It’s a rare day when a Waterloo Region startup sells for more than half a billion dollars.
Then again, 2000 was a rarefied time in the tech world, as twin bubbles in the internet and telecom sectors ballooned inevitably toward bursting.
That summer, California-based giant Cisco Systems snapped up PixStream Inc., a Waterloo-based upstart that made hardware and software to move video across then-new broadband networks. The stock-swap deal was worth $554 million in Canadian dollars.
The euphoria was blunted four months later when Cisco announced a major downsizing, including the shutdown of its video networking business unit, and by extension, PixStream.
When the axe fell, Dave Caputo, who had joined the company as marketing VP in 1998, wasted no time in moving on. Within 12 hours of the shutdown announcement, he and three PixStream colleagues - Brad Siim, Tom Donnelly and Don Bowman – got to work on building a new company called Sandvine.
Their new venture quickly became a global leader in a field that has become ever more central to modern life over the past decade: management of network traffic on the internet.
Today, Sandvine has customers in 85-plus countries, representing hundreds of millions of broadband internet users. Its shares are traded on the London and Toronto stock exchanges, and the company employs more than 350 people.
As CEO, Caputo has overseen tremendous growth and faced the challenges that come with being a publicly traded, globally oriented technology company.
We sat down for an interview on a recent snowy morning at Sandvine’s Waterloo headquarters.
Q – Bring me up to speed on where Sandvine is now, and what we can expect for 2012.
A – Sandvine got started back in 2001, so we’re entering our 11th year.
I often joke that there’s really no word in English that describes the feeling of, “It feels like yesterday, yet it feels like a lifetime ago.”
That word might be “Sandvine.”
I’m extremely proud that the initial premise that we founded Sandvine on is one that we’ve stuck to, from the sense that back in 2001, when you looked at your phone bill, you spent more on call waiting, call display and voicemail than you did on just dial tone access.
And we thought, “Why wouldn’t broadband and the internet evolve the same way?”
If you fast forward to 11 years later, I think we’ve never been closer to that reality of having many different ways to consume and pay for bandwidth. That is the intelligence layer that we are trying to build across the consumer internet.
So what does that mean, practically speaking?
In the not-so-distant future, you’re going to have tens, if not hundreds, of devices connected to the internet, but you’re not going to be expecting to pay a $40-a-month subscription for them.
Some you’ll buy on a transaction basis, like the Amazon Kindle; you buy a book and pay for the bandwidth right then. Some of them you will pay for through ancillary services; you’ll buy a camera that is a 4G device, take a picture, it stores on the cloud, and when you print the picture or store the pictures beyond five years, you’ll pay for the bandwidth that way.
Maybe it’ll be monetized with advertising beside the photos that you have there.
And so, there are going to be many, many different ways to consume bandwidth in the future, and there are going to be many different ways of monetizing that bandwidth.
That is the initial, central and continuing premise of Sandvine.
Q – Are you saying things have developed the way you predicted they would in 2001?
A – Certainly we were ahead of our time back in 2001, and I think there were around 16 million broadband subscribers, wireline subscribers, back at the end of 2001.
There’ll be 600 to 800 million by the end of this year, so the concept of broadband becoming ubiquitous was a good bet in the beginning, and as subscriber growth slows, but subscriber consumption of bandwidth grows unabated, there are some economics that need to be fixed in the service providers,’ or ISPs,’ business model.
Those unstoppable economics of subscriber growth, bandwidth growth and average revenue per subscriber being flattish have to be fixed moving forward, and Sandvine plays a central role there. That’s our bet, anyway.
Q – Speaking of economics, there was some receding in Sandvine’s revenue in 2011. Is that a symptom of these economics that you’re talking about?
A – There are a lot of dynamics that have conspired against us over the past year, largely around our shift to resellers; around shifting resellers to existing customers. It really slowed our ability to develop those customers.
And so, if you look at our growth over the past five or six years, it’s been incredible. Over the past year, we didn’t have the growth that we needed and expected to have.
Q – Do you see that as a temporary thing until other issues get sorted out?
A – Let me ask you: Do you think broadband’s going away? Do you think broken business models are fixed? We don’t think so.
We’ve taken the path that we truly believe the technology we’re working on is trying to solve some of the most difficult problems on the planet – I shouldn’t say that; that sounds a little bit presumptuous – some of the most difficult problems in networking.
And that is, to look at every packet in real time and apply a policy on those packets in real time.
