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Founders, Investors, and CEOs

Why do so many founders in high-tech startups fail to successfully go through the corporate transitions and come out as winners at the end? A good example is the story of SiGe Semiconductor. Founded by John Roberts with 2 other cofounders back in 1996 and ultimately acquired by Skyworks in 2011 for $210M, the company went through several reincarnations with three waves of investors either wiped out or severely diluted. Close to $150M was poured into the company and thus the ultimate outcome was a modest success, primarily benefitting the last-round investors. Even though the founder, who was forced out around 1999, had a good vision, laid down a solid foundation and lifted the company off the ground, at the conclusion he ended up with nothing or next-to-nothing. Why?

Why do Boards struggle with managing the dynamics of the typically conflicting interests between the VC investors, founders and management, often resulting in the failure of their ventures? The histories of most high-tech startups are full of colorful stories of fascinating ups and downs of the relationships between these three groups of players as they go through the evolving startup life cycle. Those relationships often go from the seduction stage, through a reasonably calm but rather brief marriage, only to end up in bloody separation and divorce battles. What could be done to make it a bit more civilized and productive?

And why are so many CEO careers often brutally interrupted, paused or derailed in the most often stormy and highly stressful world of high-tech ventures? In the world of high-tech startups, the CEO job, even though often glamorized, is actually one of the most fragile on the planet. Apart from the occasional glory when things go well, most of the time they are the lightning rods for anything that may go wrong with the venture. Since typically high-tech startups are high risk ventures, guess who gets severely beaten and pays the highest emotional toll most of the time? Looking around at the careers of early-stage company CEOs in the Ottawa Valley such as: Jim Derbyshire, Rick White, Jim Roche, George Cwynar, Paul Slaby,  Kevin Rankin, and many others, one could generally observe a large turnover rate with a half-lifetime of 2-3 years and a pause of 1-2 years before they land a new gig. Isn't this a terrible waste of top talent? Why is this?

The key to understanding and dealing with these issues is to realize that startups, just like human beings, go through a predictable life cycle consisting of infancy, childhood, adolescence, adulthood, and maturity/exit. Each of these stages has its specific characteristics and requirements which necessitate different talents and qualifications to navigate through it. We could typically distinguish a Founders Team, Growth Team and Exit Team. Between these major stages of the life cycle, the company and the people involved go through a transition.  In general, these are typically Entrepreneurial Transition, Growth Transition and Maturity Transition.

The problem arises when the key players in these transitions (founders, investors, CEOs) are not prepared for what is about to happen and drift blindly into the white waters ahead of them. Navigating corporate transitions in the seas of ambition, passion, and conflicting interests is a skill that could be developed. And since these transitions often carry a heavy emotional toll, you cannot afford to be naïve about it but rather you must plan ahead and put in place protective measures against being screwed. 

The battle of crowdfunding in Canada

There is a fierce battle going on right now in Canada's high-tech sector, lobbying for the legislative changes in the country's security laws to enact, so-called "crowdfunding" or "crowdsourcing" legislation, which would permit Canadian entrepreneurs to raise up to $1M for their startups in small chunks solicited (often over the Internet) from a fairly large number of individuals.

What is the problem, then? The issue is that under the current Canadian securities laws, startups can only raise money by selling equity in their business to so-called "accredited investors," who are strictly defined and typically include family members, angel investment firms or venture capitalists. Should you wish to raise funds from a broader circle of individual investors, your company needs to go through a process of stock listing on a publicly traded exchange that is normally prohibitive to the startup. More details on that is available in an excellent and succinct six-page document, "General Overview of Canadian Securities Laws Relating to Raising Capital By Early Stage Companies" prepared by FMC Law, members of the CrowdSourcing Advocacy Committee of CATA and available through their office.

The advancements in internet technology, however, make it possible these days to approach and raise the required capital in small amounts from a much broader group of individuals. Why is this approach important? It all has to do with risk management and sharing. To illustrate the issue let me quote from my article recently published in The Ottawa Citizen.

"Let's say I need to raise $0.5M for my startup. I go to you and ask you for the whole sum or just a $100K chunk. Even assuming you have the means, you are going to agonize at length over your decision. However, if I ask you to invest $10-15K, you will spend far less time worrying and be much more predisposed to take the chance. By employing this tactic, an entrepreneur will likely raise her $0.5M because the risk is shared among many investors and each of them does not risk that much.

