Thursday, October 25, 2001
Starting the start-up
Roundtable panel looks at challenges of going from brainstorm to business
Gary Will, Special to the Record
The status of this area as a high-tech centre depends on the continuous creation of new companies. Successful start-up firms are needed to grow the local economy and build the critical mass necessary to sustain a technology cluster.
Even with the increased attention to supporting the creation of new companies, forming a start-up and taking it from something that has interesting technology to a flourishing business with successful products remains one of the toughest obstacles an entrepreneur can face.
Most of this region's largest home-grown tech firms were formed in the 1980s. The list includes Research In Motion, Watcom (now part of Sybase), Descartes, Dalsa, MKS, Virtek, Open Text (technically, its predecessor company), and Northern Digital.
The 1990s saw the launch of Mitra, PixStream, PrinterOn, and BlueGill (now CheckFree i-Solutions).
Today, there are more local resources available to help start-up companies than ever before. There are regularly scheduled networking opportunities, mentoring services, and support services with high-tech experience.
Venture capital firms from across the country are paying attention to what's happening here and are looking for deals. The area is now home to two professionally managed firms that specialize in seed stage financing.
Recently, a few companies have received significant seed and early-stage capital. Ardesic, ADexact, Intellitactics, Sirific and Sandvine have each attracted millions of dollars in investment money.
The Record brought together five people who have worked in or with high-tech start-ups to discuss the biggest challenges faced by emerging companies in the area.
On finding people
Chris Howlett (Freedom Intelligence: Finding the right staff is always tough. There's lots of people around to hire, but we've had difficulty finding the kind of people we really want.
Tons of really good programmers graduate from the University of Waterloo, but there's a need for software engineers. There's a difference. It's tough to find people who know how to plan and execute software development tasks.
David Wang (Handshake Interactive): We've just started a software engineering program at UW. We accepted our first stream of students this year but they won't graduate for another three years.
Brad Siim (Sandvine): We aggressively hire co-op students every term and by the time they're graduating, I would say that more than half of them are doing software engineering.
Wang: Because of our ties to the university, we haven't had difficulty in finding people. Money is the key issue for us.
We've got people waiting at the door right now that we can hire as soon as we get funding. We're finding our University of Waterloo ties to be extremely valuable.
Andrew Abouchar (Partner in Tech): Our challenge has been finding sales and marketing folks and senior managers rather than the technical staff. We've seen some great success stories locally and tied up in those companies are a lot of experienced senior management and marketing management people. I think of the folks at PixStream. There were a lot of resources there and at some of the big companies.
For the young companies, it seems that there's a wealth of technical knowledge, but when you look at the level of expertise at the senior management level, that's what separates the companies that will do very well from the companies that will struggle a bit.
Siim: It goes through phases. It starts with the technical challenge and then very quickly it moves to marketing.
We're doing a telecom product, and there's not very much telecom marketing talent in the region.
Finding salespeople has been tough, but our basic approach is to meet the market wage and have a cool product.
Howlett: We find quite a lot of recent immigrants are available. There is a language barrier, but this year we had ESL (English as a Second Language) people come in and work with them.
I think PixStream did the same thing with the same consultant. The results from that were really good.
Siim: I called the YMCA and they sent me to the consultant. No one had ever asked her to do that before. I found that it wasn't just language. There are huge differences in culture.
One thing where we had trouble with new immigrants from certain regions was that they wouldn't tell you when they didn't understand something.
One of the things we worked on with the ESL consultant is they've got to tell us if they don't understand. Otherwise, we're going to have to let them go.
Abouch-ar: Encouraging folks to come to town has been a challenge, but it's an absolutely fabulous way of life here.
Paul Weber (Business Accelerator Program): That's an issue that Communitech tries to address. I typically see companies at a very early stage where there's just a technical person involved.
Many of them are first-time entrepreneurs and they haven't got the "been there done that" that a Sandvine has coming out of the blocks.
They tend to focus on the technical side and they need to attract business people. The spin-outs like Kaparel and Sandvine are going to accelerate this community because they've got the people who have been through it.
We're still in the phase where we have to attract people with those talents from out of town. The people coming out of university can fill the technical requirements, but people are still needed to fill out the business teams.
I'm seeing a bit of a shift lately. I get a lot resumés from people who want to get involved with early-stage companies and I've seen a lot of high-quality people. Typically, they are Canadians who have been working in the United States and are looking to come home. They're looking for a tech community and there aren't many choices in Canada. You can go to Toronto or Ottawa, but there aren't many tech clusters.
