Canadian Business

A switcheroo at the speed of light: look out, Nortel. Your ex-employees at Innovance are about to pull a fast one on you. (Fibre Optics).(Company Profile)(Statistical Data Included)

In mid-August 2000, four former hotshot Nortelers met for the first time at their brand-new headquarters--a renovated, three-storey brick building in the grungy, west-end Ottawa neighborhood of Hintonburg. They were lucky to have office space at all: the tech boom was in overdrive, and the capital's corporate real estate market was overflowing with start-ups chasing the big-money dream.

Innovance Networks was no different. Just months before, Peter Allen, James Frodsham, Alan Solheim and David Nicholson held high-ranking jobs at a high-flying telecom giant. Now, they sat in an unfinished boardroom with a white board and not much else. Their discomfort was alleviated somewhat by the $30 million in seed money they'd received from a San Francisco yenhire fund. Still, they had one very important thing to figure out: just what was their new company going to make?

What they settled on was this: Innovance would integrate the best optical components to form a cheaper and more efficient long-haul fibre-optic network than Nortel's. By mid-September they had started hiring engineers. The next month, Allen, Solheim and Frodsham jetted to Silicon Valley to begin the first leg of a campaign they expected would take them next to Boston, New York and Toronto.

Innovance's cofounders got two surprises. The first was that they never needed to hit the East Coast. Their reputations preceded them. VCs in the Valley were well aware the foursome were members of the optical industry's elite and had been key to Nortel's dominance. In three days, Innovance pocketed $115 million--the largest VC financing in Canadian history.

The second surprise came from their former employer. Just days before the team returned to Ottawa, then-Nortel CEO John Roth made a now-infamous announcement: third-quarter revenue, he admitted, had fallen short of estimates--US$200 million short. Roth's bombshell was the first sign the good times were over.

Initially, Innovance's four cofounders weren't concerned about the steep recession that followed. All of them had left Nortel at its peak and were flush with cash. So was Innovance. Thanks to massive layoffs at Nortel and elsewhere, they were able to hire talented engineers. Market turmoil wasn't a concern--the company had nothing to sell. "It's like a golf shot over the water," says Frodsham, the chief operating officer. …

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