Why Wasn’t BackType Funded in Canada?

This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting.


BacktypeFor those of us who work in the Canadian social media and startup circles, there was some celebrating earlier this week when BackType announced it had been sold to Twitter.

Lots of credit goes to founders Christopher Golda and Mike Montano, who have made BackType one of the leading services to track and analyze social media activity.

Without raining on the BackType parade, a question that begs to be asked is whether BackType should have been funded in Canada as opposed to the U.S.

To provide some background, Golda and Montano were electrical engineering graduates from the University of Toronto, who showed their entrepreneurial chops by starting a service called iPartee. While the business didn’t succeed, Golda and Montano proceeded to start BackType in 2008 as a way to search for blog comments.

To jump-start the business, they applied and were accepted into Paul Graham’s YCombinator startup program in Silicon Valley, which coughed up $15,000 for a 6% in BackType. This let Golda and Montano create a prototype they could pitch to investors. Over the next three years, BackType raised $1.3-million and expanded into Twitter search.

In hindsight, BackType is a big fish that got away from Canadian investors. I would hazard to guess that in 2008 getting seed capital from Canadian investors was a remote possibility for Golda and Montano, which is likely one of the reasons they applied for the YCombinator program.

The question is whether BackType would get funded today in Canada. It appears the seed and startup investment landscape has changed with the emergence of new funds such as Real Ventures. Meanwhile, there has been a growing number of startup acquisitions, which should bolster the confidence of investors and entrepreneurs.

Do Canadian investors now have the ability and willingness to finance smart entrepreneurs with ideas? Or do Canadian investors still need to see traction such as a finished product, customers or revenue?

For more on the BackType story, check out this TechVibes story.

  • http://www.rho.com/ Roger Chabra

    The reality is that there was very little seed money available to Canadian entrepreneurs in 2008. Many angels had stopped making seed investments because of the global economic meltdown. In terms of organized seed funds, Extreme Ventures, Montreal Startup and Bootup Labs were all active then. But we can’t expect Canadian angels or seed funds to fund all of the available deals. Not even all of the “good” deals. Like everyone, these individuals and groups have limitations – money and time. Only so much to go around. They (and I) will always miss a few “winners.” But they will also hit a few out of the park as well – PushLife, BumpTop, J2Play, Sysomos, PostRank and especially Radian6 were all seed stage deals that drove great returns for their seed investors.

    The border is erasing. Particularly in good times like we are experiencing today, US firms are fishing for deals north of the “border.” But even in bad times like 2008, you will see the more adventurous US groups look for deals in Canada and anywhere else in the world great deal flow takes them, for that matter. Speaking personally, “the border is erasing” premise was one of the main drivers behind us setting up a division of NY and Palo Alto-based Rho Ventures in Montreal, Canada.

    Can we do more on the seed and early stage side? I think the only geography in the world that doesn’t answer YES to that question is the Valley. Of course we can. We need more capital in Canada at the seed and Series A level. Not for patriotic reasons but because it’s just good for entrepreneurs. We need Canadian dedicated and focused funds that will weather the inevitable bad economic cycles and times with Canadian companies. In these times, US investors tend to retreat to their own geographies and tend to their young there. And we need local Canadian value-add investors who can spend the huge amount of time it takes to help an entrepreneur get their idea off the ground. Not impossible in today’s connected world but it is tougher to do when your investors are across the continent.

    The seed bracket in Canada is starting to fill out nicely with angels becoming more active again and with organized groups like Mantella Ventures, Real Ventures and Extreme Ventures. We are all hoping to see the Canadian Series A stage filled in over the next year as well. Building a self-sustaining ecosystem which would allow us to finance companies from conception through to IPO would put us all in a very good position. But even then, we will miss some good deals. And frankly, IMHO, that’s not only inevitable due to time/money constraints but it’s also ok. That’s the way it should be. Entrepreneurs should have a free market and should have the opportunity to go after the right investors for them, regardless of where they are located.

  • http://startupcfo.ca/ Mark MacLeod

    Great comments from Roger. Completely agree. 

    YC was a great opportunity for them and I can see why they stayed. True Ventures is a great fund. So, overall, moving to the US worked out for them.

    Hopefully accelerator programs like Growlab, Extreme U and Founderfuel will give our founders the right start, visibility and acceleration to keep them here.

