Conspiracy theories and hockey talent

Photo by kennymatic

The brain drain. Canadian actors in Hollywood. This was a common thread for a in Canadian media outlets. But there is something new going on in tech north of the border. International corporations have been snapping up Canadian startups and talent. Foreign investors (think US Venture Capitalists) are looking north of the 49th parallel to actively deploy capital in high growth, scalable companies. Just look at the recent track record of activity in the past 9 months.

Recent Exits

• Layerboom acquired by Joyent.
• Plan9 acquired by Apple.
• Sysomos acquired by MarketWire.
• SmallThought acquired by Twitter.
• Opalis acquired by Microsoft.
• Bumptop acquired by Google.
• Sitemasher was acquired by Salesforce.
• CoverItLive was acquired by Demand Media.

Recent Foreign-led Investments

• Highland Capital Partners invests in Montreal-based Beyond the Rack.
• Bridgescale Venture Partners invests in Toronto-based Dayforce.
• Bridgescale Venture Partners invests in Toronto-based Bluecat Networks.
• FTV Capital invests $35M in Toronto-based Varicent.
• Altos Ventures invests $4.5M in Toronto & SF-based Kontagent.
• Metamorphic Ventures invests $1.5M in Toronto-based Chango.
• Grandbanks Capital invests in Toronto-based iLoveRewards.
• Grandbanks Capital invests in Toronto-based xkoto.
• Panorama Capital invests $8M in Calgary-based Tynt.

So just what is going on. Why the sudden interest and opportunity?

1. A History Lower Valuations, Less Capital & More Traction
   When you look at the historical news archive from the Canadian Venture Capital Association (CVCA) about the state of venture capital in Canada you begin to see a common thread. Canadian companies generally raise less money than their US counterparts at each stage of growth. This leads to lower valuations and more traction from local investors and has created a generation of Canadian entrepreneurs that are used to funding growth from profits. In 2009, the US market saw US$18 billion invested through venture capital. Canada startups only raised approximately US$1 billion representing 5.5% of the US number (source: Wellington Fund blog). The challenge is that the Canadian economy is approximatley 12.5% of the US economy and this leaves a significant gap in the amount of potential capital being deployed to Canadian startups. There is a gap in the level of investment and the overall economic performance in Canada. This leaves a huge opportunity for other funding sources.
2. Strong Local Communities
   When you look across Canada entrepreneurs are using the web, events and models developed locally and internationally to connect each other, share information and build successful startups. There are examples ranging from government funded initatives like the Accelerator Centre in Waterloo, WavefrontAC in Vancouver, the RIC Centre, MaRS, Lead to Win in Ottawa, and Communitech (there are a ton more). There are grassroots movements like DemoCamp, MontrealNewTech, StartupCamp and LaunchParty happening across the country. There are an emerging set of incubators and early investors like BootupLabs, Extreme Ventures, Montreal StartUp/Founder Fuel, and Mantella VP. These communities provide entrepreneurs opportunities to connect with other entrepreneurs and seed investors to share methods, pursue informed development and find mentorship and funding.
3. Close Proximity
   As soon as you decide to get on a plane, the game has changed. It’s not about can I drive to a board meeting in less than 45 minutes. It’s about can I make return travel in the same day. Flights to Vancouver from San Francisco are only minutes longer than flights to Seattle. If you’re leaving the comforts of Silicon Valley to travel to Seattle, Boulder, or other destinations than you should consider Vancouver. Toronto and Montreal in the same geographical proximity to Boston, New York and Chicago. The decision for most investors has less to do with travel and more to do with finding great companies whose growth can be accelerated. Having an international border throws a couple of new complications (see the next section Taxation Reforms) into the mix but it should not prevent investment or acquisition. There might be taxation and immigration impact on
4. Taxation Reforms
   Charley Lax at Grandbanks Capital was a vocal critic of Section 116 of the Canada Tax Act. However, on March 4, 2010 Finance Minister Jim Flaherty announced amendments to the Act that excluded shares of Canadian private companies. Basically, this removed a major tax barrier to foreign investment opportunities. A few of the deals listed above where completed before the changes to Section 116, significantly more seed and early-stage deals involving capital from US investors can be seen.

The times are a changin’

Conspiracy theories of Canadians infiltrating American companies are mostly true. But the brain drain is a thing of the past. Silicon Valley is heading north to find new deals, new talent, and new opportunities. Grow Conference in Vancouver is a prime example of the exploration north of the border. Elite investors like Rob Hayes of First Round Capital, Dave McClure of FoundersFund, Jeff Clavier of SoftTech VC are heading across the border to engage with Canadian entrepreneurs and startups. The Canadian Tech Mafia, sorry the C100, continues to show a strong presence with Rob Chaplinsky from Bridgescale, Chris Albinson of Panorama and others.