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

At the cafés in the San Francisco Bay Area, where I live, you get used to seeing older men dressed in business-casual taking meetings with younger men dressed in casual-casual. At one time, these younger men would have been seeking something—preferment, a reference, a job—from the elder. But as often as not in these topsy-turvy times, the younger man (and it’s generally a man) has something the older man wants: an “in” to a tech business that just might scale—go global at the astonishing pace that a well-executed idea now can. And so, after the pleasantries end, it’s the young guy asking the questions: Why do I need your business acumen, your legal expertise, even your money, when I could just as easily get it somewhere else?

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There must be something in the water here. A significant bunch of this rising generation’s best and brightest are choosing to become entrepreneurs—a rational choice when conventional jobs are so scarce for young people. But that’s not it, not entirely: Even some highly employable people are opting for a life in the risky world of tech entrepreneurship. They love that line in The Social Network, delivered by Napster founder Sean Parker (played by a suave Justin Timberlake): “A million dollars isn’t cool. You know what’s cool? A billion dollars.” They want their work to touch not hundreds, or even thousands, of individuals, but millions—and technology (along with hard work and a bit of luck) has put that possibility within reach.

Not just in the Valley, but here in Canada, too. Ontario is home to the second-largest cluster of IT companies in North America. Last year, Toronto-Waterloo welcomed more than 1,700 new start-ups—many of them working out of the region’s incubators and accelerators. And the influential research organization Startup Genome recently named Toronto—home to an estimated 178,000 tech workers—the world’s eighth-best place to start a tech business. That’s thanks, in part, to local universities like the University of Toronto, Ryerson and the University of Waterloo that produce graduates ready to seize tech opportunities. Credit is also due to the federal and Ontario governments for supportive initiatives over the past decade. (Most recently, the feds have been lauded for the introduction of visas for internationals who plan to start tech ventures here. The so-called Start-Up Visa is the first of its kind in the world, and something the Valley’s leaders have long been asking President Barack Obama to introduce.)

BlackBerry’s presence in Waterloo, where roughly 6,000 employees occupy 24 buildings, looms large in the start-up boom, too. Many insiders suspected, until recently, that the Toronto-Waterloo scene would tank if BlackBerry went the way of Canada’s previous flagship tech company, Nortel. The end to the BlackBerry story is, of course, still unknown. But even with the company down to a 3% share of the international smartphone market and shedding staff, it continues to fuel one of the continent’s most vibrant start-up scenes.

Back in Ontario this summer, I visited the incubators and accelerators of Toronto and Waterloo, and spoke to 15 young entrepreneurs (and one outlier—a 64-year-old social media tycoon). Some are in the early stages of turning an idea into a potentially viable business; others have found their niche and, with serious backers from Canada and abroad, are experiencing explosive growth.

I also spoke with 15 of the scene’s mentors and investors. Most of these guys (and again, they are mostly men) did well in Internet 1.0 and are now seeking to make even more money off Internet 2.0—and, through their connections to this new generation of founders, to stay in the game.

Herewith, a portrait of a start-up boom born from a decade of dominance by a single company. What rises as BlackBerry falls, or at least as it reinvents? For now, it’s this—this sphere of hackathons, demos and boot camps, of seed and Series A funds, of never-ending (never-ending) pitching. Everyone dreams, if all goes well, of a major exit, of that cool billion.

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Welcome to the Trough of Sorrow

I’m lying on a big beanbag in a high-ceilinged old office. The headquarters of Vidyard takes up the entire top floor of a four-storey building on Kitchener’s seen-better-days main drag. There’s a guy in a tricorne hat working at a high table (at least, it looks high from this vantage point) and a mural on an exposed-brick wall of a robot driving four horses through the stars. Two go-carts sit idle, waiting for any of the start-up’s 31 staffers who want to blow off steam.

In a glassed-in boardroom in the centre of the space, one of Vidyard’s founders, Michael Litt, is finishing up a meeting with investors; since its founding in 2010, Vidyard has raised about $8.5 million.

“Welcome,” he says as he emerges from the room and extends his hand—but I’m not quite sure how to get up gracefully from the damned, nearly beanless beanbag. Litt is wearing a lilac shirt, its French cuffs turned up to reveal the different pattern inside, and sports a tidy beard. Living in San Francisco, the epicentre of the tech revolution, I know the look all too well: The 26-year-old has got the hipster-dandy happening, de rigueur for the founder of a tech company.

Vidyard sells software that helps companies figure out which parts of their online videos viewers are watching, what they’re rewatching, which parts they fast-forward through or where they pause, having lost interest. “The idea is that this information is useful, particularly to sales teams, to know what interests their clients, and possible clients, and what doesn’t,” says Litt.

