Brigitte Bouvier, The Ottawa Citizen / Despite the tech stocks plunge, James Frodsham, CEO of Innovance Networks, left, says his firm is going ahead with a recruitment drive. The company's roster -- only 10 employees last August -- should swell to 350 by the end of the year.

Bruno Schlumberger, The Ottawa Citizen / Zenastra Photonics CEO Peter Scovell says his staff to 350 from the current 200 by the end of the year. And he's going ahead with a $40-million manufacturing plant in Kanata.

Chris Mikula, The Ottawa Citizen / The stock market tumble 'hasn't really brushed us at all,' says Espial's chief creative officer, Alan Wille. 'We're still quickly adding staff.'

The market volcanos may rumble, but the tremours are barely felt at 19 Fairmont Ave. in Hintonburg, headquarters of Innovance Networks.

Like many other local high-tech companies -- Zenastra Photonics and the Espial Group among them -- Innovance is sitting atop a rich war Innovance Networks

At Innovance's plush new offices, the centre's holding quite nicely.

"We're optimistic and remain very confident in the fundamentals," says chief operating officer James Frodsham. "Of course, we're aware of the market correction that's been happening -- and we don't wave it off. But the market will come back, sooner, we hope, rather than later."

Company president and CEO Peter Allen concurs.

"You can ask any fibre supplier today and he'll tell you he's continuing to be sold out. Now, true enough, there's a pause in sales of equipment used to light that fibre -- but you've got to light the fibre to use it at all. So the belt-tightening can't last. Things have to pick up, probably in the second half of this year."

So confident is Innovance in the future that it's plunging full steam ahead on its recruitment drive. The company had only 10 people last August and has 200 now. By the end of the year, that number should swell to 350.

Is that making bold in the face of adversity?

"Not bold, no," Allen says. "These are people we need in order to beat our competitors in bringing our products to market. And for the moment this downturn in the market is only helping us, actually."

The market's tightening has produced what he calls a "flight to quality.''

"Engineers are looking for the surest bets -- the companies with the greatest depth of technical talent. And I'm glad to say we're perceived as high quality, attractive to world-class talent."

Allen observes a similar flight to quality in the venture capital market, a phenomenon that he says benefited Innovance in its quest for early-going funding.

"In fact, our investment partners -- and they're all world-class -- wanted to invest even more than we were hoping for," he says. "But that was their reaction to a market that was just beginning to tighten. They had to be very discerning and pick only the best prospects. Their support reflects the quality of our idea and the quality of our team."

After its incorporation last May, Innovance had done well in its search for seed financing, coming up with $30 million Cdn. Last December, however, this achievement was put in the shade by its receipt of $115 million Cdn in second round financing, the largest amount ever received by a private Canadian technology company. The American investors were a truly blue-chip crew, led by Morgenthaler Ventures and Thomas Weisel Partners and including Advanced Technology Ventures, Banc of America, KPL Ventures, and Azure Capital.

"I don't think it would be as easy now," Allen says. "We refused offers from some companies and, from the ones we liked, took less than they were offering. Those aren't luxuries an optical startup would have today -- in fact, we'll probably see a shakedown among them."

That money should take them through to early next year, as they pursue development of a suite of products for large service providers in the class of Level 3 Communications, Qwest, Worldcom, Global Crossing, and Bell Canada. Innovance is aiming at the backbone providers whose networks link up cities to the world-spanning Internet.

They are, for good corporate reasons, reticent about just what services they intend to offer. "We're in stealth mode," Frodsham says. "But I can say that we offer a portfolio of products that will enable networking companies to use their assets about three times as efficiently as they're doing now."

Innovance is not particularly looking at new ways of increasing the carrying capacity of fibre. That's been done, to the point of virtual irrelevance, Frodsham says. Nortel Networks, for example, will soon offer equipment that allows a transmission rate of more than 1.6 terabits per second down an optical fibre. Since fibre cable typically has at least 96 fibres, that suggests transmission of more than 150 terabits per second is possible down a given fibre cable. "That means one carrier's cable could carry four times the base load in the entire North American network today," Frodsham says. "And there's more than 10 carriers, so our focus clearly doesn't any longer have to be on heroic performance in terms of raw transmission capacity."

Carriers do face other challenges, however. For one, their equipment takes up so much floor space that much of their profits have to go to building new premises rather than providing the services that earn revenue. Moreover, some carriers are running short of electricity to service their networks. And too many people are currently needed to run a network, boosting labour costs to the detriment of the bottom line.

Innovance hopes to help with all these problems through substituting photonic technology for electronic technology, wherever that's feasible. The result, Frodsham says, will be "improved profit margins to the carrier and improved services to you and me."

Innovance will be beta testing its products in the final quarter of this year. By mid 2002, the company believes carriers will begin deploying them.