We can’t think of a more difficult problem that needs to be solved in networking.
Q – Waterloo has a reputation for taking on these kinds of difficult problems. What is it about Waterloo Region, and tech people here, that makes them want to engage with these heavy-duty, core issues in technology?
A – I think it has to do with not shirking away from the most difficult problems out there. Life is short and you might as well make a difference while you’re trying to make the technology world better.
I think people in the Waterloo tech community want to make a difference with their technologies, and making a difference usually means tackling the most difficult technology problems.
Q – There are a lot of places around the world that have tech clusters now, and incubators are popping up all over the place. What do you think sets Waterloo apart from other places like Silicon Valley or Boston?
A – My sense is that the tech community in Waterloo is a real community, where we feel that we’re in it together, and that’s likely in no small part due to Communitech.
That facilitation of technology companies working together, being informed about each other and having a true willingness to help each other out really has created this community, and my sense is that it’s one of the best-developed technology communities on the planet.
Q – What kinds of things do you hear about Waterloo when you’re travelling? How would you gauge the general awareness in the tech world about what we’re doing here?
A – It doesn’t matter where I go in the world; everybody has heard of the University of Waterloo and everybody has heard of Research In Motion.
Those two stalwarts have put us on the technology map.
Q – Take me back to when PixStream was sold. How old were you when that happened?
A – That’s a good question. It was 2000 and I was born in ’67, so I guess I was 33 when that happened.
When PixStream was sold to Cisco, it seemed like a great day for the technology community here in Waterloo, bringing a great company like Cisco here.
When they decided to shut their video networking business unit down [and thus close PixStream] just a scant eight months later, it seemed like the worst day, but I now look back and think it was a great day, because there was a team ready, willing and able to start a technology company with some pretty good scale 12 hours later, and that was Sandvine.
Q – 12 hours later?
A – 12 hours later.
Q – What do you remember about that 12-hour period?
A - Let me just give it some perspective. They announced the shutdown four months after the sale, and announced that it would be shut down in four months, so that's the eight months.
The initial feeling was, let’s take some time off, let’s go to Disneyland.
I tell this story of [billionaire telecom entrepreneur] Terry Matthews calling me on the day that we announced the shutdown, and he asked, ‘So what are you guys going to do?’
And I said, ‘We’re going to go to Disneyland.’
And he said, ‘Dave, you’ve got to start another company. You can’t let everyone scatter to the four corners of the Earth. You guys know how to build carrier-class products; you know how to solve real customer problems. You’ve got to start another company.’
And I said, ‘But Terry, I just fired all the engineers today.’
And he said, ‘Don’t you have their fucking phone numbers?’
And so he inspired us to get back on the horse and we were able to start the company with $19.5 million of seed financing, and during those four months, negotiate that and figure out who would be on the initial founding team and get it going.
Q – So that money was there from the purchase, right?
A – Yes, that’s right.
Here’s some insight, because I get asked by entrepreneurs all the time, ‘How do you raise money?’
And Sandvine is one of the least reproducible stories out there, because it was ‘First make your investors hundreds of millions of dollars, and then ask them for $20 million to start a company, and chances are you’re going to have some success at raising it.’
Q – And what was the sale price of PixStream again?
A – It was $369 million US, and at the time, there was a huge difference in the exchange rate, so it was about $550 million Canadian.
Q – What was it like to see that number for the first time and realize that’s how much your company was worth? You were a 33-year-old guy, and very few people in this community have seen that kind of a number on an exit. Did it mess with your head a bit?
A – No. It was a sign of the times back then, you know?
We were absolutely planning on going public, so those types of numbers were already being talked about.
It was a time when the internet bubble was occurring, plus what many people forget is that there was also a telecom equipment bubble at the time.
So, the timing was very good.
But PixStream had real revenues; we had done $25 million the previous year and were probably going to do $70 or $80 million the following year, so for the time, it was the type of number a company like ours was valued at.
Q – Were you tempted to disengage for a while and get out of the whole thing?
A – If I was tempted, I was tempted for a day. I think the reality is, we were still very young, we still wanted to be involved with technology that would change the world in some way, and we wanted to be great role models for our kids and be industrious.
And so, I don’t think anybody on the founding team at Sandvine contemplated retiring. We were all too young and we wanted to do it again.
Q – When did PixStream start?