The University of Waterloo engineering grad anticipates he’ll need to almost double Vidyard’s staff to over 50 by the end of the year to keep up with a growing roster of blue-chip customers, including Eloqua, Salesforce.com and McAfee. “We’re in the phase of stepping on the gas, but it wasn’t a sure thing,” Litt says, sipping a microbrew from Vidyard’s mainly beer-filled fridge. “There were lots of moments where it could have all gone wrong. And it still can—in a moment.”

Litt and his co-founder, Devon Galloway, met at Waterloo, and both turned down sweet job offers—Litt at Google’s Zurich office, Galloway at the international powerhouse McKinsey—to start Vidyard. “My dad was terminally ill and he lived locally, so that was one big reason to stay here,” Litt says. (His father died this past spring.) “And we’d worked on this project in our final year at Waterloo—like an interdisciplinary thesis.” In it, they proposed an efficient way of making slick instructional videos, charging $80,000 a pop. “Our clients were much more interested in the analytics platform that went with the videos, so we took that idea and ran with it,” he says. In the start-up jargon that has entered everyday speech, at least in these circles, they “pivoted.”

Over by the water cooler, Litt shows me a photo of Vidyard’s patron saint: the English-born venture capitalist, Silicon Valley guru and renaissance man Paul Graham (PG, to everyone who’s anyone). Graham runs the Wimbledon of start-up crucibles in the Valley, Y Combinator. It’s an intensive three-month course that helps founders transform their ideas into viable business plans and, if they impress PG and his pals, obtain some funding (in exchange for a chunk of equity). Only 3% of the start-ups that apply from around the world are admitted, and Vidyard emerged in September, 2011, with a playbook and $1.65 million in seed funding.

“When we drove back here from San Francisco,” says Litt, “we thought—excuse me—but we thought, ‘What the fuck are we going to do with all this money?’” They took some time to refine the software and find customers. “We were in what PG calls the Trough of Sorrow. I was working to close deals for, oh, $250 per month, and I was pretending it’d all be okay. We’d had our Crash of Ineptitude—another PG term for when you shit the bed—and we’d come back from that, and the product was now good.” In November, 2012, they drove to Orlando for an Eloqua conference, their entire car an advertisement for Vidyard, and landed $50,000 in new business. By Christmas Eve, they’d closed a Series A round of funding for $7 million.

After our interview, we slide in to Litt’s silver Porsche convertible so he can show me Vidyard’s former office, in a spooky, old house. “This car was something that came from a lucky investment in real estate,” he says hastily, knowing that investors prefer start-up founders to live on Ramen noodles until the business really takes off.

As he drops me at my own, less flashy, ride, Litt turns serious—the inveterate salesman making one last pitch: “They say the future of the Internet is television. At present, 57% of consumer traffic is driven by video, and by 2017, some estimates peg it at 92%. That’s where we are, what we want to participate in.”

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“We’re rooting for BlackBerry”

Iain Klugman, the CEO of the Waterloo-based incubator Communitech, bears a striking resemblance to the Jean-Luc Picard figurine on his desk. Klugman’s buzzing incubator, with its 120 start-ups, occupies 44,000 square feet in a former tannery. He knows just about everyone on the scene, including Litt, and he points out some aspects of Litt’s story that make him typical of this generation. “He had other employment options,” says Klugman. “He’s also one of six Waterloo-area entrepreneurs in the last three years to get into Y Combinator and come back with solid funding and a new, more global perspective.” (They include Stephen Lake, a fresh-faced 23-year-old whose Thalmic Labs recently raised $14.5 million to make the MYO armband, which helps users control almost anything remotely; and Mike McCauley, who last year sold Bufferbox—which allows customers to ship their courier deliveries to secure boxes in public places—to Google for a reported $17 million.)

There is something else that makes Litt typical of area entrepreneurs: He once worked at RIM, developing tools for small and mid-sized businesses. “We’re rooting for BlackBerry, of course,” says Klugman, whose building is jammed with RIM vets. “And we’re seeing a huge infusion of talent from it into the local community.”

For a long time, Klugman continues, when people thought of Waterloo, they thought of RIM and maybe OpenText. “But in 2013 alone, we’ll have had 520 companies start up here. They’re drawing investors, getting traction. There’s a generation of founders, aged mainly from 23 to 35, who are exciting; they remind many people of the founders of the big tech businesses that grew up here in the last generation.”

The University of Waterloo’s internationally renowned, co-op-driven engineering program, with its emphasis on entrepreneurship, also has a lot to do with the start-up boom here. That, and the influence of renowned economics professor Larry Smith, whom I met for a drink at the pub attached to the tannery. “I am an adjunct professor, by choice,” says Smith. “How can I tell these kids to go out and risk everything if I have a cushy tenured position? I tell all of them they need to be entrepreneurial, even as employees.”

