The billion-dollar boomtown

Fledgling optics firm lands $115M in venture capital, pushing Ottawa over the top

Dennis Lueng, The Ottawa Citizen / (Technology Venture Capital Investments in Ottawa)

Innovance Networks, a six-month-old optical startup, plans to announce today that it has secured $115 million Cdn in U.S. venture capital.

The financing sets a new record for an Ottawa technology company and means more than $1 billion in new financing has been raised this year.

In its short life, Innovance has itself raised more money -- $145 million -- than all regional technology companies in 1998.

With almost a month left this year, the Ottawa area has attracted four times the capital it raised in 1999 -- money that is feeding employment, housing demand and financing purchases of new car and luxury goods.

Chief executive officer Peter Allen cited a talented team as a "big reason" for the company's success. "Where many other startups have only one or two people with more than 10 years experience, we have a full team."

Ottawa is emerging as a Northern City of Light because it has a deep bench of engineers who can move the flood of Internet traffic faster on streams of light than electrons can manage on traditional copper wire.

At least 12 companies with names like Metrophotonics, Silicon Access, SS8, Quake or Maple Optics have been formed to raid Nortel and other players with fat salaries and stock options.

Still, the investor taste for technology stocks, including fibre-optic plays like Innovance, has soured since early September.

The stock prices of Nortel Networks and JDS Uniphase have fallen more than 50 per cent and are trading at close to 52-week lows.

Venture capital fundings in the third quarter slipped below $200 million after hitting $350 million in the second quarter.

But in the past two months more than $250 million has flowed into Ottawa.

Iain Grant, an analyst with the Yankee Group, said shell-shocked investors aren't likely to pull the plug on fibre-optic investments for at least another year.

"Venture capitalists raised a tremendous amount of money this year by promising an awesome return on investment. Now they've got to find the next big thing."

He said the wave of investments will continue until it becomes clear the returns aren't there and some startups fail.

Ron Begg, past president of the Canadian Venture Capital Association, said a weak stock market for technology companies is creating more business for venture capital companies.

"The investment bankers took some new companies to the market with stars in their eyes. Now with the correction in stock prices, they are coming back because these high-growth companies still need new rounds of financing."

Like many optical companies, Innovance is operating in deep stealth mode. It won't say what products its top-flight team of former Nortel and Lucent researchers are working on.

It picked an obscure part of town to nurture its operation through the first few months: just off Wellington Street in Mechanicsville far from the glitz of March Road and overheated Nepean.

It has doubled its team to 70 in the last two months. It has another 30 in New Jersey, close to another wellspring of optical talent -- the famous Bell Labs of Lucent Technologies.

The latest financing shows how well-heeled U.S. venture companies are increasingly shoving their way into the Ottawa market.

The current round of financing is led by Morgentaler Ventures and Thomas Weisel Partners. Other investors include Azure Capital, Advanced Technology Ventures, Bank of America and KPL Ventures.

The latter outfit is the investment vehicle of Kevin Kalkhoven, who retired as chief executive officer of JDS Uniphase Corp. in May.

"Innovance is one of the few new players capable of tackling backbone optical networking, and for good reason ... it is a challenge," he said in a statement.

"They know their customer base, the technology and are connected in the industry. They've done it before, and they've got vision and strategy in place to do it again."

Mr. Allen has 20 years' experience in optical and broadband technologies, most recently as vice-president of business development of Nortel's optoelectronics organization.

From Lucent, Innovance has recruited chief financial officer Wayne Edmunds and Dr. Lucas Hsu, vice-president, technology.