Howlett: One of the challenges with the companies I've worked with has been strategic marketing -- having the right thinking processes to figure out how to go after markets.
That's been a gap that we've had to fill by using really good talent from Toronto.
Wang: We've had exactly the same experience.
The marketing people we're working with right now aren't from here. They're both in Toronto. Which makes it tough since everything is by e-mail.
Siim: For less strategic marketing positions, like product marketing, that's a real tough area to hire people.
We've been pretty successful having people transition out of the engineering area.
Support services with savvy
Abouchar: It's very clear that we have lawyers in town who are every bit as good as what you'll find in Toronto. And they're smart enough to know what they don't know, so if you have patent issues, for example, they may go to associates at other offices in the firm to deal with that. But you're well served
Howlett: I think we've got some good legal people in town. Really good ones.
Siim: They're very busy.
Wang: And the same names always come up.
Abouchar: Some people think, "Oh, I'll become a tech lawyer," but they miss the nuances of tech. So you do see the same names, absolutely. The same four or five guys.
Weber: Some of the start-up companies that come to us are using the same lawyers they used to buy their house or do their will. You really need to find the ones who have that experience and that talent.
For accounting services, there are people in town who specialize in helping start-up companies and they're willing to get hands-on. And then, obviously, there's the national firms which are all here.
Abouchar: With recruiting, I've been using some folks from out of town for the higher level stuff.
Nothing against the people in town. I've been working actively with a long-time associate in Boston who has what he calls "Project Tundra" -- expatriate Canadians who live in Boston or the Valley and might be thinking it's time to come home.
It's probably easier to convince someone to come to Waterloo if they're already considering making a move.
Siim: There's maybe three different levels of recruiting.
First, there is executive recruiting, which I think we've done out of the U.S.
The second is marketing recruiting, which we usually do out of Toronto.
And then there's engineering recruiting where anybody can send me resumés.
It's always the same two or three people who send engineers to us, but we'll hire from anyone.
Weber: I don't think it's important that the recruiters are physically located here as long as they are committed to the area and can bring the right talent to town.
Abouchar: They have to be willing to sell what we've got. People who can really talk up how great it is to live here.
Thinking about the product
Howlett: Transforming technologies into products that have a focused market that you can touch and feel, that's always a challenge.
We've made some big strides there. About a year-and-a-half ago, our company was really viewed by the founders as a horizontal technology -- anybody should want it. It's a long way from there to getting a cheque from a customer.
Abouchar: Going from research to revenue is like crossing the valley of the shadow of death.
I look at Brad (Siim), and that the things you've done with Kaparel and PixStream, and it's pretty clear that in your organization one of the pieces of corporate intelligence is how you do that.
It's not random chance. There's process to how you're going to find out what is compelling to customers and how you're going to approach them and how you'll get that 20 per cent of functionality which delivers 80 per cent of the value of the product. That's a huge challenge.
Siim: For us, it's more a matter of getting to a focus. There's lots of products.
In doing Sandvine, we looked at a whole bunch of different possibilities. The challenge is to get the right blend -- people skills, interests, market -- and then trying to nail down that feature set and go after a focused market.
You've seen sales campaigns for products that can do anything.
When you're sitting across the table from that, you're like, "This is vapour. Can you solve my problem?"
Howlett: When you say you do everything, the implicit message is that you do nothing.
With any given technology there's a million things it can do and it's a hard choice to look at it and decide what you're going to do and what you're not going to do.
Abouchar: And that, I think, is a bit of an epiphany for the entrepreneur. How many folks have sat in my office and told me, "Our technology has that application, and that application, and that application."
To ask them to focus on one means cutting off half their family. It's really hard for them to do it.
Weber: I heard [RIM co-CEO] Mike Lazaridis speak once.
There are so many cool things you could build into the BlackBerry and he always has to get reeled in by the people who have a market focus in his organization.
You need an understanding of what people are willing to buy.
Siim: You don't want to get lost in not making a decision. Make a decision, but don't fall in love with it.
We try to train our whole company to think like that. Make a decision and if it's wrong -- which it might be one out of 10 times -- do a course correction quickly. Don't be afraid to say, "Hey, I made a mistake here."
Weber: There are so many opportunities out there, but you have to train your sales staff.
They can't just walk in and sell a general thing.
Abouchar: And if you are driving towards a specific application, that affects the way you hire salespeople.
