The Ottawa Citizen René Seguin is the Ottawa-based director of venture capital for Business Development Bank of Canada, the busiest venture firm locally over the past year with new investments in 14 Ottawa-based companies. In light of today's economic climate, major venture firms are increasingly cautious about dispersing their funds, he says.

(Conrad) Lewis

(Andrew) Waitman

(Bruce) Gregory

(Claude) Haw

Akara chief executive Ed Ogonek is probably one of the nicest chief executives you'll ever meet in high tech. Akara's founders interviewed at least a dozen candidates for the top job last year before finally settling on Ogonek, a family man with a sense of humour and an ability to connect with other people. This was important because Akara wanted to become known as the company where people matter, where employees take an interest in the community around them.

So, when Ogonek and his fellow managers decided a few days ago to sack a third of Akara's 120 employees, ithe move was not taken lightly. On the face of it, the layoffs weren't even necessary -- Akara had raised $30 million U.S. in fresh venture financing in the spring, more than enough to take the company through another year of operations.

Yet, in a potent reminder of how much the venture-capital industry has changed in just one year, Ogonek decided he just couldn't take a chance the money would be there next year when he needed it. By trimming staff, he can guarantee Akara will survive at least until mid-2003. "This is the best way of ensuring that we'll be dealing from a position of strength the next time we raise money,'' says Ogonek. "We want to give our employees the best possible chance of success for the long term.''

Like many other startups, Akara has discovered its major customers aren't in a buying mood. Akara's products, designed to help phone and data-service companies cope smartly with a flood of optical signals, are being tested by the right kinds of buyers. But high-volume orders are not likely to come until late 2002 at the earliest.

Other Ottawa-based startups are facing the same equation, thanks to a glut of capacity in global telecommunications networks and corporate data systems. BitFlash, Espial, WebHancer, Eftia and Databeacon have all recently cut staff -- often within weeks of raising new capital.

If they cut too many engineers, they'll naturally risk being late to market with their products when the economic recovery finally kicks in. But most entrepreneurs now believe the greater danger lies in running out of cash. Already this year three firms with good products but lousy timing -- Zenastra, Rebel.com and NetActive -- closed shop after efforts to raise more money fell short.

René Seguin, the Ottawa-based director of venture capital for Business Development Bank of Canada, says the city will see more high-tech bankruptcies in coming months. "There are companies we've seen that are in panic mode," he says. "They need cash right away."

The irony is, there has rarely been so much cash available for Ottawa-based startups. As the venture industry prepares to meet this week with dozens of entrepreneurs at a series of soirées, conferences and venture fairs, Ottawa's tech industry is on track towards raising about $1 billion in venture financing in 2001.

This is down from the record $1.3 billion that flooded into the region last year, but the level of investment is still running at nearly five times the level recorded in 1999. The slight decline this year in Ottawa also compares favourably with the projected 60-per-cent drop in U.S. venture investments.

Venture capital plays a critical role in the high-tech economy. Not only does it lay the groundwork for next-generation technologies, it also has a very direct impact on employment. Every $100,000 raised by startups leads quickly to a new hire in this R&D-intensive industry -- which means this year's fundraising supports about 10,000 high-tech jobs and probably twice as many related jobs in the service sector.

By the same token, a sudden drop in venture financing produces an equally rapid compression in jobs and economic activity. Fortunately, there are signs venture capitalists remain strongly interested in Ottawa's startups, not least because so many of the latter are specialists in networking products, whether based on copper, fibre-optic or wireless technologies.

Nobody is sure when telecommunications carriers will begin spending on next-generation networks, but venture firms are still confident these will be built.

U.S.-based companies such as Morgenthaler Ventures and US Venture Partners are betting Ottawa startups will be contributing key pieces. So far this year, 10 fibre-optic startups alone received more than $500 million in venture financing, the majority contributed by U.S. investors.

Two companies alone -- Solinet Systems and Tropic Networks -- nailed down a combined total of $236 million. Because their financings were completed recently, these startups are expected to ride out the customer drought with relative ease.

Innovance Networks, a developer of fiber-optic systems, raised $26 million recently on top of a $115 million equity round in late 2000. Innovance chief executive Peter Allen, a former Nortel executive, notes that, far from contemplating job cuts, he has boosted his workforce by more than 50 per cent since spring to 320.

Even Ottawa's less well-connected startups have potential access to major sources of capital. Toronto-based Vengrowth is bolstering its presence in the Ottawa area while California-based Newbury Ventures, Ventures West of Vancouver and Kodiak Ventures of Boston have done so recently. For example, Kodiak venture partner Bruce Gregory quietly set up shop at the beginning of the year.

