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Where Canada's next billion-dollar idea is being hatched Add to ...

The end result is that there’s a decent level of funding for start-ups, but it dries up once enterprises start to scale up, leaving them no option but to look south for larger infusions of cash or for an outright sale.

The Ontario government dispenses a moderate amount of seed funding through its Investment Accelerator Fund—administered through MaRS, it makes investments of up to $500,000 in hand-picked start-ups. And the federal government announced in the winter that it would soon pump $400 million into the venture market.

“This $400 million, it’s important and appreciated,” says Bruce Croxon, another Toronto tech financier, best known as the rakish star of CBC’s Dragons’ Den. “But it’s still not a huge amount by international tech standards.”

Croxon sold his own start-up, the online dating service Lavalife, for $170 million in 2004. “Canadian entrepreneurs,” he says, “can hold their own with anyone in the world. We have proven that, with the big exits from our scene. At present, we lack one thing: the appropriate amount of later-stage capital to lever our strengths. It’s that simple.”

He and some partners recently founded Round13 Capital, which is halfway to its goal of raising a $100-million fund to focus on early-stage investing. They’re already receiving about 50 requests for investment per week. “It’s a strong scene here—a vital one,” he says.

Croxon says he made a number of mistakes with his own exit from Lavalife, ones he’d love to help other young entrepreneurs avoid. As for who gets his backing in the first place, his answer is nebulous. Like the other investors I talked to, he mentions the team, of course; the strength of the competition; the founders’ willingness to learn; the uniqueness of the value proposition; the size of the problem sought to be solved. Croxon’s bottom line is strikingly similar to Crow’s, and it’s not much to go on: “It’s not a really satisfying answer,” he says, “but you know a good start-up when you see it. You see the next big thing and you just know it.”

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The young and the stupid?

I wondered if I was meeting just that—the next big thing—when I sat down with Zak Homuth. Many of the players I’d talked to (including Crow, an investor in Homuth’s company) had pointed me his way, and so here I was, in the basement of a downtown Toronto row house, where he and a dozen of his fellow 20-somethings were working feverishly on Upverter. With shoulder-length hair bunched into a bun on his head, the two-time dropout (first from high school, then from the University of Waterloo) has the charisma of a rock star, or maybe a revival preacher, and intelligence to burn.

You can understand at once how he talked his way into Y Combinator two years ago: “We didn’t have it all pulled together, and we applied late, but they saw something, even in our raw plans, and brought us there, and we rented a shitty house in Mountain View, and worked 18 hours a day,” he says. “PG is just so good at what he does, it accelerated our process—we’re a year ahead of where we would have been.”

Upverter left Y Combinator with $650,000 in funding, which it is using to build a cloud-based hardware design program for engineers and inventors. The company’s top selling point is that it works with plants to create prototypes of products designed on Upverter, within a couple days. Homuth hopes—no, he knows—it will be faster than existing design suites. “We’re all engineers, hardware geeks—it wasn’t a photo-sharing app we wanted to do, but something to revolutionize manufacturing. A big problem, big risks.”

His description of the start-up process is full of the same amplitude as Litt’s. “Our first attempt, last September, it had problems. No, it was a total and complete failure. We built it and no one came.”

They regrouped, and preliminary reviews for Upverter are strong, with 11,000 users tooling around on the new version, working on 10,000 projects.

“We’re young and stupid enough to believe we might change the world,” he says. “We have the chance to reach millions and affect great change. Out of this Cambrian soup, a bunch of things are going to emerge. Maybe it’ll be our project. We hope so. Maybe it’ll be someone else’s. Whatever comes, it’s going to be transformational. The economy needs to be transformed, and it will be.”

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Kickin’ it old school

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