  • http://davidcrow.ca/ davidcrow

    We see the emergence of new funds like Klass Capital, Golden VP, Grassfed Capital and others that are playing in the $25k-$500k seed range. This capital definitely wasn’t available in 2008 (along with Mantella or EVP or others). It’s becoming the next stage where capital is less developed. 

  • http://davidcrow.ca/ davidcrow

    I hope that we can keep more of ‘em in Canada. Or at least get them to come home. With PushLife, Bumptop and PostRank all based in MountainView. And great entrepreneurs like @backtype:twitter  @attachmentsme:twitter @acharoo:twitter @uwdanny:twitter  @mcfazeli:twitter @shazow:twitter all heading to SF to pursue bigger badder things. 

    Founderfuel, Grow Labs, EVP/ExtremeU, MantellaVP are all part of the ecosystem we need to make entrepreneurs want to stay here.

  • http://blog.homestars.com bsharwood

     I’m still looking for the company in the valley that is  purchased by a Canadian company, or even funded by a Canadian fund. Let’s start bringing those people and companies back to Canada. I’m sure there have been few RIM purchases, but outside of that, have there been any recently which go the reverse direction – U.S. to Canada?

  • http://twitter.com/ekovarski Edward Kovarski

    For the last paragraph, I think it would be more apt to ask whether Canadians are willing to take a risk on entrepreneurs with ideas? Investing is all about taking risks and I still think as a nation we are still very reserved while SF is willing to take risks… Reality is that not every idea is a winner but you’ve got to take risks which they are more willing to do so in the States. Hopefully investors in Canada are going to take more risks at home because there is no doubt that we have in house talent, we just have to take a leap of faith from time to time.

  • http://whoyoucallingajesse.com/ Jesse Rodgers

    I can’t really disagree with the comments here but I do have to say that from my recent experience a hold up is that talking to Canadian’s about SaaS, funding needed, and valuations is less than the conversations you have in the US. It isn’t that they don’t ‘get it’ but they certainly don’t want to fund it with what is needed to have a real go at it or they are too slow to move. 

    With VeloCity connected startups only one raised a significant ($1M or more) amount of Angel money but his next round was all US money. Others have raised ~$500K in Canada but they need the US to make it work (one headed to YC recently). Every single one of them had a brutal time getting there though and they don’t have a lot of confidence of future support in Canada. Some that have funding do think they can get money from the US and stay in Canada like Kik has managed to do.

    What I am trying to figure out is how to connect young talent with right people at the right time. I think GrowLab and Founder Fuel may do that but I am sitting here at the tap of uWaterloo talent and they are looking south — be that from their co-op experience or their friends co-op experience. There isn’t a lot of reason not too.

  • http://www.facebook.com/duncan.logan Duncan Logan

    Don’t be too hard on yourselves, From what I can see overall Canada is doing a pretty good job here in the Valley.
    Firstly as an immigrant (UK) to Silicon Valley I think it is essential for any budding tech entrepreneur to come and spend some time in this unique culture. Like it or not, (and copy it as you may) Northern California still has a second to none culture and experience for tech start-ups.
    But Canada is doing some pretty smart things. The C100 Group (top 100 Canadians in the Valley) http://www.thec100.org/ is the envy of pretty much every other country operating here. The ability for Canadian Tech Entrepreneurs to call on or “hang” with this group is fantastic.
    The Consulate General of Canada also has a sponsor program to help Canadian companies come and sit in the heart of the start-up activity in The Valley either at http://www.rocket-space.com in San Francisco or http://www.plugandplaytechcenter.com  in Sunnyvale. Both of these centers are hubs for start-up’s, VC’s, Angels etc.
    Canada won’t create its “Silicon Valley” overnight, it will take generations of successes but whether Canadians are starting companies in the Valley or back in Canada is an overall good thing for Canada. The money follows talent and from what I can see Canada is doing a better job than most in supporting it’s talent as well as keeping it in a Canadian Community.

  • http://davidcrow.ca/ davidcrow

    @twitter-214160400:disqus this is a great question. Much of the early stage investment thesis has to be a breadth capital deployment. What YCombinator has figured out is how to get the best of the best from anywhere at a bargin basement price. This summers class is ~60 startups. That’s approaching the size of a small university program (assuming 2 founders/startups = 120 founders which is larger than a class at UW Optometry (irrevelant program to this discussion)). The idea that you have to bet on 120 founders to get a few hits is a very scary proposition for a small fund. I wonder if we have the capacity to handle the informed risks. 

