by James Bagnall
National Post, Monday, February 1st, 1999.

How a four-year old upstart grabbed a 90%-plus share of its niche and convinced industry giant Intel to come along for the ride.

Steven Baker is a 46 year-old former entertainment and publishing manager from Florida who has just pulled off a series of coups in one of high-tech's fastest-growing fields.

Today, Mr. Baker's five-year old security technology company, Chrysalis-ITS Inc. of Ottawa, will unveil a $9 million U.S. private placement in which California-based Intel Corp. has taken a significant piece.

Other investors include Toronto-based J.L. Albright Venture Partners Inc., which has taken the lead role, Manitoba-based Centara Corp. and Kanata-based Mosaid Technologies Inc.

Although Intel has made similar equity investments in dozens of other small technology firms across North America - including Toronto-based MGI Software Corp. and Waterloo-based Research in Motion Ltd. -- it's believed to be the first time the microprocessor giant has entered the market in this manner in the Ottawa region.

As with the other investments, it's not the size of the Intel stake that's important. Instead, it's the credibility it offers, not to mention the prospect of doing follow-on business with Intel directly.

"We have an opportunity to work with Intel in a number of key technology areas they have under development," Mr. Baker said in an interview. "This is all happening very quickly."

Intel, one of the globe's most profitable concerns, announced last month that it's adding security features to its next-generation Pentium-III chip part of what's likely to be a long-term effort aimed at putting Intel processors at the heart of most transactions involving electronic commerce and secure communications.

Mr. Baker is not tipping his hand about Chrysalis' precise contribution to this new thrust by Intel, other than to note that there are already firm contracts in place involving the transfer of goods and services to Intel.

Mr. Baker did not arrive at this juncture by accident. Chrysalis positioned itself from the beginning to take advantage of key industry trends and is now starting to ride what appears to be an unstoppable wave of electronic commerce. International Data Corp., a U.S. consulting firm, is predicting that the value of electronic commerce will soar to $426 billion U.S. in 2002 from just $32 billion U.S. in 1998.

In order for firms to conduct business securely over the Internet, they generally need three things. First is security software, known in the industry as public key infrastructure (PKI), that establishes a framework and a set of rules for determining who on a network is entitled to send and receive secure information or electronic cash.

The second ideal feature is a piece of ultra-secure hardware for storing encryption keys and signing electronic documents. The third enabler is technology that allows networks to more quickly process secure information.

Chrysalis just happens to be in the business of providing the latter two. Its bread-and-butter product to date is a small bit of hardware, dubbed LunaCA, that allows companies to create master keys and sign digital certificates or documents in a module kept separate from the main network.

The encryption algorithms used to create these electronic master key are analogous to the plates used to make $20 bills, for example.

The modules are offered as a hardware option along with the security solutions developed by companies like Ottawa-based Entrust Technologies Inc. of Verisign Inc. of Calif. That's because products sold by these firms are software-based and potentially liable to be hacked or infected by viruses.

Such an event is considered unlikely, but when it comes to electronic signing authority, many customers don't like to take a chance. That's where LunaCA comes in.

LunaCA is the globe's leading cryptographic hardware security system, with a stunning 90-per-cent-plus share of the market. And Chrysalis achieved this distinction with impressive speed.

Less than two years ago, Chrysalis signed its first deal to sell LunaCA to Verisign, but then it quickly added Verisign's archrival Entrust. Since Verisign and Entrust were the leading security software players, it didn't take long before Chrysalis had signed similar deals with other rivals and would-be contenders -- ranging from Baltimore Technologies of Ireland to IBM Corp. of New York.

"We were surprised to discover we had landed on top so decisively," said Mr. Baker, "But as long as we continue to provide the leadership in this space it's unlikely we will be overthrown," he added.

Here's the beauty of Mr. Baker's position: his company is offering a valuable hardware component to nearly all the software-secured networks being built today. Every time Entrust or one of its competitors lands a sale, Chrysalis is guaranteed a shot at new business and, increasingly, more customers are opting for the extra security of a hardware module.

The growth curves in this burgeoning industry are steep. Entrust, for example, had $49 million U.S. in sales last year and is expected to surge this year to nearly $80 million U.S.

Chrysalis is starting from a smaller base -- its sales last year (fiscal year ended Oct. 31) were somewhere between $7 million U.S. and $10 million U.S. -- but it's been doubling year-over-year for several years.

The Ottawa company has 44 employees, but Mr. Baker expects this to top 60 by the end of April.

Some of the new growth is being fueled by Chrysalis' second main thrust a cryptographic accelerator designed to speed up secure computer networks.

