Jozef Babiarz knew that after 14 years, his time at Nortel Networks would soon be up. The 52-year-old development manager had survived eight years of job cuts at the Ottawa-area Carling campus, watching helplessly as it shrank to 3,300 employees from more than 20,000 in 2000. He kept plugging away, though, leading a small team of research engineers in Ottawa, creating advanced wireless technology for corporate offices. While others got pink slips, they kept working. “We thought we were very important to the business,” says Babiarz. But when Nortel filed for bankruptcy protection in January, the writing was on the wall. “I knew what would happen if our sales didn’t pick up or if an acquisition didn’t happen quickly,” says Babiarz. “We just didn’t know who or when.”
For Ottawa’s collection of 1,850 knowledge-based companies, Nortel’s final spasms are complicating what are already challenging times. In Nortel’s dismantling, the region loses its single largest source of tech jobs, according to the regional economic development agency. (The top spot is now held by IBM, which employs 3,500, largely because it acquired homegrown software developer Cognos in 2008 for US$5 billion.) And this at a time when the recession is hitting the local industry hard: as of July, according to Statistics Canada, high-tech companies in the Ottawa-Gatineau region have shed 5,800 of 60,000 jobs since January, a drop of 9.7%, which comes on the heels of a decline of 5.8% in 2008.
For Babiarz, his day came July 7. Given only four weeks’ vacation pay, Babiarz, along with the rest of his Canadian engineering team, joined the swelling ranks of highly skilled ex-Nortel workers in Ottawa. Like most people in Ottawa’s beat-up tech cluster, Babiarz has been left asking himself, What now?
While politicians grandstand over saving Nortel’s patents from foreign acquisition, and Nortel retirees and former employees protest over the potential loss of their pensions and severance payments, the region once touted as Silicon Valley North faces a quieter, more prosaic struggle: how to save and create high-tech jobs. Large multinationals like Alcatel-Lucent, which employs about 2,700 people, and IBM do their part, as will those who buy Nortel’s remains. Similarly, multimillionaire entrepreneur Terry Matthews’ Wesley Clover investment group has backed a dozen local tech firms like Mitel Networks, March Networks (TSX: MN), DragonWave (TSX: DWI) and Bridgewater Systems (TSX: BWC) that each employ hundreds of people. But even Matthews knows he can’t single-handedly keep all of Ottawa’s skilled techies fully employed.
If Canada is going to have an economy based on more than commodities and manufacturing, Ottawa is a key proving ground that tech companies can survive and thrive here, and no longer just in telecom. This heartland of Canadian innovation needs to reinvent itself for life after Nortel.
Within days of losing his Nortel job, Babiarz was undertaking his own reinvention, as entrepreneur. “Friends of mine have suggested I apply to RIM and other companies, but this is something I always wanted to do,” he says. Babiarz and another engineer from his old team have co-founded 3inova Networks Inc., a development company that plans to focus on technology similar to their work at Nortel: enabling high-performance wireless for corporate voice and data networks. “Instead of being on the sidelines just working for somebody, my company can do it,” says Babiarz.
Many former Nortel employees and other jobless are choosing a similar path. Frank Horsfall, a 47-year-old senior manager in the CTO office specializing in network security projects, was laid off in June 2008, after about 13 years. He spent months unsuccessfully vying for a small number of project management positions in town against hundreds of other candidates, and contemplated opening a small computer store. But when a cadre of former co-workers were also let go in January — with no severance — Horsfall convinced four of them to co-found EnTeraSec Inc., a network security firm targeting small local businesses. Now, while some of his business partners are paying the bills by working short-term contracts with federal government agencies, Horsfall is focused on getting his new venture up and running. It’s a steep learning curve. Nortel may have provided many valuable skills, but tech entrepreneurship wasn’t one of them. “In Nortel, as a project manager, I would have similar types of activities, but you weren’t everything,” says Horsfall. “Now I’m bookkeeper one day, market research and analysis another day, then I’m sales another.”
To gain some business savvy, both Horsfall’s and Babiarz’s new business teams have enrolled in Lead to Win — an intensive crash course run free of charge by Carleton University that helps launch new tech businesses. Its goal is simple: retain and create new high-tech jobs.
Lead to Win is the brainchild of Tony Bailetti, director of Carleton’s Technology Innovation Management Program. He first conceived the program in 2002 as the telecom industry was melting down. Back then, Ottawa was in the midst of what would be a four-year span that witnessed the loss of a third of all jobs at high-tech companies. One Statistics Canada study found that in 2000–2001, about four out of five laid-off high-tech workers who found employment had to leave the high-tech sector, and about a third found work outside of Ottawa. In all, about 40% of laid-off high-tech workers left the region. Originally, Bailetti self-funded Lead to Win, coaching 29 participants, over half of whom started businesses that, with ongoing mentoring from Bailetti, have collectively created more than 300 new jobs and attracted more than US$90 million in investment, most of it venture capital. Nakina Systems, for instance, which makes gear for managing communication networks, now employs about 100 people.
By 2005, the job market was thriving again — employment was up 18% that year. But when the economy tanked and jobs once again started vanishing at an alarming rate, alumni from 2002 urged Bailetti to revive the program. This time, though, he has $165,000 in funding from government and local business support groups. “Some of the people that are in the class now are people whose pensions have totally evaporated,” says Bailetti. “In 2002, starting a new tech company was an option; in 2009, it’s the only option. I’m talking to people who have lost everything with the loss of Nortel. That has changed the culture of this town forever.”