There's also a healthy stable of well-financed venture operations headquartered in Ottawa. Business Development Bank of Canada, Celtic House, Skypoint Capital and Capital Alliance Ventures are all scouting out promising investments. Purple Angel, operated by current and former Nortel managers, and Venture Coaches, founded by Claude Haw, concentrate on seed and early stage investments.

"In the past few weeks I've been swamped with good, well-formulated business plans,'' says Pat DiPietro, a former Nortel manager who, along with former PMC-Sierra veteran Mark Janoska, was recently hired as general partner with Vengrowth and is opening a local office. "The activity from Vengrowth is going to increase.''

Vengrowth is already one of the venture industry's more active players in Ottawa. While it was recently forced to write off its $11.7 million investment in Zenastra, a fibre-optics firm that went bankrupt this month, Vengrowth has plowed $49 million into seven Ottawa startups since the beginning of the year. Among them are three firms -- Akara, BitFlash and Espial -- that have recently cut staff to preserve their cash.

"The decision to reduce employees isn't something we force down management throats,'' says Tim Lee, a general partner with Vengrowth in Toronto. "They are very supportive of the idea of achieving the same broad business objectives with less.''

Like other venture firms, Vengrowth maintains a cash cushion so that it can take advantage of interesting new opportunities and contribute to future rounds of financing for its current investments. Lee says Vengrowth has about $160 million in cash available now and will raise more money early in the new year.

Vengrowth is just one of several Ottawa-focused firms with more than $100 million worth of available capital. Celtic House, controlled by March Networks' founder Terry Matthews and run by Andrew Waitman, manages a $250-million U.S. fund, of which half is available for new startups.

Eagle One partners Conrad Lewis and Ken Wigglesworth -- former Newbridge executives -- have access to a largely uncommited $250-million U.S. fund controlled by their affiliate, Newbury Ventures of California. And Kanata-based Skypoint Capital has raised about $100 million U.S. -- with the hope of creating a fund twice that size dedicated to funding early-stage telecommunications firms.

Not all this money has been earmarked for Ottawa startups. Celtic House has increasingly been investing in out-of-town companies. So is Skypoint, which recently hired another partner in Montreal where it sees plenty of new investment opportunities. The Eagle One founders, for their part, must share their nest egg with their Newbury partners in California and Europe.

The major venture firms are also increasingly cautious about dispersing their funds. "A year ago, if you waited three months to make an investment, the price you paid tripled,'' says BDC's René Seguin. "Now, if you wait three months, the price either goes down or stays the same. There's no rush.''

BDC can afford to be somewhat patient. It's been the busiest venture firm locally since the beginning of the year at least in terms of deals. It's invested $25 million in 14 Ottawa-based startups.

Finally, venture capitalists are also constrained by their own access to capital. Funds such as those operated by Celtic House and BDC are financed by profits generated when one of their startups goes public or is purchased by another company. Since initial public offerings and acquisitions have declined substantially, recent capital gains have been slim.

Skypoint and Vengrowth rely on outsider investors, such as corporations (and individuals in the case of Vengrowth's retail funds) to contribute capital. As long as investors continue to believe venture investing will eventually pay off, raising capital shouldn't be a huge problem. But, notes Skypoint partner Andy Katz, "Raising money is definitely tougher than it was last year.''

Skypoint has a built-in advantage through its partnership with TD Capital, which has agreed to contribute up to 40 per cent of the Kanata firm's investing capital. Ultimately, Skypoint expects to raise $200 million U.S., which it will invest in anywhere between 12 and 18 startups. This assumes an initial investment of $2 million U.S. to $5 million U.S. followed by Skypoint participation in late rounds involving other venture firms.

Since its inception in 1998, Skypoint has seen only one successful exit -- the sale of Montreal-based Avantas earlier this year to EXFO Electro-Optical Engineering for $65 million U.S. But Katz says his firm typically invests at the earliest stages of a startup, which means Skypoint's initial investors didn't expect to begin cashing out until 2002 or 2003. Now, thanks to the economic slide, Katz expects those exits will be delayed another year or so.

Skypoint has invested in eight Ottawa-based companies to date, including, so far this year, Precidia, Atreus and Tropic Networks.

In some ways, the business of venture capital is returning to its roots. Until the late 1990s, it was normal for investments to take four to seven years to pay off and for some investments to fail. The bubble economy turned patience into a vice. Investors are now learning it's not.

The venture-capital boom did wind up introducing the Ottawa tech industry to the rest of the world, as U.S. and other financiers ranged further afield in their hunt for places to park their money.

Nearly 100 separate venture firms invested in 35 Ottawa startups in the nine months ended Sept. 30 -- a lineup that includes investors from Asia, Europe, Israel and throughout the U.S.

This sort of diversification was unimaginable as recently as 1998, when Ottawa firms in total attracted only $124 million in venture financing.

It's now equally inconceivable the city's venture community will return to the quiet anonymity of the 1990s.