  • Dan Morel

    Roger – I was going to make the same point.  2008 was a terrible year to be raising money anywhere, but esp in Canada.  Backtype gave up 6% for $15k – I think that tells a lot about how hard it was to do a raise in those days.  You’d be hard pressed to find that deal this day as an investor.

  • iamjohnstokes

    BIG NEWS: BackType wasn’t funded in Canada because Chris and Mike wanted to go to the Valley. 

    I met them at YC graduation day in Boston at the end of August 2008. At that time we were investing from Montreal Start Up and so were more restricted on where we could invest than we are now with Real Ventures.

    We told the guys that we would like to fund them but that they would have to come to Montreal – but they were “under the influence” (;-)) of PG and wanted to go West.

    It was a different story with the guys from Vanilla who after graduating from Techstars decided to come to Montreal – and were funded by MSU, Eon (Denver) and Klein Venture Partners (Valley).

    A team like Chris and Mike could get funded in Canada without a problem !!! They are smart, hardworking and deserve their success and I hope that we get a chance to fund guys like them in the future (and in fact we are pretty sure that we already have ;-) …)

  • http://twitter.com/rikutter Riku Seppälä

    I think the most important thing in Canada is to make more people like Christopher and Mike wanting to create startups. The best way to do this is to have some good success stories like theirs. I’m sure smart capital will find it’s way if we have great people willing to start and do awesome stuff like Christopher and Mike. I hope those guys are willing to come back once in a while and share their story. I’d be really interested in hearing about their first failed startup and the transition they made between the two. Maybe Startupnorth could cover that?

  • http://ericbrooke.wordpress.com/ Eric Brooke

    Its not all about money, it is also the level of risk that investors want to take.  My limited experience so far is that American investors on either coast are willing to take greater risks, than Canadian investors.  I am very happy to be proven wrong on this.

  • iamjohnstokes

    Actually Dan – that’s the same deal most teams going into accelerator programs get today – they valued the menotrship / advice and network much more than the money … and even in hindsight i’m sure they would have given up more than 6% to get what they got.

  • http://www.techentrepreneurship.com/ Helge Seetzen

    There is a big difference between leaving Canada and going to the Valley. Entrepreneurs leave Canada if they cannot find financing or other core startup elements. Entrepreneurs go to the Valley for very specific offerings (e.g. YC mentorship & PR advantages that are so critical for a social media service business). Canada needs to adjust its entrepreneurial ecosystem to prevent the former. Fighting the latter at a national level is hopeless because it really isn’t a national phenomenon (or even regional – it’s Paul Graham’s personal value proposition).

    Personally, I think Canada’s ecosystem is making a mistake by trying to compete with the Valley in the exact same domain (social web & mobile). That’s like competiting with Detroit for car manufacturing (both in the sense of uphill battle against established infrastructure *and* in the sense of betting late on a maturing boom). Instead, we should build capacity in the areas where the Valley offers a lot less advantages to new entrepreneurs: energy & infrastructure, health & lifestyle, biotech, consumer electronics, etc. Really any sector where technical innovation is a major success driver and networking effects are less relevant. Canada has the US beat in per-capita basic research - nobody beats the Valley in the social networking “start-declare winner-exit” game.

    Making that step as an ecosystem is extremely hard. The web will have us believe that “startup=web startup”. >90% of the top 100 non-wikipedia-like Google hits for “start-up” are web-focused. TechVibes recent “comprehensive” list of Canadian tech M&A shows nothing but web/IT companies. Try finding a non-web/IT entrepreneurship blog…

    But reality is a bit different. Some ~80% of M&A activity of the last 5 years happened in non-web/IT spaces (MoneyTree Report 2010) and the Techvibes authors could have massively expanded their list with the trivial search “acquisition canada bio” (or any variant of the last term for the energy, industrial, consumer electronics, etc. markets).

  • garydpdx

    Hi, Helge!  Just to add to your point about Silicon Valley’s attraction, I was previously in Chicago and Portland, Oregon and have kept touch (back in the Windy City, often) and they have issues on local companies fleeing to the Valley for lack of local funding and/or interest.  That’s despite Chicago’s metro area being the third largest in the US, Portland being Silicon Valley’s backyard (largest Intel R&D site in Hillsboro; Open Source Development Center in Beaverton, where Linus Torvalds bicycles to work nine months of the year), and both being inside US borders.