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They had no idea the party was over.

Ten years ago this month, the Nasdaq stock market index hit an all-time high of 5,048.62. Euphoric investors of all stripes, from Wall Street titans to novice retirees, had poured hundreds of billions of dollars into dreams that an unstoppable force of technological innovation was changing everything.

However, the combination of exuberance, ignorance and greed that sent technology stocks to impossibly high valuations was slowly breaking down.

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Nobody knew the scale of destruction of wealth that would ensue. A decade after the March, 2000 high, the tech-heavy Nasdaq benchmark remains 55 per cent off its dizzying peak.

The tech meltdown weighs on the sector to this day.

The fallout forced a maturing of the industry. Companies have clamped down on spending, investors demand growing revenue and profits, and financiers have become highly selective about putting money into young companies and new ideas.

Today's challenging environment is particularly demanding in Canada, where entrepreneurs and others say the venture capital model for funding innovation is broken. With former giants such as Nortel Networks either failed, sold or faded away, Canada's tech sector is struggling to create the next Research in Motion.

"When I look at the future of this country, I am deeply concerned, from an industrial policy perspective," says John Ruffolo, who heads the technology, media and telecommunications practice in Canada for Deloitte & Touche LLP.

"I think that particularly now in the 21st century, with the rise of some major economies, like China, India and Brazil, every country is a competitor to you from day one. Canada needs to rethink the future of this country," Mr. Ruffolo says.

Last year, Canadian venture capitalists raised $995-million, just short of the $1-billion raised in 2008.

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This represents the lowest level since before the dot-com era, in the mid-1990s. Part of the reason is the poor returns they have delivered over the past decade.

Where's the funding?

Private venture capital posted a 3.9 per cent loss over the 10 years ended June 30, 2009, according to Canada's Venture Capital & Private Equity Association. In comparison, the 10-year return of the U.S. Venture Capital index was 8.4 per cent.

"There is a shortage of venture capital in the Canadian market, which is narrowing down the deals into the very best," says Rob Chaplinsky, managing director of Bridgescale, a Silicon Valley-based VC firm that has set up an office in Toronto to capitalize on the situation. He has met with some 200 Canadian firms in the past year and invested in at least one, BlueCat Networks, whose technology helps businesses manage Internet protocol networks.

Remember when? A look back at some of The Globe's coverage of the dot-com crash 10 years ago

  • March 11, 2000: Eric Reguly - Is it possible dot-com investors have things horribly wrong?
  • March 2, 2000: Canadian rings up instant billion
  • Dec. 1, 2000: Brian Milner - Nasdaq seems destined to wreak havoc on economy
  • Dec. 4, 2000: Matthew Ingram - Are computers becoming like toasters?
  • Dec. 5, 2000: Nasdaq racks up best session
  • Dec. 27, 2000: The tech stocks' wild, wild ride
  • Jan. 31, 2000: Year of promise turned out badly for many
  • Five-year anniversary: Matthew Ingram - What has the bubble taught us?

Funding is both harder for VCs to raise and entrepreneurs to access today, agrees Dave Kroetsch, co-founder and president of Aeryon Labs, a Waterloo-based firm that makes aerial robots for surveillance.

"They want as sure a thing as possible," he says. VCs today like to wait for a market to be proven before making a bet on it, the way Facebook legitimized social networking. "Then everyone wants to invest in the segment. Before, there wasn't that hesitation." On the customer side, purchasers today are also hesitating to invest in something new, even if it offers compelling value, he says.

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Over the past three years, Aeryon has relied completely on private money, a large amount of sweat equity and mentoring and support from Communitech, an industry network in Waterloo. The firm is in the process of trying to raise VC funding and has fully bypassed the Canadian market, looking instead at VCs in the northeastern U.S.

One key upcoming test of investors' appetite for Canadian technology is Smart Technologies ULC.

A decade ago, the small Calgary-based company developing interactive whiteboards thought seriously about joining the rush to the public markets, but abandoned the idea as the market soured. Today, Smart Technologies is one of the most highly-anticipated IPOs in memory, with market watchers expecting the firm to file a prospectus this year. (The company itself is publicly quiet on the matter.) Smart Technologies has annual sales north of $500-million.

Co-founders David Martin and Nancy Knowlton beat the odds to reach this stage. They found private funds after venture capitalists denied them financing, sidestepped a potentially disastrous early IPO, hired well and grinded through seven-day workweeks for years.

CEO Nancy Knowlton says the firm maintained a fundamentally different philosophy to other early-stage firms in 2000.

"We've been very much about being real, having revenue, serving customers, having repeat customers, creating products, intellectual property, creating a channel and really developing something with an element of permanence to it."

Still, the list of Canadian tech firms on a path to global success is short.

