Malcolm is one of Canada’s most successful
yet least-known technology start-up entrepreneurs. Over
the past twenty-five years, the former University of Waterloo
professor has founded four companies and left an indelible
mark of innovation on the North American technology scene.
His first company, Waterloo Microsystems was a pioneer
in operating system design before being sold to Hayes Microcomputer
in 1990. His second company, Network Appliance currently
has revenues of $2.8bb per year and employs over 6,500
staff around the world. His third company, Cacheflow (now
BlueCoat Systems) had one of the most successful public
offerings in the late 90s. His most recent company, Kaleidescape
is a market leader in high-end home entertainment servers.
Headquartered in Silicon-Valley, and with R&D in Waterloo,
Ontario, the fast-growing company employs over 140 professionals
and is solidly profitable.
Malcolm discussed his deep and varied start-up career,
including the lessons learned along the way, with StoneWood’s
Let’s start with your first
company, Waterloo Microsystems. That company is unfamiliar
to many today. What was its story?
After completing my doctorate in Computer
Science at Stanford, I joined the faculty and founded what
largest computer science research project, called the Software
Portability Group at the University of Waterloo. During the
next few years we built the first operating system that was
portable from one hardware platform to the next. They were
heady times and in short order we found some commercial use
for this technology and the university actually began to
earn some royalties. As we started our second major project,
the university encouraged us, as they did many others, to
spin off our research into a company. Waterloo Microsystems
The early 1980’s was a different time to start a business
such as this. There were very few venture capital firms in
Canada and you could not raise US money as their funds had
covenants which restricted their ability to look at deals
outside their border. Also, Canadian investors did not really
understand tech at that time. I remember investors telling
us that they would fund us to get up and running but that
once the product was ready they expected us to trim our R&D ‘overhead’ so
that we could get profitable as soon as possible. They did
not understand that our human capital was our intellectual
property and that cutting engineers was suicide for a firm
such as ours.
In any event, we raised a little money
and started an operating systems company. While we had
success installing our software in some 5000 networks,
we were young and learning as we went along, and in hindsight
very naïve. We knew little about
marketing and sales and if the truth be told, our whole business
model was flawed. The PC industry at the time was like the
auto industry in the 20’s with hundreds of manufacturers.
We failed to understand or correctly anticipate how this
was going to play out. We were overly ambitious and tried
to build a general-purpose operating system that would meet
the needs of all of the people all of the time instead of
doing one thing very well. I never made that mistake again.
In any event, I was eventually ‘resigned’ from
Waterloo Systems and the company was subsequently sold to
What happened then?
Waterloo Microsystems taught me, among many things, what
I did not know. And while learning what not to do is important,
I wanted desperately to learn what to do. So I moved to Silicon
Valley. I had marketable credentials in product innovation
and engineering management so I consulted with a number of
companies for the next five years. I observed and learned
from many successful organizations and their leaders.
After a while, however, I was getting anxious to do something
on my own. I had consulted with a file server company called
Auspex Systems who I thought was optimizing their product
for the wrong performance goals. They were all about maximizing
throughput and I thought that the real opportunity was in
minimizing response time. I could not convince the CEO of
this however. About four years later, after watching them
fail to exploit this opportunity, I started a company to
develop the technology, Network Appliance.
This time I was going to develop a product and company that
did one thing well, and only one thing. I would not bite
off too much, just a file server. My co-founders and I wrestled
long and hard over all the ways this venture could fail,
and when we believed we had considered every angle we started
When we went looking for funding we were shunned on almost
every front. The only venture capital investors who understood
what were doing were already invested in Auspex and they
did not want to touch us. We talked to dozens of VCs and
made precious little progress.
In the end we found 31 angel investors
who invested a total of $1.3mm in the business. We were
hugely disappointed at the time as we had been trying to
raise $3mm but it was actually the best thing that ever
happened to us. It forced us to simplify things and to
focus. Plus, we were able to hang onto more equity which
I am thankful for to this day. I
have come to believe that many start-ups make a big mistake
going out for funding too early. Running a business with
very few resources is actually very good. It disciplines
an organization, and teaches it good habits which come in
handy even when it becomes successful.
