Friday interview with Deloitte's Duncan Stewart

By now you’ll have the hang of how this works. Our quarry this week is the esteemed Duncan Stewart, a man of tremendous experience in tech investing, raw trend analysis and generally calling the shots. Although he has no time for such things, he agreed to be our 3rd Friday interview candidate, despite needing the time to settle in to his new role as Director of Research for Deloitte’s Technology practice here in Canada. Thanks again for doing this.

#1. What will you be doing at Deloitte in you new role as Director or Research?

It’s an incredibly exciting opportunity. Deloitte has thousands of employees in Canada and 140,000 worldwide – and many of them are busy finding out all sorts of interesting things. In the areas where I will be directing research (technology, media, telecommunications and life sciences) I will get to pick the best of the Deloitte global research product, think about its Canadian implications, and make it even more relevant to Canadian companies, the media and individuals. My mandate includes meeting with great Canadian companies in the TMT and Life Science fields and picking their brains on what they see as important trends in their industries.

And finally I get to originate research in those sectors – primarily focused on longer term industry directions and also the intersections between innovation and societal change. In other words – the world is my oyster!

#2. Nortel has been a disappointment for investors for an awfully long time, despite the patch of good news earlier this week. How much longer can it stay an independent company?

I’m not sure it’s totally fair to say that Nortel is “disappointing” people. There’s no question that the INVESTMENT community is disappointed – just look at the share price! I wouldn’t wish what Nortel went through on my worst enemy: that combination of plummeting end markets, Asian pricing pressure AND corporate accounting issues almost destroyed a Canadian and technology icon. Turning that situation around is a long and painful process…but there ARE some signs that the company is getting rid of uncompetitive business units, moving towards cash profitability and continuing to innovate in some important areas like Provider Backbone Transport, or PBT. I think it can stay an independent company for a surprisingly long time. They are a legitimate number 2 to Cisco in the enterprise, and although they are an incredibly distant second place, markets and customers tend to support that contender in order to keep the dominant player honest. I wouldn’t rule out Nortel being bought – it has some great global assets – but my gut tells me it stays independent for a few years at least.

#3. For that matter, despite its wild success, how long can Research in Motion stay out of the clutches of Motorola, HP or Nokia?

RIM is a wonderful Canadian company and tech icon, and one of my proudest achievements as a venture investor was that I bought RIM while it was still private. They have great brand, technology and profitability. But they sort of fall into an M&A vacuum. Acquirers will buy very large companies at a price…sometimes even a fairly high price like 5x sales. Or they will buy a smaller growth company at a high multiple like >10x sales. But there aren’t many public company CEOs that will pay up for another very large but very expensive public company. MOT, HPQ and NOK trade at 1.0x, 1.2x and 1.8x sales respectively. RIMM would be at 10x if you include the takeover premium that would be necessary. I’m not saying that the executives of other firms wouldn’t WANT RIM…but I suspect that they may have trouble paying that sort of dilutive premium. (It would be really unlikely for MOT – taking over RIMM would almost be a merger of equals based on market cap.)

#4. ATI, Hummingbird, Creo, Geac, Pivotal, Ad Opt, Cedara, Workbrain…the list goes on and on. Is Canada creating enough new tech companies to replace the ones that are being acquired, largely by foreign firms?

Absolutely…over time. But there are some complex factors as to why it appears (in the short term) that we are losing more than we are gaining. 1) Canada has spectacular bench strength in telecom and networking technology – and those areas still haven’t completely recovered from the Bubble. 2) We are a relatively small country, and with only 1/10th the size (if that) of the US the numbers are very small – even one or two companies NOT going public makes it look like we are in a slump. 3) The changes to the Labour Sponsored Venture Capital Fund structure didn’t “cripple” the Canadian VC industry – but they didn’t help. 4) The resource sector (bless it!) has drawn a lot of attention both from the press and from capital markets. If you were a young entrepreneur in 2001 and had a choice between tech and oil and gas…which would have worked out better? Over the long run it is likely that we will see more young Canadians starting up the next RIM and next Cognos – but that process has been obscured by all the fireworks that the “rocks and trees” folks have been letting off.