This is exactly how I raised, some time ago, angels financing for ATMOS Corp. I brought in about 20 private investors, with each contributing between $10K and $25K. The beauty of this approach is that nobody is going to loose sleep and the entrepreneur gets his objective accomplished. In fact, this is the same principle in action that powers the IPOs and syndicated VC rounds albeit in a smaller scale. It works, therefore, use it."

As is often the case, our American friends are much faster on their feet and have already kick-started the required changes by the U.S. President Obama enacting the Jumpstart Our Business Startups (JOBS) Act on April 5, 2012. The act includes provisions to relax rules around online equity crowdfunding and will allow businesses to raise up to $1-million  via online “funding portals". There is a real risk of Canada falling behind on the legislative side but also, more importantly, of having Canadian startups falling behind their competitors in the US.  Recently, Andrea Johnson, Partner with Fraser Milner Casgrain, summarized nicely the risks of falling behind the U.S. in this video interview with BNN.

Given that, unlike the US, Canada has no federal securities regulator and instead, securities are regulated at the provincial  level, we are likely looking at a rather fragmented approach to this problem -  with some provinces taking the lead and others a wait-and-see approach. In a typical fashion, it will likely take about 2 years for Canada to get its act together and catch up. The only bright side and some hope is the energetic lobbying campaign currently underway conducted by  the Canadian Advanced Technology Alliance (CATA) led by John Reid, president and chief executive officer. They deserve our strong support so take action today by writing and talking to your MPP or MP!

In a broader context of supporting and fostering entrepreneurial culture, why do we often have to be so reactive and lackadaisical in Canada? We need to create conditions in this country which encourage and make it easy to pursue new, especially knowledge-based, business creation. How about Canada as a startup nation? We already have a reasonably solid R&D infrastructure, we have system incentives, through the SRED mechanism, to encourage innovation. What we do not have are strong financial incentives that support risk- taking and capital raising for early-stage companies. This is not rocket science, a number of attractive measures have been put forward, including the proposed angel financing tax credit or these crowdfunding ideas. We need to lobby our politicians to take action now!

Eulogy for semiconductors in Canada

The last two nails were hammered into the semiconductor business in Canada recently with the acquisition of GENNUM  by Semtech and ZARLINK by Microsemi (both out of California). This follows the recent acqusition of SiGe Semiconductor by Skyworks and earlier TUNDRA by IDT. For all practical purposes we are left with no significant size Canada-based and Canadian controlled semiconductor company in the country - back to chopping woods, digging minerals and pumping oil (not that there is anything wrong with that... :-)

Oh, sure, there are still some left-overs and a few pocket-size and interesting niche-y microelectronics firms but nothing of the scale that would make a difference at the national level. Does it matter? History will tell but it sure is a bit sad for those of us who were part of the ride and, well, after all, who really wants his future to be just about running a branch-plant?

Thus, appropriately here is a nostalgic look back and a brief crash course in the history of the semiconductor industry in Canada.

The beginnings of it go back to the early '70s and the story of MicroSystems International Limited (MIL), initially a government inspired venture with Northern Telecom (Nortel). When MIL was winding up in 1974 it spun out two important seeds: Semiconductor Components Group (SCG) as part of Nortel/BNR and a pair of two budding entrepreneurs Terry Mathews and Mike Cowpland. They started MITEL whose semiconductor division (Mitel Semiconductor) later on became ZARLINK. At about the same time Wally Pieczonka and Doug Barber started Linear Technology Inc (LTI) in Burlington, Ontario which was renamed GENNUM later on. These three companies became pillars of the foundation on which pretty much all the rest (with an exception of PMC-Sierra) of Canadian semiconductor industry was built.

The golden age lasted about two decades (1980-2000) with the '80s being particularly heady days as the industry was young and rapidly growing. When I joined Nortel's SCG in the early '80s as a member of its R&D team, Nortel had a vertically integrated semiconductor operation. It involved not just the chip design but also manufacturing of silicon, process and device technology, packaging, testing and design automation. The synergies in such an environment were just immense. We were doing world-class engineering and, most of the time, money was no object. As a young manager I was nevertheless able not just to collaborate but also sponsor leading-edge research at Stanford University, Carnegie Mellon and a number of Canadian schools. 