Smith’s TED talk on entrepreneurship (“Why You Will Fail to Have a Great Career”) has been viewed more than 2.5 million times, and many of his 20,000 former students have gone on to apply his precepts as entrepreneurs. (He famously mentored Mike Lazaridis when the RIM co-founder was at Waterloo.) “Suddenly, everyone’s enthusiastic about entrepreneurship, but it’s not new,” this precise-to-the-point-of-fussy man says. “I’m a farm kid from the Ottawa Valley—all the farmers, my uncles, they were all entrepreneurs. Entrepreneurship is all about, in simple terms, freedom.”

_________________________________

Get ’em while they’re young

If the Valley has its PG and Waterloo has Larry Smith, Toronto has Reza Satchu, founder of the Next 36 program, which is run partly out of the innovation palace that is the MaRS Discovery District (a pioneer in public-private tech commercialization created in 2005). Satchu and his brother—whose Ismaili family moved to Canada from Kenya when they were kids—built a supply-chain software company, backed by heavyweights like KKR, Onex and Sequoia, that was bought for nearly $1 billion in 1999. Since then, the Harvard Business School grad (and onetime U of T entrepreneurship prof) has spent his time searching for investments for his Alignvest Capital Management and helping to run the Next 36.

When I mention the similarities be-

tween his program and Y Combinator,

with its 3% admission rate, Satchu bristles: “Ours is 4%—of the nearly 1,000 applicants from across the country, we admit, well, 36. So it’s almost as selective.”

The nine-month program, geared to undergrads, feels a bit like a reality show. Participants work in teams of three to create and refine a business plan, with help from mentors and patrons like W. Galen Weston and Paul Desmarais Sr. After working remotely for six months, they all bunk together for another three at U of T. Tempers can fray—including Satchu’s, whose tongue-lashings are infamous among survivors of the program.

Why so much competition for these slightly sadistic boot camps? “For this generation, being an entrepreneur has gone from a slightly disreputable, second-tier choice to people’s top career choice,” says Satchu, who spent 12 years at New York private equity firm Fenway Partners. “Of course, there are also so few real jobs with benefits and prospects of advancement. But people in this program have other options. They’re kids with some moxie, some work ethic. They’re in it because they want to build something themselves.”

Vancouverite Michael Cheng, the only child of immigrants from Hong Kong, participated in the Next 36 session that ended this summer. The faux-hawked 24-year-old has 11 business ideas on his LinkedIn profile, from self-tightening shoelaces to an online method for buying and selling used cars. But the plan he worked on at the Next 36 was for Needle, an online market for designers.

After Cheng delivered one hyperconfident presentation, Satchu asked his classmates: “Does anyone have any doubts about Michael or Needle?” To Cheng’s surprise, several Next 36ers went at him; as Satchu pointed out, Cheng’s cocky attitude aroused more animosity than admiration. Still, Satchu awarded Cheng the program’s highest accolade—a prize in Satchu’s own name—for Needle, whose new office is at Ryerson’s dynamic DMZ incubator. Needle was officially launched in August, and now has 11,000 registered buyers, 120,000 designers and 2.5 million pieces of work; Cheng and his partners have persuaded six angel investors, including a B.C. judge, to contribute an undisclosed amount of seed funding, on top of the $80,000 they got from the Next 36.

“I appreciated Reza taking me down,” Cheng says, a few days after delivering his final pitch at the program’s closing session. “It sounds odd, but I did. It was about authentic leadership. If you’ve been authentic, when you mess up, people stand by you. They want to help you. I obviously hadn’t been. I’d brought other things to the table, but not that—being honest about my weaknesses as well as my strengths. You learn, hopefully fast. My parents have worked so hard to give me opportunities.” He pauses; there are tears in his eyes. “I’m committed to making a go of this.”

If Satchu was Cheng’s biggest critic (“I’m hard on the people I think highly of, who have a real shot,” he says), local investor Dean Hopkins has been his biggest supporter. In far-off 1994, Hopkins, a Waterloo grad, left McKinsey to start an Internet company, Cyberplex. “It was so early that people were saying, ‘What’s the Web? Why do we need a website?’”

He sees a bright future for Cheng. “Michael and his generation grew up immersed in the Internet, and for them, the world is flat,” Hopkins says. “They have online friends and contacts all over the world, and they think globally. Michael knows how to access resources and customers abroad. It might not be this project that takes off—but with Michael, it’ll certainly be the next, or the one after that.”

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Show me the money

The big money in Canada hasn’t really gone in for tech. Real estate, natural resources, financial services, yes, but not tech. There’s money here, sure, but it’s spread across small, government-established angel networks and private financiers—mostly guys who did well in the Internet’s first big run and cashed out before the crash.