If you end up in an enterprise sale, don't go hire retail channel sales folks because you're heading down a rat hole.
You don't want to have to build two or three different sales forces in the hope that one sticks.
Wang: A little while ago, we were pretty scattered.
We had just come out of the university, where you were trained to look at things horizontally rather than vertically.
Our approach has been to go to consultants within these target verticals and bounce things off of them. That's been extremely helpful.
We were initially looking at six markets and now we've got it down to two. Now it's just a matter of figuring out which is potentially more lucrative.
Getting that first customer
Siim: Getting your first customer is a challenge. At PixStream, we needed an incumbent telco to buy our product. We were very fortunate that one of the leading telcos for leading edge technology is in Canada, NBTel.
So we got our product into their laps and they were looking at doing video, which was perfect for us.
You put yourself in the right opportunities as many times as possible and then there's a little luck.
The telco industry in Canada is a small community. But the downside to that is, if you make a mistake there, you're in trouble. Now you've wiped out all of Canada.
When we were winding down PixStream, we got some interesting feedback from our first customer.
They said what finally sold the system to them was when we said, "We guarantee you that we will not let you down. We will be there as long as it takes to make you successful." And they believed the person who was presenting to them.
We had a wrap-up interview at the end, and they said we did what we promised.
But it was horrifically expensive. We put in a lot of resources to make them successful. Whatever they wanted, we did.
Howlett: It's an investment that you have to make to get that first customer.
Siim: We put a whole team on that first customer. Everybody worked on it.
Abouchar: And later how many reference calls did they take for you? And how many site visits did they host?
You get your investment back.
Siim: So that would be my advice. Make sure your first customer is a good customer and then invest what you need.
Every problem is our problem, even if it's not our product that's causing it. Whatever problem it was, they could phone us and we would send somebody there to fix it.
And you're going to end up doing the same thing.
Weber: The biggest problem for some start-ups is that old saying, "No one ever got fired for buying IBM."
The established companies are much safer bets unless you find that customer who's willing to take the risks with the bleeding edge, which it typically is at the early stage.
An effective strategy is to partner with people who already have relationships and you sell through or with others.
Siim: Our business card used to say, "A Newbridge affiliate."
Weber: There's huge credibility right there.
Looking for money
Howlett: Our biggest challenge for the last 18 months has been cash. We've been living hand to mouth for a long time.
So in this kind of environment, the question is, how do you get out of that mode? It's very tough, except for the Sandvines of the world.
We're now merging with a strategic partner, a U.K. company based in London. They have sales and marketing strength and money, and the ability to bring capital into the merged company.
Raising money is hard work. You can't sell just on being faster. It takes a lot of machinery around it.
The VCs (venture capitalists) wanted us to be even more focused than we were. I was gradually narrowing the focus, but not fast enough. Most VCs hate horizontal.
As we matured, our approach got us closer to a deal with a traditional North American VC, but by the time we got to that, we already had the merger happening.
Wang: We're close to a deal for venture capital, but we've been saying that for the last couple of months.
I expect that we'll close something soon. Now that we've narrowed down which markets we're going after, it has brought more people to the table.
Abouchar: That confirms what I've been saying for a long time.
If you're having trouble raising money, maybe there's something in your business plan that needs to be considered.
Howlett: Oh, yes. Our difficulties in the early going were because we didn't have our story figured out.
We didn't have the value proposition identified for the particular markets.
We couldn't describe the kind of conversations we were going to have with our customers.
Abouchar: The VCs are trying to mitigate risk and they're looking for patterns that they've seen be successful before.
The Sandvine financing is a good example. Kaparel was a success, PixStream was a success, $20 million says Sandvine will be successful as well.
If you can identify the kind of patterns that will attract their attention, that's when you're going to start to pull them to the table.
Weber: A lot of people spend a lot of time going after the wrong sources of capital.
They get very frustrated and come back saying, "The investment environment in Canada sucks and no one talks to me." They don't realize what people are looking for.
There are a lot of companies that aren't going to attract venture capital no matter how they package themselves.
There's a lot of great companies around here that will never be bigger than 10 or 20 people. They generate a lot of benefits for this community but they're never going to be of interest to venture capital. And they divert their focus from their business and waste a lot of time. That's a tragedy.
Others don't focus their business and don't package it properly, or they go after the wrong source at the wrong time. People will meet with you. That doesn't mean that you fit into their objectives.
Abouchar: The VC community does itself a disservice.