"It's a little bit about getting into the culture of winning, like the Olympics we just had," says Ungad Chadda, senior vice-president of the Toronto Stock Exchange. "I don't think the technology entrepreneurs around here are encouraged and supported to think beyond the $250-million cheque that a U.S. company can give them."

Canada's junior stock market is one avenue for tech firms, but that route brings its own challenges.

Nightingale Informatix Corp, which specializes in software and electronic records for the medical industry, opted for an IPO on the TSX Venture Exchange several years ago and followed that up with two rounds of private financing, for an aggregate of $22-million. The market is supportive but opportunistic, says Sam Chebib, founder, president and CEO. "They want to invest on the cheap, and that creates issues for companies." In this tough environment, Nightingale has chosen to focus on profitability ahead of revenue growth.

Of the roughly 120 tech-related firms on the exchange today, only five are profitable.

Government help

While U.S. startups and businesses in general remain largely suspicious of government involvement in the market, across Canada diehard capitalists are calling for government to play a bigger role in order to bolster the country's emerging tech sector.

The federal government produced a cheer across the industry this month when the budget removed a cumbersome process for foreign VCs to collect their money when they sell an investment in Canada, including the need to file tax returns when no tax was payable. But there are also widespread calls for the government to loosen the rules for its research and development tax incentives and to get directly involved in funding firms.

Quebec is leading the way in corralling the private sector to work with the government. Last year, Solidarity Fund QFL, the Caisse de dépot et placement du Québec and Investissement Québec created Teralys Capital, a venture firm with more than $700-million in capital. Fifty per cent of investment will be directed at Quebec-based tech firms, with another 25 per cent funding deals in the rest of Canada and the remainder earmarked for international investment.

"The government has realized that they need to step in to support the industry. I'm a free-market guy, but on issues like this, where China has the upper hand, this was brilliant," says Mr. Ruffolo, calling for other provinces to make similar moves. "Government policies need to be strategically pointed to support the idea. But they're not. They're sort of a grab bag."

The government has a role in helping entrepreneurs build companies, but once they are built the issue becomes Canadian's entrepreneurial spirit and whether it is strong enough to forge global companies.

Each year for the past seven years, PricewaterhouseCoopers LLP has surveyed emerging software firms across Canada. Early on, about one-third of them aspired to an IPO. Last year, the figure was just 2 per cent. More recently that has risen to 10 per cent.

Big thinkers

"What we need is more $100-million software companies. We need CEOs that don't want to sell out at $30-million or $40-million," says Peter Matutat, a partner and leader of PwC's emerging company practice.

"There is no question that you can build a world-class company here in Canada," says Tim Jackson, the CEO of the Accelerator Centre in Waterloo, which is supporting 31 startups today through funding from federal, provincial and municipal governments and the University of Waterloo. He points to Com Dev International Ltd. (market capitalization of $273-million), Open Text Corp. ($2.83-billion) and RIM ($43.18-billion) as evidence.

Mr. Jackson has never been afraid to think big. He is also a founder and partner of the local VC firm, Tech Capital Partners. But he is perhaps most widely known as the former chief financial officer of PixStream, and the man who negotiated the $369-million (U.S.) sale of the company to Cisco Systems Inc. in 2000.

Every single firm within the Accelerator aspires to be the next RIM. While most won't be, the RIM effect is widely felt today, not just through inspiration but more directly from funding to the community and mentoring from its people.

The RIM effect pulses at Adenyo in Toronto. The startup's technology helps companies deliver interactive advertising and marketing to mobile devices.

"We're a very ambitious management team," says Tyler Nelson, chairman and CEO. "The sky is the limit. We are here to build a very large Canadian company."

Most entrepreneurs boast a sense of eternal optimism and have plenty of bravado. What gives credence to Mr. Nelson's stand, however, is that he learned about building big from the masters at RIM, where he served as head of global business development. Working with Jim Balsillie and Mike Lazaridis taught him the alternative to selling out.

"It's the attitude," he says. "From the outset you build the culture to build a big business. That becomes ingrained. Then when opportunities come to cash out, your team isn't driven to sell. You don't come to work to make quick money, but to grow a company. The key is to build a board and a team to think like that and say 'come along on the ride with us.'"

Mr. Nelson's team has a long way to go. Adenyo opted not to seek venture capital, fearing that VC firms push for early exits to recoup their investments. It is privately funded, with sales in excess of $20-million and no debt, and is growing at about 40 per cent a year.

"There will be another Research In Motion," Mr. Nelson says confidently. "It's going to take an entire ecosystem of supporters to build that company. We have to create together fertile ground to allow companies like Adenyo to become $100-million, $200-million, $1-billion companies. It's a team effort."

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