Allen and Frodsham were both part of the team at Nortel Networks that developed the world's first 10 gigabits per second optical transport team. Two of their confreres on that team have also joined Innovance. Alan Solheim is chief technology officer, and David Nicholson is head of product development. A strong presence on the board of directors is Kevin Kalkhoven, formerly CEO of JDS Uniphase.

"He was a gratifying admission to the team," Allen says. "We were all from big companies, but Kevin had taken a company from startup to an astonishing success, the same journey we wanted to make."

The company's Ottawa premises used to be the headquarters of Crawley Films. Hintonburg, with its restaurants and boutiques, has a charm and an intimacy that you won't find on March Road.

One third of the 200 employees work at a second site in New Jersey.

The inter-city optical networking market -- Innovance's raison d'etre -- is roughly $20 billion US. Most analysts expect a growth rate from 30 to 50 per cent over the next five years. "Speaking conservatively, I'm sure it will be at least a $30 billion market within three years," Frodsham says. "I think we're likely to be in the top five players globally, with products that are best-in-class. We'll be one of the fastest-growing companies Canada has ever seen."

Innovance expects to hold another financing round early in 2002.

At some point, the company will hold an IPO. The timing, always sensitive, seems particularly so in the current bear market.

"We're not particularly worried," Frodsham says. "This is not the dot.com market. The fundamentals remain very sound. The demand underlying the industry is continuing to grow exponentially."

Zenastra Photonics

That same guarded optimism holds true at Zenastra Photonics on Colonnade Road.

Money is tighter than it was several months ago, says CEO Peter Scovell, in the midst of a new financing round. "But you still see deals being done. You can raise money, if you're the right company in the right sector."

Last April, Zenastra won more than $60 million in a private placement underwritten by Yorkton Securities and HSBC Securities, at the time the largest private high-tech financing deal Ottawa had ever seen. Zenastra will be making silicon wafers to enhance performance of optical components.

"No matter what we see on the stock markets, there's very strong growth in demand on the consumer level," Scovell says. "What's happening reminds me of the ups and downs of the microelectronics market, with inventory running short every two or three years, then capacity frenetically catching up, then everything slowing down again, and the whole cycle repeating itself."

Scovell expects the photonics market to grow strongly for at least 20 to 25 years. The company has no plans to trim its recruitment drive, which should staff from the current 200 to 350 by the end of the year. Nor will construction of a $40-million manufacturing plant in Kanata, planned to begin next month, be put on hold.

Scovell expects the photonics market will grow much as the cellular telephony market has done for the past 10 years, posting growth rates from 30 to 35 per cent.

"We're not complacent, but we're confident," he says. "Our business plan is predicated on long-term growth in demand for the products we're going to be supplying. I see no reason to revisit that plan, no matter how much the stock markets fluctuate."

The Espial Group

If Innovance and Zenastra are aiming chiefly at major service providers, Espial is aimed at the far corner of the Internet. The Ottawa company makes fast and small software for cellphones, pagers, and their digital brethern.

The stock market turbulence "hasn't really brushed us at all," says chief creative office, Alan Wille. "We still have tremendous activity in our markets and we're still quickly adding staff."

Only last month, for example, Intel Corp., the world's leading manufacturer of microchips, announced it had chosen one of Espial's Java-based browsers for use in its Web Tablet -- a tablet-shaped portable monitor small enough to allow users to navigate the Internet from anywhere in the home. (The tablet will have a wireless connection with the home PC.)

Last June, Espial won $12 million in venture capital funding from Greylock and Invisible Hand. The company expects to complete a further round of financing in late spring. Is that going well, given the uncertainties of the market?

"You'd be surprised,'' Wille says. "Last year, venture capital seemed to be growing on trees. Now, they're a little smarter and will take a very close look at your vision and your list of customer wins. If you can take that scrutiny -- and we can -- then you stand out a little more."

Espial had long had only hazy notions of when it might stage an IPO. Next spring? Next fall? Even later? All were possibilities.

"For us, that's far enough out that we're really not worried at this time," says Wille. "Winning more and more high quality customers will have far more interim effect than any turbulence that the stock markets are undergoing now."

Venture capital support has buffered Innovance, Zenastra and Espial in the current troubled market waters. But Nortel Networks, Cisco, and JDS Uniphase, giants all, have, between them, announced global staff cuts of 22,000.

Some local companies, among them Sedona Networks, NetActive, and Magardi, have recently trimmed staff. Sedona and Magardi declined to be interviewed. NetActive did not return calls. No comment could be had from another local company that has announced staff cuts, Coventus Inc., based in Kanata.

Things will get better, but only after a further interim decline, says Brian Piccioni, a Toronto-based analyst with BMO Nesbitt Burns.

"There are still some rude awakenings for investors in the next couple of quarters," Piccioni says. "But investors will finally have a chance to acquire shares of good companies at reasonable prices, rather than stupidly overpriced."

Companies beginning their first search for venture capital will find things tight over the coming year, Piccioni says.