In this fertile environment a number of world-class inventions and products were developed such as the CCD imagers technology by Jim White and Joe Ellul, some of the industry-first CAD tools such as AUTOLAY and SYNFUL by Stan Jedrysiak, as well as a number of first complex telecom chips that powered the digital world. Some memorable management figures from that time were Lloyd Taylor, Graham Sadler, Geoff Shrank, Dave Lawrence, Adam Chowaniec and later on Ken Bradley and Claudine Simson. Similarly Mitel Semiconductor (ZARLINK) built its own semiconductor fab in Bromont, Que and moved into the merchant semiconductor business led by Doug Smeaton, David Brown and later on Kirk Mandy. At the same time Linear Technology (GENNUM) led by Wally Pieczonka achieved a dominant world market share of 65% as a supplier of hearing aids chips.

The spillover effect of this critical mass on the broader Canadian scene was quite substantial as it fed a large thriving supply chain, stimulated world-class research at the universities including funding university Chairs (Carleton U) and spun off a number of startups. Some of the better known included Siltronics (Gyles Panther), Mosaid Technologies founded by Dick Foss and Bob Harland, DALSA founded by Savas Chamberlain, CALMOS (later on transformed into Newbridge Microsystems and finally TUNDRA, acquired by IDT) founded by John Roberts, Genesis Microchip founded by Paul Russo, and many others. Among them was ATMOS Corp which I founded in mid-nineties. There is a famous chart, created and supplied by Doyletech, showing the family tree of locally-generated technology companies and pretty much 90% of them can be traced back to NORTEL.

In the '90s there was an important joint industry-government initiative at the time called Strategic Microelectronics Consortium (SMC) run by John Roberts. It really provided a strong boost to the growth of the fledgling microelectronics industry in Canada. In addition, the Canadian Microelectronics Corporation (CMC - currently run by Ian McWalter), mostly government funded,  was created to stimulate and support electronics research in Canadian universities.

Unfortunately most of it started to slow down around the year 2000. After a good, long 40 year run, the semiconductor industry was maturing (not unlike what happened to the automotive industry). Some players, such as Mitel Semiconductor (ZARLINK), caught the change and transformed themselves from captive suppliers into merchant semiconductor players. Unfortunately, the largest of them, Nortel's SCG, failed to achieve that, mostly due to lack of management leadership. As a result, this primary engine of semiconductor growth and expertise in the country was sold off to STMicroelectronics and following a classic pattern drifted away never to be seen again :-(

There is no doubt in my mind that the failure of the leadership of Nortel's SCG at that time to spin off its microelectronics business as something like "Telecom Semiconductor Inc", was a main trigger for the subsequent decline and slow disappearance of the semiconductor industry in Canada. We have simply lost critical mass. A number of talented highly specialized engineers and researchers moved away in search of the jobs in California's Silicon Valley and other places around the world. It's a pity but that is what lack of foresight, vision, circumspection does to a country...

For a little while though "Times they were a-changing" we got a bit of a second backwind towards the end of the '90s with the days of mushrooming semi start-ups nourished by the multi-million dollars investments from the burgeoning VC firms. This was the era of a new type of semiconductor company, no longer large capital intensive and vertically integrated, but so called fabless semiconductor company. Among the better known started at that time were: SiGe Semiconductor (founded originally by John Roberts), Skystone (Antoine Paquin & Stefan Opalski), Solidum (Feliks Welfeld), Quake (Dan Trepanier), ATMOS (Paul Slaby), Lumic/Atsana (Luc Lussier), Philsar, Extreme Packets and IceFyre. All of these companies have been acquired since and are mostly gone from the Ottawa scene.

So, what have we got left? What is the landscape after the battle? What we have is a number of small and medium size firms built up on the remnants of the previous firms. They are mostly profitable and sometimes hugely so. They usually do not forge new product frontiers or aggressive innovation. Instead they tend to provide services and capitalize on the know-how and expertise developed by their predecessors.

The most successful is definitely a cluster of what one could call "Semiconductor IP protection and licensing". This includes:  MOSAID (founded by Dick Foss, later on run by George Cwynar and currently by John Lundgren), Wi-LAN (Jim Skippen), UBM TechInsights (previously Semiconductor Insights - a spin-off from MOSAID built-up by Terry Ludlow and Doug Smeaton), Chipworks (Terry Ludlow), Global Intellectual Strategies (GIS - Pierrette Breton). It is interesting to note that all of these companies can be traced back to MOSAID - clearly Dick Foss must have done something right laying down this foundation!

