founded: 1998
CEO: Jim Hjartarson
Product: Integrated voice and DSL systems
Venture capital: $192 million U.S. to date
Employees: 250

If a yearbook for Ottawa-based startups had been published in the late 1990s, Catena Networks would have been the one voted most likely to succeed. Since its founding in 1998 by five ex-Nortel employees and managers, Catena has attracted more venture capital and paying customers than any other in the region. In the current environment, winning the customer count could be seen as a small victory. But Catena -- which specializes in technology that speeds digital information over ordinary copper wires -- is finally showing signs of turning its early promise into hard numbers.

It sold its 1,000th access system earlier this year and appears to be stealing at least some business from industry frontrunner, Alcatel SA of Paris. Catena chief executive Jim Hjartarson declined to provide specifics about his company's revenues. But two months ago he told a group of venture capitalists in Montreal that he expected his company would top $40 million U.S. in sales this year and $70 million U.S. next year. If the Canadian dollar settles in around 70 cents, that's $100 million Cdn. for Catena in 2004.

Equally impressive, Hjartarson says his company's operating margins are "significantly positive.'' He's calling for net profits in the first quarter of 2004.

Considering that Catena is selling its access gear mainly to telephone carriers -- a group of firms that have severely trimmed spending on new networking products -- Hjartarson's feat is all the more surprising. How did he pull it off?

There's no single answer. Catena has got a lot of things right all at once. For starters, the core management team has worked together -- at Cadence Design, Nortel and Catena -- for more than a decade. Except for a brief period a few years ago when Hjartarson opted for a secondary role, they have all worked for the same boss.

The team's long experience with chip design and access technologies no doubt contributed to the creation of a product line that offers carriers the ability to offer plain vanilla phone service and high-speed data services (digital subscriber line technology) for roughly the same price as phone service alone.

Catena has also assembled a top-notch board of directors. A key catch last year was Krish Prabhu, who used to run Alcatel's North American operations out of Texas. Since Alcatel controls a healthy majority of the DSL market, Prabhu's addition was taken as a sign that Catena will be a strong competitor is this field.

It hasn't been an easy ride for Catena. Early revenue projections failed to pan out when telecom spending crashed, forcing the company to trim about 150 positions from the peak employment of roughly 400. There were two things that gave Hjartarson reason for hope during the worst of the downturn. The first is that the DSL niche did not fall as far as the industry's fibre-optic spending; the second was that Catena's revenues never stopped growing when measured year-over-year.

Even in 2002, when the whole industry seemed in a free fall, Catena landed $12 million U.S. worth of sales, with the momentum picking up throughout the year.

Now, with his company eyeing profits and solid growth, Hjartarson himself is finally growing more comfortable with his role as CEO. "I kind of grew into the position,'' he says.

Hjartarson returned a few days ago from Supercomm, his industry's major trade show, pumped by the reaction of customers there. What's next? "After we turn profitable,'' he says, "we'll add to our product lines and expand our customer base beyond North America.''

Enterprise software
Databeacon
Founded: 1995
CEO: Andrew Coutts
Product: Analysis software
Venture capital: $10 million plus
Employees: 40

Andrew Coutts was a little astonished at the reception he got when he took over the top job at Ottawa-based software specialist Databeacon in the spring of 1999. One of his first tasks was to line up a second round of venture financing for the eight-year-old startup. "People just told me, 'Sorry, I'm investing in photonics now, not software,''' he recalls.

He was saved, temporarily, by the onset of what he calls "bizarro world'' -- those heady days when dot-com customers would drop cheques into his hand for hundreds of thousands of dollars for the right to license Databeacon's business intelligence software. Many of these customers went bankrupt in the wake of the dot-com crash.

All of this served as a wakeup call for Coutts' conservative instincts. For the past three years, he has concentrated on replacing his lost dot-com revenues by systematically building a more solid base of customers.

The result since 2001 -- Databeacon has boosted its sales network from five partners to 82 while the number of countries covered has jumped from four to 26. A partner is any firm that sells Databeacon software to a third party, whether directly or as part of another software application.

Databeacon pays each of its partners a fee representing up to 25 per cent of gross sales. The bonus is a network of agents who can push through enormous quantities of software if the demand is there.

"We've now got the leverage of these organizations,'' says Coutts. "When things turn up, we've got a model that can sustain 100-per-cent growth year after year.''

Will things turn up, though? The early signs are encouraging. During its most recent quarter, Databeacon reported a tripling in the number of deals compared to the previous quarter. Revenues for fiscal 2003 (ending Sept. 30) are expected to top $5 million, up more than 30 per cent from last year.

While this sounds a long way from serious money, much of the hard work has already been done. Coutts points out that it takes more than a year before a new partner begins to pay off in terms of good sales. Partners must not only be trained how to use Databeacon's software. They need an incentive to push it as well.

Databeacon has been giving it to them. First, there is the 25-per-cent fee. Second, whenever Databeacon lands a deal through one its own employees, it will often encourage that customer to use the reseller for ongoing help and maintenance.

The approach is similar to that of Cognos, which also relies on a mix of employees, outside agents and technology partners to land its sales. It's no accident. Michael Potter, the former CEO of Cognos, was an early financial backer of Databeacon, which used to be called InterNetivity. Neal Hill, a former Cognos executive, is a Databeacon board member.

Although Databeacon and Cognos both develop business intelligence software aimed at helping firms access and analyze data, they tend to target different parts of the market. Databeacon is aiming at small-to-medium-size firms while Cognos goes after larger accounts. When Cognos entered the niche in the late 1980s, it took years to establish itself before sales accelerated. Coutts hopes a similar pattern prevails in his end of the BI market.

"We've got a product that's ready and easy to use and we've got the channels to move it,'' says Coutts. "We've built a company that can scale rapidly.''

In case it doesn't, Coutts has the luxury of presiding over a firm that is generating cash flow -- Databeacon for now doesn't have to worry about raising more money.