While well established startup markets outside of Silicon Valley such as New York, Boston, and Seattle are already on venture investors’ radars, a key market for technology investment opportunities that has often been overlooked is Canada and its tech hubs, including Toronto, Waterloo, Vancouver, and Montreal.
Over the past five years, significant changes have taken place in the country’s technology ecosystem and regulatory environment. They have fueled a new era of innovation, nurturing standout companies like HootSuite, Kik, and Indochino and making Canada a key market to watch.
Where Canada is leading
What makes many Canadian technology startups so attractive to investors is that the companies have sustainable business models, with real revenue and a focus on solving very large, albeit sometimes unsexy, problems.
Material exits of globally recognized Canadian technology companies have occurred over the past few years — Eloqua to Oracle for $871 million, Taleo to Oracle for $1.9 billion, and Radian6 to Salesforce.com for $326 million, among others –- with minimal awareness that these were all Canadian-founded companies.
Canada is home to many quickly growing Software-as-a-Service companies like Vidyard, a Y Combinator alum, and FreshBooks, in addition to e-commerce players such as Kobo (acquired by Rakuten for $315 million), Beyond the Rack, and Frank & Oak. Desire2Learn and TopHat are disrupting the education market, and companies like, Shopify, BuildDirect, and Tulip Retail are disrupting retail infrastructure by creating new technology platforms and data-enabled distribution systems. Software-enabled hardware startups like Bionym and Thalmic Labs are leveraging the software-enabled hardware talent from Nortel and BlackBerry to create innovative devices and services.
In fact, the recent decline of BlackBerry has released a plethora of talent –- experienced technology executives and junior engineering talent alike –- into the Canadian tech ecosystem. The fall of this one giant will plant the seeds for hundreds of others to grow.
Home-grown tech talent
Conventional wisdom in Canada held that once you were ready to scale your company, you needed to move to Silicon Valley, or just get acquired by a larger technology company.
However, that dynamic is rapidly changing, and Canada is now seeing large American technology companies setting up shop to take advantage of the country’s rich engineering talent, lower operating costs, and thriving entrepreneurial ecosystem. For example, Facebook, Amazon, Google, Twitter, and Square all have offices in cities such as Vancouver, Toronto, Waterloo, and Montreal. The presence of these world leaders in technology in Canada injects additional energy and seasoned, as well as cutting edge, expertise into the startup ecosystem.
Canada is world-renowned for its high-quality post-secondary education, with the University of Waterloo’s engineering co-op program at its core. In fact, the Waterloo area is also now home to the Perimeter Institute, a globally recognized leader in theoretical physics graduate studies and research. And while Canada has always churned out top engineering talent, today it’s also producing outstanding technical entrepreneurs.
A friendly business environment
Many of the developments in Canadian technology wouldn’t be possible without several new initiatives. One of the most important changes was the removal of Section 116 from the tax code in 2009. The Section 116 change was significant because it made a startup investment much less complex and costly for U.S. investors.
Now foreign technology venture funding, represented largely by the U.S., is flowing into Canada in large amounts. In fact, the C100, the leading Canadian technology entrepreneur association in North America, has seen more than $700 million of U.S. venture dollars invested in Canadian technology companies involved in its ecosystem over the past couple of years.
In 2013, Canada took a bold stance when it announced its Startup Visa Program. A billboard in Silicon Valley enticed with “Pivot to Canada” –- a campaign aimed at attracting foreign entrepreneurs to Canada -– and a bit of a poke in the eye to the U.S., which has struggled to pass its own startup visa program.
R&D tax credits and refunds unique to Canada help to lower the cost of starting a company. Michael Litt, the founder and chief executive of Vidyard, says that by his estimates, it is up to two-thirds less expensive to start and run a technology company in Canada versus Silicon Valley. A number of his Y Combinator cohort companies weren’t able to get nearly as far along with their businesses as he did, given the expense and competition for talent in Silicon Valley.
There is also a new generation of talent that is helping to build the startup ecosystem in Canada. Iain Klugman and his team have built Communitech in Waterloo, a massive technology hub that supports more than 700 startups and several global technology companies, along with a couple of incubators and an accelerator. And smart, driven early-stage investors like Boris Wertz of Version One Ventures, J.S. Cournoyer of Real Ventures, and Chris Arsenault of iNovia Capital, among others, have all helped to raise the bar of what success should look like for Canadian technology entrepreneurs.
Heads up, keep an eye on your northern neighbor
Canada is a tech hub worth keeping your eye on over the coming year. There’s a new generation of technology entrepreneurs dispelling the stereotype that Canadians are “too nice” to aggressively do what it takes to build a billion-dollar company.
Mike Serbinis, chief executive of Kobo, identifies with Canadian technology entrepreneurs being scrappy risk takers. He said that he feels akin to Peter Munk, who started a mining company in the middle of nowhere in Canada and built what is now the largest gold mining company in the world, Barrick Gold. Peter was a Hungarian immigrant to Canada, and a true entrepreneur who took real risks and made huge bets. As Mike sees it, Peter’s tenacity is the closest thing he can compare to what he’s done to build Kobo, which is now doing over $1 billion in revenue.
With the thriving ecosystem and regulatory groundwork developed over the past five years, along with a set of scrappy and talented technology entrepreneurs, Canada is poised to see a groundswell of category-leading technology companies emerge on the global stage in 2014 and beyond.
Katherine Barr is a general partner at Mohr Davidow Ventures and a co-chair of the C100, the leading Canadian technology entrepreneur association in North America. On Twitter, find the C100, Katherine, and Mohr Davidow.