In addition, there is a sprinkle of design services and IP product companies such as TSMC Design Centre (as a result of EMT (Sreedhar Natarajan) acquisition with its origin in ATMOS Corp), Kaben Wireless Silicon (which we have built-up significantly during my recent 3 year CEO run), SiDense (founded by Wlodek Kurjanowicz and run by Xerxes Wania), CogniVue (with its origin in Lumic/Atsana and currently run by Simon Morris). Outside of Ottawa the significant players include PMC-Sierra in Vancouver, DALSA, Fresco Microchip (Lance Greggain) and ViXS (Sally Daub) in the Toronto area. The industry has its representation through the ITAC SMC Council currently coordinated by Iain Scott.

So, now, what does the future hold for semiconductors in Canada? The business has changed and the glory days appear to be over and are not likely to come back. It is a different world now and no amount of nostalgia is going to change that. In particular, the old business model of fabless semiconductor companies is, for all practical purposes, dead,  when it comes to start-ups and emerging companies (you can find more about it in this presentation: http://www.design-reuse.com/exclusive/kaben/). There is a need for new approaches that have a chance to bring significant ROI justifying investments.

Just because the old ways of doing business are no longer applicable, this does not mean there is not a need or a demand for semiconductor start-ups and their innovation - quite contrary! But the way we go about it has to be different. To avoid repeating myself, I refer you to this article: http://www.eetimes.com/electronics-news/4074052/Letter-to-the-editor-IP-cars-share-common-ground

PS

Here is a bit of an inside scoop on the Zarlink story:

http://www.obj.ca/Technology/2011-12-13/article-2833053/Zarlink-momentum-lost-in-Microsemi-takeover/1

And here is an info on the GENNUM acquisition:

http://www.canada.com/business/fp/Semtech+Canadian+chip+maker+Gennum+million/6042744/story.html

5 Leadership lessons from Argentine tango

Can managers learn anything from the old fashioned tango? Isn't this musty stuff relegated to dustbins of the previous generation and of little interest to the modern crop of today's MBAs?

In the spirit of the carnival season this post is on a lighter note. In preparation for my upcoming vacation trip to Buenos Aires I have been exposing myself to the delights of the Argentine tango by way of dance classes. Now, I have never been really into dancing and so I am pleasantly surprised at the charms, depth and the unexpected management lessons (!) one can derive from this enjoyable and occasionally passionate pastime.

NOTE to the un-initiated: Argentine tango is a very different dance from your typical ballroom, Latin or disco-style dancing. It does not have a fixed rhythm or a step flow but instead relies on a "close embrace" connection between partners to execute an individual, free-flowing step structure nevertheless tuned to the played music.

Leaders lead, the followers follow (and don’t you try to change that!) - One of the first things you learn from the Argentine tango is that the dancing couple  has  prescribed roles (leader and follower) which are to be acknowledged, accepted and executed each in their own way. There can only be one leader (one pair of hands on the steering wheel) with his vision and objectives for the dance (organization). The follower's job is to be fine-tuned to that vision as well as to the directions coming from the leader. There is no bigger disaster than the case of followers attempting to out-guess the leader or impose their own vision in the dance (company). I had such a case of "founderitis" in one of the ventures I was running when the founder had a really hard time to let go and attempted to run the shop from the back seat. This can not be successful and only leads to problems. Trust and mutual respect are the foundation of a well executed dance :-)

It's about connecting - The most critical part in executing Argentine tango is to establish a close and firm connection (embrace) between partners right from the start. The partners need to feel connected in an intimate way - secure, trusting and working together. The followers may feel well taken care of, but led in a firm way.

You don’t tell, you show the direction - As soon as the movement starts, the tango dance becomes a series of small collaborative step projects. The leader's job is to navigate the dance floor (market) looking for free space (opportunities) and avoid collisions (competition), while tuning the performance to the music played (economic environment) with an ultimate objective of ensuring a beautiful and satisfying experience (commercial success). To execute well, the leaders and the followers need to be collaborating harmoniously through a series of gentle interactions: the leader extends an invitation and the follower issues an acceptance moving in the way and the direction selected.

Listen to the music - Even the best learnt dancing technique (technology) is useless if it does not fit well with the music played (market requirements). The leader's job is to ensure that the partners dance to the music played and do not in futile attempt to force the music (the world) to fit what they know and do.