Anyway, we got the product built and
it started to sell. I stayed as CEO for 11 quarters during
which the company doubled in revenues every quarter. The
next round of financing was much easier because all VCs
can understand revenue momentum; so was the ‘C’ round
It was a wild ride, one in which I learned a lot. I was
still pretty young and trying to manage a fast growing company
where seemingly something new breaks every week. I did some
things well and others not so well. At the same time I was
trying to manage a board of investors with different agendas
and goals. Young CEOs, focused as they are on their businesses,
often fail to appreciate the challenges and importance of
managing these relationships. Many investors see themselves
as experts with strong opinions on a variety of issues, some
of them have their stable of executives that they want you
to hire, and the politics of the board can have a huge impact
on the company.
For a young CEO that is a lot to deal
with and for those who try to be heroes thinking they can
do it all by themselves, it can be painful. You want someone
in your corner, a mentor perhaps, someone who has been
there before and can keep you grounded in what to look
out for, what to expect, and how to deal with certain issues.
There is no honor in going down with a ship that did not
need to sink.
I enjoy the early phase which presents
the kinds of problems I like to solve. The company is malleable
at that stage and can be molded and shaped. It is a fascinating
puzzle that plays to my strengths. On the other hand, managing
a company going through the kind of growth we had at Network
Appliance is an altogether different set of problems calling
for a different set of skills. Before Sequoia became an
investor in Series “C” we agreed that the firm
would be better put in the hands of a seasoned CEO who
had experience with such growth. I took part in that process,
found the candidate and gladly stepped aside after Don
Valentine of Sequoia agreed to become Chairman of the Board.
Don really helped guide the company through years of rapid
The firm went public in 1995 and is now one of the blue-chip
Did you start CacheFlow right away?
I retired for six months off and then
I was asked by one of the angel investors in Network Appliance,
Joe Pruskowski, to help with some due diligence on various
companies. Joe was interested in finding a company to buy
and manage. During that same period I got interested in
network caching which I also viewed as a response-time
problem. I developed some technology for dramatically speeding
up browsing on the Internet, and convinced Joe that it
would be a better idea to start a new company to exploit
this opportunity. We raised some angel money and started
CacheFlow in Redmond, Washington. We set up an R&D
shop in Waterloo. We had to build an operating system and
I knew Waterloo had a lot of this expertise so we set up
a lab there and it is still alive and well.
I did not run CacheFlow in the beginning,
but after 18 months Joe asked me to take over and move
the company’s headquarters
to Silicon Valley where it would be easier to hire executives.
A short time later the first beta test failed and I began
working feverishly on re-doing the whole technology.
That firm grew quickly, went public in 1999 near the peak
of the tech bubble, saw a huge run up of the stock and for
a period had a massive valuation. I stayed for a while as
CEO and then just stayed on as Chairman until I started Kaleidescape.
Tell me about your current company, Kaleidescape?
Well, in 2000 I started talking to one
of my former colleagues at Network Appliance and one of
the Waterloo engineers at CacheFlow. They both wanted to
start a business and we got together and started what we
called ‘Next New Gig’.
We spent a fair bit of time looking for a product idea. Eventually
we focused on home entertainment delivered over the Internet.
This led to the idea of developing a home entertainment server,
an appliance if you will with proprietary software and hardware
that would do a few things very well. I funded it largely
myself and we spent 2-1/2 years in stealth mode developing
It has been a great ride including a high profile lawsuit
with the DVD Copy Control Association, which we won. Today
we have a market-leading technology which is focused on high
end users such as yachts, aircraft and home entertainment
centres. We have over 100 dealers around the world and our
technology is in some of the most prestigious places you
can think of. We employ over 140 people, including a lab
in Waterloo, and we are solidly profitable. We have no venture
money, all employees have stock options and they all participate
in a very healthy profit sharing program. Things are going
Why did you fund this business yourself?
Well, for one I guess I had the luxury that I could. More
importantly though, I wanted to build a great company, and
that takes time. Buying that time requires that the management
team to have control of the company, which we do. There is
no way we could have found investors who would have waited
the seven years it has taken us to get to where we are. I
would have been replaced long before now if the company had
been funded by venture capitalists. This is an emerging marketplace
and there is only so much you can do to push new technologies
into a marketplace before it is ready. We called the market
correctly, but we needed time for all the pieces to come
Are you making a broader comment about investors?