Take a look at the Deloitte Fast50: there are some real jewels of innovative companies, and the next crop of tech IPOs and future Canadian billionaires are in that list. Great tech companies are like volcanic islands in the middle of the ocean. One day they break the surface and get a lot of attention. But they’ve actually been growing for years, and have risen 5,000 meters from the ocean depths. Nobody notices that part though – it is only once they get above sea level that everybody comments on them. I bet we have a lot of volcanoes-in-waiting that will make many waves over the next few years.

#5. Do you see any particular regional VC hot spots across Canada?

Quebec isn’t as hot as it used to be. There are still a lot of great minds and amazing entrepreneurs (guys like Oz, Solvision, and Wellington Financial portfolio company Airborne are just a few examples) but the days when there was MASSIVE government support for every Quebec-based tech entrepreneur are over. That is probably a good thing from a public policy perspective – indiscriminate public investment in venture distorts the market and creates inflationary pricing pressures for other tech firms.

Ottawa is still buzzing, and that will only accelerate as we start seeing signs of life out of the fibre optic and telecoms space. K-W seems to be going through a bit of a lull, but it certainly has the infrastructure of great universities and experienced managers that should help it thrive. Toronto is (as always) a bit of a disappointment. For such a large city with so many immigrants there should be more VC successes – but I guess the high rents and competitive job scene are a problem. Why go work for stock options at a start up when hedge funds or brokers will pay you a half mill in cash per year?

Calgary and Edmonton remain sporadic, although with some bright spots. Vancouver will probably do well in the near future. People keep complaining about high housing prices – but that has hardly been any kind of impediment to continued success in the Valley. The Left Coast has a lot to offer VCs – best climate in Canada, great quality of life to attract employees who care about mountain biking, same time zone as the Valley, and they are getting close to a critical mass of experienced managers who know how to build a start up.

#6. You’re a columnist for a local newspaper. How sustainable in the long term is the dead tree media in a sea of niche blogs?

I try not to be too “local” – most of the companies I have highlighted in my column over the last 7 years have been from outside the GTA. And I think the National Post does a not-bad job of covering the country outside of Toronto.

I love blogs – I read them all the time, and it is likely that I will be starting my own up at Deloitte. But I still pay attention to the existing print media. It does something special, offers unparalleled portability and reliability (for now) and gains importance because it is a shared resource. A million niche blogs are great – but I want to read the Globe, Post, NY Times, WSJ etc because almost everybody ELSE reads them too. I can’t figure out what is different from consensus, what isn’t part of general knowledge…unless there exists something to act as a reference point of what IS common knowledge.

Like you, I wish that the dead tree folks would acknowledge it when they get a story from the blogosphere, but I see a future where the two media will be able to happily coexist and even make each other better.

#7. What’s on your iPod?

Quite a lot, actually – 2903 songs and 7 days of music. Most recent additions were Billy Talent II, White Stripes and the complete Beethoven Sonatas by Ashkenazy.

But a kind of odd thing happened to my attitude about my iPod. I used to listen to it a lot – house, airplane, TTC, etc. I have been doing ashtanga yoga for about 3 years now, and one of the messages they really stress is that there is energy that flows between a yoga practitioner and the ground, the air, the other students in the class…the world in general. I look at many people on the TTC (I take the subway to and from work) and the rows of commuters with their eyes tight shut and the ubiquitous white buds in their ears remind me of Montag’s wife in Ray Bradbury’s Fahrenheit 451. She listens continuously to little headphones (called seashells) and uses that technology as a wall to shut out her husband and the hellishly totalitarian dystopia they live in.

I actually think today’s world is pretty cool – but when I think about how busy I am, how alienating technology can be, how life in Toronto and most of North America is lived inside snug living room cocoons/wombs and not on front porches and piazzas – I guess I question why I would embrace a device that lets me retreat even further into myself? (Please forgive the rant.)

Oddly enough – my (probably temporary) iPod aversion is kind of metaphor for why I joined Deloitte. I’d rather enter into a conversation with more people, with a globe full of colleagues, and with the future – spend time thinking, then communicate back with as many people as possible. You can’t have a conversation unless your ears are open…

Thanks again, Duncan. Best of luck in your new role.

MRM