The Downside of Canada’s Start-up Buying Binge

Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.comThis post was originally published in September 12, 2011 on MarkEvansTech.com.

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There has been a lot of euphoria and happy dances recently about the flurry of Canadian start-ups being acquired. The list includes Zite (CNN), Five Mobile (Zynga), PostRank (Google), PushLife (Google) and BackType (Twitter).

The positive news is that the flurry of deals (22 and counting, according to TechVibes) provide a huge boost to Canada’s start-up ecosystem, which needs all the support it can get. Acquisitions reward start-up founders, encourage venture capitalists and angel investors, embolden entrepreneurs, and provide a healthier landscape for people like myself who provide services to start-ups.

In short, Canada’s start-up ecosystem is on a roll and, hopefully, these deals will make things even better and more active.

But there is a downside to these start-ups being snapped up. Many of them are early-stage companies with interesting technology but perhaps not a lot of customers or revenue. Rather than a business being acquired, it is the ideas, intellectual capital and, as important, the people that are being purchased. Many acquisitions are fuelled by the need to add strong talent to jump-start the growth of a business or service. Zynga, for example, was looking to boost its mobile development capabilities so buying Five Mobile was a quick way to do it.

The problems with many of these deals are two-fold:

  1. Many start-ups are snapped up before they get a chance to gain real traction and evolve into small or medium-size businesses that employ dozens or hundreds of employees. It means the loss of an opportunity to build a high-tech community that features a “middle-class” between start-ups and large players (most of them U.S.-owned) such as Microsoft and IBM. In an ideal world, some of these start-ups would grow into an Open Text or, heck, a RIM.
  2. Many of these deals involve some or all of the start-ups’ employees moving out of Canada. PostRank’s employees, for example, moved to the Mountain View, CA. after the Waterloo-based company was acquired by Google. It’s an M&A-driven brain drain when the best and bright entrepreneurs, developers, etc. get sucked south of the border. Granted, many of them will likely return to Canada with more experience and some dollars in their jeans but, in the short-term, it’s a loss for Canada’s high-tech and start-up community.

I recognize that, in the scheme of things, these are nice “problems” to have. After all, it is better that start-ups are being acquired and investors rewarded as opposed to no M&A activity, which afflicted the start-up landscape for far too long. My point is it is also important to recognize there is a downside, even though it is something we can happily accept.

  • http://chrisarsenault.wordpress.com/ Chrisarsenault

    Yes, Canada needs better funded, bigger Tech Companies aka: http://bit.ly/q8NK1Q @dapshore @spelton @markevans while smaller exits are a “necessity” in order to build a strong ecosystem of relationships, knowledge and leadership 

  • garydpdx

    Re: brain drain … if the enterprise grows large enough before being acquired, it increases the chances that most or all of the team will remain in Canada.  I have seen this with Israeli companies.  In EDA, one example is Summit Design of Israel which was acquired by Mentor Graphics Corporation (disclaimer: I once worked for MGC) and their CAD software is called Vista (disclaimer: we are a competitor).  Summit had a handful of executives move to the US to chase investment and be closer to customers in the semiconductor industry, but the rest of the team remains in Israel to this day.  In communications, Airwalk is an example following a similar path.  Also examples can be found from Europe and I’m sure in Canada.

  • http://twitter.com/dapshore dapshore

    Chris – we definitely need the smaller exits also – I just worry that we have so few large exits.

  • http://davidcrow.ca/ davidcrow

    I am less worried about the size of the acquisitions but the number of Canadian companies doing the acquiring. 

    Who are the Canadian acquirers? RIM and MarketWire? We’re building companies that get acquired. Not doing the acquiring.

  • http://engag.io/ William Mougayar

    It is unfortunate that these early exits seem to be a Canadian trademark of the past year or so. It’s a sign that we aren’t able to fund and sustain growth into bigger companies. Given a choice a) take another $8 million in funding and grow to a much bigger company, or b) sell out and drain out for $40 million- I would take a), but most of these other companies didn’t have an a) choice. b) was the only option.

    While this could be seen as a stepping stone into a growing ecosystem, it’s not good when that’s all we see, and when the acquirers are mostly US. It will take another 2-4 years for these few entrepreneurs to cash out and return to Canada…maybe. 

  • http://twitter.com/dapshore dapshore

    Dave – hard to find big acquirers here – Open Text, RIM, Constellation Software, CGI…?

  • http://startupcfo.ca/ Mark MacLeod

    This is a function of 1st time vs. repeat entrepreneurs (not entirely, but largely). repeaters have that choice and will make the same choice as you.

  • http://engag.io/ William Mougayar

    Good point Mark. Thanks.

  • Dan Morel

    I think the comparison/framing is incorrect.

    US tech industrials, like say Google, buy a certain amount of technology each year.  A lot of that technology is bought at $30-$50mm price point.  They can buy technology from almost anywhere in the world.  They are buying a good share of CDN technology!  We want to win that export war – its great for everybody, the startup ecosystem, the CDN economy, etc, etc.  And we have capital that is now basically targeting this market – Xtreme, Golden, Mantella, etc.The other side of the market,  say Kobo, Rypple, CommunityLend, Fixmo, etc are built very different with different teams/investors/advisors/goals than some of the companies that have been sold for $30-$50mm.  Its clear they are trying to go big.  These have more classic institutional money and different investors than the above guys.

    Two adjacent markets with different capital pools, operators, entrepreneurs, goals, etc.

  • http://startupcfo.ca/ Mark MacLeod

    Here’s why I think these exits are actually good: http://www.startupcfo.ca/2011/09/the-upside-of-canadas-startup-buying-binge/

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  • http://www.attassa.com/ Rod Fitzsimmons Frey

    Founder and CEO of Attassa here, one of this years acquirees.

    It’s easy to worry about brain drain, but there’s less concern if you take a longer view I don’t think there’s much to worry about.  Most of these deals have earn-outs, and we lose the founders for that period of time.  But it’s what happens after the earn-out is complete that matters.  I think many of this year’s crop will return in a couple of years with some dough and an itch to start up again.

    Not all will, of course – how will you keep them in Edmonton once they’ve seen a Santa Cruz summer? But enough will to make a difference.

    Here’s one data point – I’m back in Toronto. I might even be hiring. :)

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