According to Claude Haw, president and CEO of the Ottawa Centre for Research and Innovation, the city’s economic development agency, as many as five new tech companies have been started each week since the spring. Some people are just consulting, but many are ambitious. Zeebu Mobile Inc., for instance, is developing a new kind of e-mail for smartphones, while Smart Rotor Systems is developing a quieter, low-vibration rotor for helicopters.
It’s entrepreneurs like these that Lead to Win is helping. The program, which screens applicants and makes cuts before the final round of mentorship for commercialization, demands that startups commit to generating at least six new high-quality knowledge-based jobs within three years. Of the 109 participants in the first two sessions of the reincarnated program, 66 launched 49 new businesses, and demand for the program has soared, with about double the number of people and startups that organizers anticipated.
But entrepreneurs face different challenges today than in 2002, when venture capital was flooding into Ottawa; now, it has mostly dried up. Bailetti has focused Lead to Win on how to get new companies going with minimal financial backing, grow organically via global partnerships and collaborate with potential customers.
Angel investors have pulled back as well. Rainer Paduch, a veteran of numerous Ottawa companies and a long-time angel, has stopped seeking new opportunities. Instead, he’s putting his efforts into building four companies he funded earlier this decade that haven’t burned out of cash. Ottawa still has enthusiastic entrepreneurs, he says, but they lack sophistication as to what it takes to build a business. One lesson is sinking in, though: Canadian companies are often too underfunded to compete in big markets. “What I’m hearing, and I support it, is stay away from Canadian venture capital. Focus on smaller opportunities, get the revenue faster, and once you have something substantial, find other ways to get the financing, in particular U.S. venture capital,” says Paduch. “In very fast-moving markets, that’s a challenging strategy, but if markets are moving a bit slower, or are a bit more niche, then you have a chance to get a business off the ground.”
In Michel Jullian’s business, he sees a lot of those tech companies targeting narrow markets. His 21-year-old OCM Manufacturing Inc. offers specialized product engineering and outsourced manufacturing, and just completed a 7,500-square-foot addition, doubling its manufacturing space. “It’s either the best timing, or I’ll blow my brains out,” he jokes darkly. His 40 active customers and nearly 250 different tech products cut across many end-markets, including oil and gas, clean tech, medical devices and security surveillance. Telecom equipment is only a small piece of his business. “What people don’t see is there is an underlying matrix of a lot of companies that make niche products and are very successful, but they will never become a JDS [Fitel], or even a Mitel or a Newbridge,” says Jullian, citing the three companies that along with Nortel, employed about half of all Ottawa tech workers at the turn of the century. “Some of them might, but a lot of them will remain successful, even global players, just in niche markets.”
Even the more prominent local companies are more modest. Take the up-and-coming DragonWave, which was founded in 2000 and makes high-capacity wireless backhaul gear, a less expensive substitute for fibre-optic networks. Its stock has rocketed almost 600% this year to a $190-million market cap, and projects it will top $100 million in revenue this fiscal year (ending February 2010). But it employs only about 180 people, all but 20 of them in Ottawa. Its CEO, former Nortel exec Peter Allen, who joined in 2004 after being put through the wringer at an optical networking startup that raised US$166 million and still flamed out, says one secret is designing technology products that can be manufactured inexpensively. “You can’t afford to be hand-crafted. You have to be able to access the capital investment made by bigger contract manufacturers around the globe,” says Allen. “The reason you’re in Canada is the quality of the talent base, but you have to implement that innovation on a global scale.”
Embracing that business model may be one key to Ottawa’s future success, but so too is the region’s shift away from communications equipment in favour of software, medical devices and clean technology. GridIron Software, for instance, is garnering buzz in the graphic design industry for its new workflow system, while DNA Genotek Inc. makes kits for collecting DNA from saliva, and venture-backed Group IV Semiconductor Inc. is developing all-silicon devices that generate light more efficiently than conventional bulbs. But some still worry that there is too much expertise tied up in telecom, and not enough growth capital. “There are lots ofsmall companies trying to make their way up the chain,” says Adam Chowaniec, a veteran entrepreneur in the region’s struggling semiconductor industry, “but I don’t see any huge growth here for a long time to come.”
Paduch, the angel investor, is of two minds about the tech community’s prospects. “We’ve lost a lot of momentum, and I think it’s going to take a while to rebuild the credibility, to get larger venture money in place,” he says. “But there is still lots of energy, and while the telecom [equipment] industry has shrunk dramatically, the software industry is alive and well. So we need to retool.”
Veterans of Nortel like Babiarz, Horsfall and their new business partners would like to prove Paduch wrong. They know it won’t be easy, though. “I’ve got very modest goals,” says Horsfall. “I would really like EnTeraSec to get to the point where the five co-founders are working full-time, generating revenue.” For now, though, he’s happy just to have a modest grant from the NRC Industrial Research Assistance Program to conduct a full market feasibility study. And that six-figure Nortel salary, now gone forever? “I kind of miss it,” he says. “You learn how to budget when you’ve got very little coming in.”
As for Babiarz, whose wife works at a department store to help make ends meet, he aims to hire on a few developers, just as soon as 3inova gets a customer. He’s given himself until year-end to line up a contract. “If I don’t have a customer by then, something is broken, and it’s time to look for something else,” says Babiarz. “And I like Ottawa, but if a career opportunity presents itself south of the border, I would move.”
Ottawa may not have long to try and salvage the last of Nortel’s fading legacy.