What they will fund shifts around depending on the market.
They may have a preferred habitat, but as the market cools off they say, "I can get less risk at the same price, i.e. we want to see more revenue." Or as the market heats up they say, "I have to get in earlier to get a lower price."
On top of that, VCs tend to be deal junkies. They can never resist a good deal. And the venture business is incredibly subjective.
Wang: It's very confusing for a start-up and that's another place where networking is so important, meeting the right people, getting in touch with the right organizations like Communitech. Then you're talking to people who have an idea what the VCs are looking for.
The typical guy doing a start-up has no idea. And then they get into this pattern where they are going to the wrong people. It's so important to have the right people guide you through this.
Abouchar: You can go to the wrong fund and, yes, they will give you a cup of coffee and a half-hour because, frankly, you never know until you talk to somebody. They may find a way to say 'Yes' if they really love it, but that's not usually going to happen.
Weber: It's a problem when inexperienced entrepreneurs meet with the wrong VCs.
They'll leave the meeting very excited because they think the VC is interested in what they're doing. They hear what they want to hear.
Abouchar: If an entrepreneur comes to my office and presents his business plan to me and I say to him, "I don't like your transaction for the following specific reasons," I'm going to get a big argument. Typically, their reaction won't be, "Oh, that's interesting, let's see if we can explore how we can overcome these objections." I'm going to get, "Well, you're wrong because of this, this and this." It's a lot easier for me just to say, "You're too early."
You have to persuade the VC that you're not going to argue with them. You're just looking for information and you want to understand what it is about the plan that they don't like.
Howlett: My experience with the Toronto VCs was that they were very clear about qualifying themselves.
I could identify in the first couple of minutes if we had a fit. In fact, I found the VC community on the whole to be very professional. A lot of good, insightful people.
I got misdirected to one and figured out after the first sentence that he was interested in something further along than we were, so we talked about Waterloo instead because he had gone to the University of Waterloo and wanted to catch up on gossip.
Siim: You might want to look at what deals they're financing to get a feel for what they're excited about. At PixStream, we could easily have done video for another industry but we went after Newbridge initially -- the Celtic House guys -- and they are telecom. We said, video and telecom -- works for us!
Howlett: We always looked carefully at the portfolio of a VC. We viewed it as a club and we had to decide whether we wanted to be part of that club. Are the other companies ones that we could sell to, or partner with?
Abouchar: And what about picking up the phone, calling some of the CEOs on that list and asking them what it's like to live with these guys?
The challenge of finding space
Siim: Finding space can be real challenging, depending on how fast you're growing. It feels like you're always out looking for space every three months.
With Sandvine, we're taking over a real large chunk of space.
The agent asked me why I wanted so much. I don't want to continue to be shopping around; we've got products to develop.
Abouchar: There are two issues: space availability and space management. When you're on the rapid growth curve, you're constantly running out of space.
Within three weeks you go from having all this space to wondering where you're going to put the next desk.
Siim: And you don't want that to become your business.
Being in Waterloo
Abouchar: One of the huge advantages is that it's such a helpful community. The collegial atmosphere is just fabulous.
Yes, we have a lot of problems with start-ups -- everybody does, it's a challenge.
Weber: We have all the key components here.
Wang: And, like you said, the attitude, the sense of co-operation and community.
And being close not just to any university, but the University of Waterloo, is very important.
Howlett: I think Waterloo is a wonderful place to be a start-up.
There are some challenges but they are dominated by the advantages. This is the place to be.
Andrew Abouchar: Partner in Tech Capital Partners Inc., a Waterloo-based venture capital firm managing $35 million in two early-stage funds. Abouchar came to Waterloo in 1999.
Chris Howlett: President and CEO of Freedom Intelligence, a provider of high-performance database systems, formed in 1997. Howlett was CEO of Web Pearls Inc. and executive vice-president of Waterloo Maple Inc.
Brad Siim: Vice-president of engineering and COO of Waterloo's Sandvine Inc., which is developing a networking product for the telecommunications industry. Siim was co-founder and vice-president of engineering at PixStream Inc.
David Wang: President and CEO of Handshake Interactive Technologies Inc., a Waterloo-based developer of technology to enable force effects to be sent over Internet. Wang is a professor in the University of Waterloo's department of electrical and computer engineering.
Paul Weber: Director, Business Accelerator Program, which helps early-stage technology companies become investment-ready. It is part of Communitech, the technology association serving Canada's Technology Triangle.