A – Let’s see, I graduated from high school in ’86, graduated from computer science in ’90, graduated from my MBA in ’92, worked at HP for three or four years here locally, so that’s ’96; moved to Colorado for a few years and came back in ’98.
So I think it would have been started around ’96 or ’97.
It was started here by Brad Siim, Marc Morin and Stephen Bacso, and then I came back from Colorado as VP of marketing and Tim Jackson came and joined as their CFO back in ’98.
Q – So PixStream was still a startup?
A – For sure; there’s no description of startup that PixStream wouldn’t have fell into.
Q – How are conditions different for startups now than they were back then?
A – There was considerably more venture capital back then than I perceive there is today.
There were many more people starting companies in the networking equipment space; these were the halcyon days of Nortel and optical networks, and the early days of the internet and broadband.
Q – So there was lots of growth potential, building the information superhighway?
A – There were IPOs of, like, dogfood.com. But no one would dispute that the internet has been one of the most transforming infrastructures of our lifetime.
Q – When you look around the Waterloo Region tech landscape today, how does it compare to the one you were working in back then?
A – My impression is that Waterloo Region has become the tech entrepreneur capital of Canada.
There are many more smaller, very nimble technology companies getting started than there were 10 or 15 years ago, and probably in no small part due to Communitech, the Accelerator Centre, the Hub.
It was probably easier to raise money back then, but it’s probably easier to get a company fully functional today because of the cloud, because of Web 2.0, because of the ability to quickly productize a prototype on the internet.
Q – Much is said about Canadians’ reticence to be aggressive in taking their place in the broader world. Obviously there are exceptions here in Waterloo; we’ve got RIM, we’ve got Sandvine, we’ve got OpenText; we’ve got companies with a truly global perspective. But there still seems to be some reluctance to, say, try one’s hand in Silicon Valley. Do you think Canada is making progress in that regard, or do we have a long way to go yet?
A – I guess we always saw Sandvine being a global company, even from Day 1 as a startup here in Waterloo.
We knew we had to be relevant wherever IP flowed - and that’s internet protocol as opposed to intellectual property – and that is to say, around the planet.
I guess I don’t believe in generalizations about Canada not being able to solve global technology problems, and there are plenty of examples here locally – RIM, OpenText – that if you’re solving a true technology problem, it makes no difference whether you’re in Canada, the United States, India or anywhere else.
Q – What about entrepreneurial spirit? Much is made about Americans being more risk-tolerant and more failure-tolerant, and about Canadians not raising our kids to see entrepreneurialism as a viable career option due to the risk.
A – You know, one of my favourite things to do is to watch Dragons’ Den with my boys. I think it’s a great example of being able to see entrepreneurialism first-hand and to have discussions with your children about ‘Is that a good idea or is that a bad idea,’ and help them develop their sense that they could certainly start a company if they would like to.
I think it’s always going to come down to an individual’s context, whether they are risk-averse or not, and I would avoid any generalizations.
Q – We also hear it’s difficult for companies to move from the startup phase into the established small-to-medium-sized company phase in Canada, due to lack of available capital to scale up, and as a result we see a lot of early exits instead of companies building for the long term.
A – You know, having a successful product solves almost all problems, because the success of that product can help fund the changes that a company has to go through to make it to the next step.
A lack of available investors is almost a problem that isn’t in the entrepreneur’s span of control, but having a wildly successful product that delights customers is almost fully inside of their control.
If they focus on that first, they will easily navigate moving from one level to another.
Q – Where do you see the internet taking the world in the next five to 10 years?
A – Nothing overly unique here in that it’ll be ubiquitous; you’ll have tens if not hundreds of devices connected to the internet, and it will be interactive.
The world has really migrated very quickly from ‘download and enjoy later’ to ‘entertain me right now’, and we publish a couple of times a year what we call the Global Internet Phenomena Report, where we show how dramatically usage of the internet shifts every six months or a year.
Sandvine is very fortunate to have a front-row seat to see the changing waters of the internet in real time.
We were the first to say back in 2002 that 50 to 60 per cent of the traffic on the internet was peer-to-peer file sharing. We were called heretics at the time; popular wisdom was that e-mail and web surfing were driving bandwidth.
Sandvine brought that knowledge to the world.
We were the first to say that Netflix was 30 per cent of prime-time traffic, so it was real-time streaming.
So we get to find these novel pieces of trivia, of how people consume bandwidth, and we get to figure out policies that will improve subscribers’ experiences with those changing phenomena.