“My estimate is we need $1-billion of new risk capital per year,” Mr. Chowaniec said. “Four hundred million on a one-time basis isn’t going to do it. We have a lot of stuff going for us in Canada, but we have some broken pieces. If we don’t fix them, our chances of building new billion-dollar companies are going to be slim.”
The money issue
Ask anyone on the Ottawa tech scene which company is the sector’s next great hope, and you will get one answer: Shopify Inc.
The private firm, founded and led by a 31-year-old transplanted German software developer named Tobias Lutke, started out six years ago as an online snowboard seller before other companies began asking to license its homemade e-commerce software. Now, after ditching its snowboard business, Shopify boasts more than 25,000 customers, ranging from General Electric to dance band LMFAO, which use the software to set up online storefronts in minutes.
Shopify’s revenue is increasing by more than 100 per cent a year and is in the tens of millions of dollars. Mr. Lutke has had little trouble raising money from investors, closing a $15-million round of financing last fall, and is hoping to take his company public in four to five years. But when you talk to him, he makes it clear that the company’s success is almost in spite of its location, not because of it. (Had he not married a Canadian, he likely would have ended up in Berlin or San Francisco, he said.)
Mr. Lutke set up his company in the city’s Byward Market nightclub zone, far from the old-guard techies out in the suburb of Kanata, with whom he has little in common. “You can’t get them to talk anything but doom and gloom,” he said. Most of his financing comes from sophisticated U.S. venture capital firms, including one Silicon Valley VC firm that backed LinkedIn, and is one of the few early-stage companies in a position to turn away Canadian investors. When he went looking for money, his criteria was: Would you pay money to have dinner with that person? “If the answer was yes, we would want them to invest,” he said. “The answer ended up being ‘No’ fairly frequently, looking at the Canadians. I wouldn’t pay money to have dinner with them. It’s the difference between money and smart money.”
The problem in Canada’s high-tech sector isn’t a lack of ideas: Entrepreneurship is alive and well. Bruce Lazenby, president and CEO of Invest Ottawa, a publicly funded economic stimulus agency, said there are close to 2,000 tech companies now in the Ottawa region, about four times as many as there were a decade ago.
Rather, the issue is money, or lack thereof, due to a lack of investor interest in Canada. It’s a pattern that manifests itself at all levels in Canada, and can best be explained as a Nortel hangover. Until the late 1990s, Canada had a healthy, if not flashy, high-tech sector, centred in the Ottawa region around telecommunications, dating back decades. With the rise of the Internet, “at a time when the world said ‘We need connectivity,’ Ottawa said, ‘We can do that,’ and it took off” led by Nortel, Mr. Lazenby said. “We were in the right place at the right time.”
But unlike the U.S., there was almost no risk capital to support the growth of the tech industry here. The first experience many investors had with tech here was Nortel’s outstanding stock market success, and that of other shooting stars that briefly sported inflated valuations during the Internet bubble. Nortel’s massive size at its peak was also unnaturally high, meaning many ordinary Canadians felt the pain – either through their portfolios or their Canadian mutual funds – when it melted down.
That helped to create an aversion to the tech sector as a whole, and it also meant Canadians didn’t recover as quickly as Americans, who were more accustomed to the ups and downs of technology investments. “There are a lot of people in Canada still smarting from the dot-com bust, and that’s a real problem,” Mr. Lutke said. “They are still thinking about the money they lost 10 years ago. That’s a bad state of mind to be in.”