I have come to learn that there are some
good investors and a lot of not so good ones, and entrepreneurs
need to be more discriminating. Young entrepreneurs get
obsessed with wanting the cash. They seek venture capital
like it is a good housekeeping seal of approval, validation
if you will that you are ‘in the game’. I
do not believe it is the smartest thing to do in most cases.
For one thing, venture capitalists invest in early-stage
companies expecting the founding CEO to fail. They expect
to replace the founder and tether him or her to a very short
leash. Running these companies can never be a science and
mistakes are inevitable. I have made my share. But learning
is all about making mistakes, adjusting and moving forward.
I think the trigger is often pulled way too fast on many
of these CEOs and for many startups the result is fatal.
To make matters worse, many venture investors bring little
more than money to the table which can be dangerous. It is
one thing to demand more from CEOs but another matter altogether
if they themselves add no real value by way of relationships,
experience or specific expertise. Entrepreneurs really need
to be more discriminating in selecting their investors, they
must ask what these people will contribute to their businesses
besides money. I know that sounds crazy to a young entrepreneur
who does not feel he has many choices, but I assure you that
you will pay a very big price if you hook up with the wrong
investors. If you can do it yourself, you should. Or look
for angel investors. There are lots of angel investors who
are former entrepreneurs; they bring real experience, they
know better than to interfere with management, and they tend
to be more patient than VCs.
Finally, I would again say that timing is important. Venture
money makes things easier and harder. It can corrupt just
as easily as help. I believe that engineers and managers
make better decisions when they are financially challenged.
Hunger focuses people, drives them to make efficient decisions,
and motivates them. How are we going to get this product
out the door with this amount of money? Companies can lose
this edge if they are flush with cash.
What is your philosophy today about starting a company?
I used to think it was all about the technology. Now I look
for big markets and big problems that require complex technology
to solve. That complexity creates barriers to entry and solving
those problems creates protectable technology.
I believe companies need to spend more time in stealth mode
building their technological barriers to entry. They have
to do the basic innovation first. Kaleidescape was in stealth
for over two years. We believed that once we came out of
stealth we could then focus on building different kinds of
barriers to entry and we would mostly lose the ability to
build huge new technical barriers because bug fixing and
feature creep would consume most of our engineering resources.
After coming out of the stealth closet we could build market
barriers by developing our brand and our channel, finding
partners, alliances, and customers. For example, we now have
over 1,200 dealers for our products. This is not an insignificant
barrier to entry for would-be competitors.
Why do you keep going back to Waterloo?
Don’t take this wrong but there
are differences between Canadians and Americans in the
tech sector. The US has a stronger culture of entrepreneurial
risk-taking, hard driving, ambition and it reflects in
the sheer number of start-ups and people like me who do
this over and over again. I have found Canadian engineers
to be better long-term team players and more socialist.
They value security, stability, and life style.
My companies have all involved complex
operating systems, and other huge pieces of software. This
kind of work requires teams of very smart people. It requires
working together, and really knowing each other. Waterloo
is perfect for that as I can put together teams of very
bright people who will stay together for a long time, learn
to compensate for each other’s deficiencies, and
produce wonderful things together. We have people working
at Kaleidescape that I first met in the early 1970s as
students at University of Waterloo. These are very talented
people. It is more difficult to do this in Silicon Valley
where loyalty is harder to come by and people move around
a lot more.
How would you characterize Michael Malcolm?
I love to create things. I always have.
When I was a young assistant professor, a long time ago,
I actually joined a potter’s guild in Waterloo. I
learned to throw pots. I loved the whole process, I learned
the classic forms and I learned glaze chemistry, and I
enjoyed creating and selling hundreds of pots. And I dare
say I got pretty good at it. After a while I found that
I could make a lot more money from pottery than I was making
as a professor and I seriously considered becoming a full-time
potter. Fortunately I never made that change!
I get the same satisfaction architecting
a new software or hardware product. It’s the complexity of the overall
system, the problem solving, the many moving parts, the creativity.
And companies are no different. They too have many moving
parts, many variables which interact. Both require creativity
to build and that’s what I love to do.
So instead of pots, you now ‘throw’ technologies
I guess that’s me!