Enjoy yourself! - Why do we dance (live and work)? Beauty, love, romance, graceful moves, scent of roses, fresh-cut grass, slender limbs, taste of honey, that's the stuff that dance and life is made of. We all spend most of our waking hours at work. Let’s make sure we make it a bit more like the tango :-)

PS

I have stumbled upon this brief video which helps to illustrate some of my points:

http://www.youtube.com/watch?NR=1&feature=endscreen&v=Cswrnc1dggg

If you would like to see a brief sample of master tango, here is a clip of Gabriel Misse and his partner Alejandra Martinan. It starts off slow, but note the amazing footwork as they progress. Most amazing? It's ALL improvised on the spot (yes, market conditions can change quickly :-)

http://www.youtube.com/watch?v=LNhgBjdXKZU&feature=player_embedded

Finally, if, after all of the above :-) you are in need of tango instruction, here is a website of my favourite master teachers:

http://www.francineandre.com

Ottawa start-ups suck?

Out of the 20 winners of the "CIX Top 20" competition at the recent Toronto conference (www.canadianinnovationexchange.com) there was only one, bitHeads - not exactly a young start-up, out of Ottawa this year. Most of the presenting companies were from Toronto, Waterloo or Montreal area. What's wrong with us, guys?

Here are some of my observations and impressions from this event which covered most of high-tech, focusing on ICT and Digital Media, but without clean-tech.

·         There is still an acute sense of a shortage of capital pools for high tech investments in the country. 2010 data shows ~ $1.1B VC capital deployed in Canada versus ~$6B spent in the year 2000. In comparison, this year, US-based VCs will invest ~ $26B.

·         There is a growing pressure to push the governments to institute policy-based incentives, such as angel investment tax-credit and even a corporate VC tax credit, to help address the shortage of risk capital.

·         The times, they are a-changing… It is much easier now than ever to get a start-up going. 10 years ago it used to be $0.5M to start plus $5M and 2 years to see if you got anything. Now it is $50K to start plus $0.5M and 6 month to sell for $3-5M.

·         For high-tech veterans like myself, there is a remarkable shift in the composition of start-ups from 10 years ago and even from 2008 when I pitched my last time - winning the "CIX Top 20" for KABEN. Practically all the companies this year are from the internet and mobile apps space. I have not spotted a single hardware-oriented start-up. As an example of what folks are doing these days, here a sample of some of companies which caught my attention:

Wave Accounting - online, banking integrated accounting software for SMBs (<9 staff)

TribeHR - HR software for SMBs

Recoset - mining data for ads

Vanilla Forums - weeding out "bad" comments and users from online forums

Massive Damage - location-based mobile gaming

Achievers - rewarding employees web-based software

NexJ - CRM software

Polar Mobile - publish to mobile media apps

Quick Mobile - mobile event apps for smartphones

Shoplogix - real time manufacturing data software

Going back to the lack of Ottawa-based start-ups presence, perhaps the reason in the above context, is that the former strength in telecom and hardware, due to the presence of Nortel, Newbridge, etc is no longer in vogue while at the same time Ottawa high-tech has not yet developed software, mobile and internet critical mass to spin out new-style innovative start-ups.

Early Exits - way to go!

"Today, the optimum financial strategy for most technology

entrepreneurs is to raise money from angels and plan an early

exit to a large company in just a few years for under $30 million."

That's the essence of the message from Basil Peters' book "Early Exits" which I have discovered for myself recently. Coming from the Vancouver-based well experienced entrepreneur, operator, CEO and investor, this is one of the best reads for  high-tech entrepreneurs and early-stage CEOs that I have come across in the last decade.

This book, available in hardcover or as an eBook here: http://www.early-exits.com/, is brief, no BS, to the point - almost like an instruction manual for high-tech start-up operators, providing blueprints on how to design your venture for today's economic environment.

The book is entirely focused on the end game: the exit. It provides a succinct background of the current economic climate for early-stage companies as well as the evolving business models for both traditional venture capital and individual angel investors, with an honest disclosure and discussion of their conflicting interests.

Having lived and managed through several M&A transactions myself, I have found interesting examples, debunked myths, dirty M&A industry secrets exposed as well as several useful case studies of real life exits which are good lessons for investors and entrepreneurs interested in selling companies for more money, sooner and with a greater chance of success.