Accelerators are considered useful in a secure network because the job of inspecting, authenticating or rejecting secure data packets and arranging for the exchange of keys consumes a lot of processing power. The result is that secure networks tend to be slow.

Chrysalis is now attacking this potential market with the same enthusiasm it reserved for the cryptographic hardware niche. Early last year, it signed a deal with Israel-based Checkpoint Technologies, one of the globe's leading makers of firewalls -- systems that screen digital traffic for viruses and other forms of 'illegal' traffic. More recently, it announced a sale of this technology to Nokia, the Finnish wireless communications giant.

Chrysalis is positioning itself as a supplier of components to larger firms like Checkpoint, California-based Bay Networks and Cisco Systems Inc. -- which build secure networks, known as virtual private networks, for clients using the Internet.

Mr. Baker is convinced that the two sides of his business will eventually converge. "They'll become key components for building a framework for electronic commerce," he said.

With this in mind, Chrysalis last month signed a technology agreement with Mosaid Technologies aimed at substantially improving the performance of these networks. The two companies are collaborating on a new system-on-a-chip that promises to substantially to boost the speed of encryption accelerators and help to eliminate many of the bottlenecks on secured networks.

Along with this comes a breathtakingly ambitious business model. "We wanted our technology to be pervasive", said Mr. Baker. "We want to see our products bundled and packaged with every server, every router, every firewall." Inside everything, in other words.

Indeed, it was the creation of this strategy that led Mr. Baker last year to seek out Intel. "We needed partners with business models that were similar to ours and Intel was top of the list," he said.

So how does a small Ottawa company get Intel's attention? For that, you have to understand something about where Chrysalis came from.

For starters, Mr. Baker is not shy. A Montreal native, he grew up in Florida where he graduated with a degree in political science from a local state university.

He did some graduate work at Carleton University, where he met his wife, Benita, then returned to Florida. There, he worked in the late 1970s and early 1980s for MCA Records in marketing and promotion, and later for a group of foreign-language entertainment magazines.

In 1983, he and his wife moved to Ottawa. Benita, today the export control manager for Chrysalis, signed up with the federal government and found herself part of the team that created the Canadian Security and Intelligence Service the civilian security agency.

Mr. Baker, meanwhile, took some time to study the local business scene. He read some Ottawa Citizen interviews given by area high-tech executives, and decided to call them up out of the blue. One of them was John McLennan, then a senior executive with Mitel Corp.

These conversations gave him enough confidence to try setting out on his own. His wife's insight from CSIS told him there was an important opportunity in the whole business of processing information securely.

Mr. Baker started out slowly, helping to co-found TSI, a distributor of electronic security products. Then, in 1985, he got more ambitious he and two other partners founded Emcon Emanation Control Ltd. to manufacture and service security products that conformed to Nato standards. For example, Emcon built 'Tempest' systems that could prevent outsiders from gathering information from a computer screen or the signals that radiate from a computer.

Emcon emerged as one of the leading suppliers of Tempest security systems to 16 Nato nations. In the early 1990s, it began exploring ways of diversifying to civilian markets.

The federal government at the same time was looking for ways of securing confidential information contained on its taxation, health and welfare databases. Federal officials approached Emcon to do hardware solutions and relied on Entrust -- then part of Northern Telecom Ltd. -- for security software.

That was the catalyst that prompted Mr. Baker to buy out his two partners in 1994. The result later was a new firm called Chrysalis-ITS. "Chrysalis and Entrust emerged from the same, hot, bubbling stew," he said.

Chrysalis began intensively developing its encryption hardware product. Mr. Baker diluted his 100 per cent holding with a private placement in 1996, followed by a second round in the summer of 1998.

Combined, the first two investment rounds brought in $5 million U.S. Equally important, they brought in new investors -- including Antoine Paquin and Jim Furneaux, a founder and early investor respectively in Skystone Systems Corp., now the Canadian unit of Cisco Systems Inc.

Mr. Paquin and Mr. Furneau, now members of Chrysalis' board of directors, were well connected. They convinced Harold Hughes, the former chief financial officer of Intel, to invest as well. That, and Chrysalis' product line, provided the link to Intel.

In hindsight, it all looks easy. "This third venture capital round was different", he said, "because we realized who we are and who we could be. The issue was that we need enough money to be able to separate away from the pack," Mr. Baker said.

Mr. Baker got to this position only after 16 years of careful maneuvering and patient building. By now he understands that simply getting inside Intel's camp is no guarantee Chrysalis will emerge a winner. But this is now his niche to lose.