Defrosting The Great White North's Startup Ecosystem

By Andrew James , written on July 30, 2012

From The News Desk

The Canadian tech ecosystem has suffered in silence. Not unlike that guy in the ED commercials, it's ashamed of failures, but equally afraid of a short-lived success. The startups that moved south and succeeded usually refrained from moving back after the ecosystem labelled them “sell outs." The ones that stayed, struggled.

In Waterloo, that played out in the shadow of RIM. Most startup communities dream of having just one multi-bilion dollar, globally known tech giant, banking on that to flush local entrepreneurial coffers full of cash, mentors, and hope that they too could make it. But in the case of RIM, this just didn't happen. RIM did invest in the university from which it plucked future interns and employees, but almost nothing went into Waterloo's tech community. When startups like Kik began to rise up, RIM attempted to unceremoniously squash them. Not only did this keep the startup community down, but it poisoned the waters around the company's own development environment.

Sure, we can’t solely blame RIM for not releasing the parking brake on Waterloo’s startup community – as well as Toronto’s. But not supporting the surrounding techspace hampered the environment, and startups in Waterloo struggled to find their own mentors, let alone gather seed funding. For smaller companies, sticking around meant little funding from venture capital firms uncomfortable with the idea of investing in a Web-based business – not to mention one without a business plan.

Add to all that the problem of being Canadian – yeah, it’s a thing. I know, because I am one. Friendly and polite isn’t ideal for a company trying to push things forward against its brash American counterpart.

In Ted Livingston's case, he was so unassertive about his intentions, worrying there would be animosity about his grand plans, that he didn’t even mention Kik to any classmates. That  ended up with Ted entertaining visits from New York godfather of venture capital, Fred Wilson, who funded his company, even while it was  being sued by RIM.

If you thought life with RIM was rough, now Canada is staring down a life without it. With Canada's sole tech giant sinking into oblivion, there’s a focus to find the next “tech darling” to replace the handset maker's position. But why? Another round of RIM-style leadership would be disastrous for Canada's ecosystem. What matters right now is the myriad of startups and talent flourishing just below the surface. But for all the complaining about companies moving away, local venture capital firms have been squeamish to fund the startups.

There's not enough local capital, and local investors will only realize the value of the startups after Canada gains some "more big wins," says Skyscrpr co-founder Paul Burger. Burger recently made the move from Vancouver to Silicon Valley to found his company.

“Canadians need to stop complaining when a company moves anywhere,” says Debbie Landa, the founder of Dealmaker Media and Grow Conference in Vancouver. She believes that if they supported the companies, instead of heralding Canadian-ness, successful companies that make a solid exit would be more willing to put back into the community. As well, those big exits would provide more confidence by old school VCs to invest in revenue-less startups.

The older VCs in Canada that had finance backgrounds and didn’t know how to handle the tech environment. They weren’t willing to invest in the concept of a Web-based startup without a business plan or a physical product. “To invest in a company, you need to understand them,” says Landa, and only recently has the environment seen more digitally-oriented VCs launch. As well, accelerators and incubators have poked up across the country over the last two years with FounderFuel and Year One Labs in Montreal, Extreme Startups in Toronto, and GrowLabs in Vancouver.

South of the border, increasingly high valuations in the Valley are sending some VCs to venture beyond the Caltrain line. While some funders still believe that the talent is just better in the Valley, Landa's Grow Conference is aiming to change that by pulling speakers up to Vancouver for a three-day conference and demo day every year. High-value, talented companies and engineers with low self-esteem are as much as half the price of their American counterparts – and they're increasingly making Canada a destination spot for talent acquisitions. So, while US VCs may not be outright investing in Canadian companies, they are making acqui-hires. Two recent examples are Acrylic Lab, which was just picked up by Facebook for its two designers, Dustin MacDonald and engineer Mark Davis, as well as Halifax's GoInstant, which was purchased by earlier this month.

All the factors that held the startup community back have started to pair with their inverse south of the border, to Canada's benefit. Over the past two years, the northern tech scene has morphed into a giant Canadian goose popping out golden eggs, and at an astounding rate. There are now over 300,000 Canadian engineers working in tech in the United States.

The one thing Canada has going for it as an investment destination – not just a poaching ground – is the SR&ED tax credit, which covers half the cost of all scientific research and experimental development in the country. Meaning half the payroll of programmers is covered by the government. When Fred Wilson visited Kik's Livingston in Waterloo and heard about the SR&ED, Livingston says his response was, "This country is crazy, but I love it.”

Landa believes that what’s holding back Canada's startups – and several other ecosystems – is their inability to brand and promote themselves. Basically, the ability to push themselves into the limelight and not lose their shit at the slightest sign of criticism of their community.

But it’s not just a problem in Canada, “Anyone outside the Valley is terrible at branding themselves,” says Landa. While New York City is making a strong play for being the exception, that does seem to be the case. But it’s time to refocus, because there’s now more value in distant locations – as well as the retention rates for engineers hired to work locally is significantly higher – and investors, who are having problems even getting into meetings with Valley startups have started avoiding demo days because of the high valuation numbers. They're all heading for the hills.

This is a pivotal moment for Canada. RIM didn't help much when it was thriving, but now that it's nosediving, it’s ejecting talent into the local community – which may turn out to be it's biggest gift to Waterloo's startups. A significant obstacle for Canada – a country with less population than most moderately successful social sites – won’t be talent, entrepreneurial spirit, or a tumbling giant. It’s the focus on being the next tech leader, not the next Canadian tech leader.

As Landa says, “[the community] needs to be industry focused, not Canadian focused.”