Perhaps the biggest financial fish in the local tech pond is OMERS Ventures (a wing of the $60-billion Ontario municipal employees pension fund). David Crow invests in and advises hot start-ups, and works part-time for OMERS, as its Evangelist-in-Residence (seriously). He has major cred on the scene—not least for a blog post he wrote last fall, titled “Don’t Panic: A Hitchhiker’s Guide to the Toronto Start-Up Ecosystem,” that has become something of a bible for scenesters: which weekly events are worth crashing, which classes are worth taking, which hackathons and demos draw real talent. He’s relatively new to OMERS, which has a good track record so far, having backed, among others, Vidyard, Vancouver star start-up Hootsuite (which helps companies and individuals manage their social media profiles) and Desire2Learn, a global education software company housed in the same Waterloo building as Communitech.

I met Crow at the OMERS Ventures offices, high up in the same gold towers where RBC is headquartered in downtown Toronto. He was wearing a jaunty striped gondoliers’ T-shirt and green jeans—not exactly typical Bay Street couture.

Canadians, he says, are a cautious bunch. “We love our GICs.” Here, investors want to know who else is in; the Valley business model is to take big risks in search of big payoffs. “Our major investors are used to the risks with mining and natural resources, and they can be considerable,” says Crow, who was born in London, Ontario, and is a veteran of the Valley and the Austin, Texas, tech scenes. “But they don’t yet seem to understand tech. The risks aren’t any greater; they’re just different. One of the problems is that a number of Canadian financiers got in to the market just a couple years before the last big crash. They didn’t get to ride that cycle when it was hot; they just got the big downside.”

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.”

_____________________________________

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.”

______________________________________

Kickin’ it old school

Before you get the impression that the future of the world lies in the hands of a bunch of 20-somethings with sumo ponytails, meet Isaac Raichyk, a gregarious 64-year-old serial entrepreneur and founder of Keek. “A funny thing happened on the way to retirement,” he tells me. “I built a social network and 65 million people came.” That’s right—since 2011, this relative geezer has drawn 65 million users to Keek, where they share 36-second videos. The Kardashian clan and Justin Bieber are all over it (“I had to use Google to find out who he was,” Raichyk admits). But it also features first-hand accounts of the havoc wrought by Hurricane Sandy and of the conflict in Syria, including one of the gas attack. “It’s enough time to tell a story with a beginning, middle and end, but short enough for our users to click through many of them—the keeks—quickly,” says Raichyk.

Even with his solid track record (Raichyk’s first venture, Kolvox, went public in 1994 and hit a $100-million valuation within a year), securing financing was a challenge. “I don’t look like the typical tech entrepreneur, do I?” he says, running his hand over his bald head. But a local financier, Devon Cranson, bet on Raichyk. “There was something to Isaac,” he says. “He’d done it before, and when he said he’d do something—add this many users or beef up this technical aspect of the app—he did it, and more.”

Since its founding in 2011, the company (“keek” is old Scottish for “look”) has raised over $30 million, mainly locally. On the day I met with Raichyk, at Keek’s office at Yonge and Eglinton, he’d just come back from Silicon Valley, where Morgan Stanley is reportedly seeking to raise a further tranche of funding—rumoured to be between $50 million and $100 million—to help Keek retain its lead in this increasingly competitive sphere. As of September, Twitter-owned Vine had 40 million users, 25 million fewer than Keek, and Facebook’s billion-dollar photo-sharing baby, Instagram, with its 150-million-plus users, has pushed into video. “We’re doing well because of our speed,” says Raichyk. “We don’t use the cloud—it’s too slow. We have our own data centres. We’ve built all our own solutions.”

Raichyk is circumspect, even a little evasive, about his plans. So far, Keek is free, and he has yet to introduce advertising in a big way. But whether he can monetize the site without alienating existing users remains to be seen. He’s been reported as saying he’d consider a buyout offer over $1 billion, something he won’t confirm or deny.

For now, he seems happy here, in this nondescript mid-rise—which, with offices of Facebook and LinkedIn nearby, is becoming Toronto’s social media hub. “It’s all happening at Yonge and Eglinton,” he says cheerily. “Towers going up, condos, condos and more condos. This is where it’s at.”

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JARGON

Ping me, a friend who works at Apple says to me, meaning contact her, e-mail her, text her, Facebook her, do anything but call her. Tech scenesters share a particular vocabulary—and, with tech imperial these days, it’s only a matter of time before even civilians start speaking their language. What’s your exit? is a common question in the Valley and, now, Toronto, meaning who do you see buying you out—Facebook, Google or Cisco? The ecosystem is not what your green-minded Grade 6 teacher told you it was, but a set of software and hardware that all works together. Or that’s what it was initially; now, it gets used a bit more loosely, to denote a particular sphere of the tech industry or, in more lingo, a space (or, even more horrifically, a geography). As in, “We’re in the lo-mo-so space”—meaning local, mobile and social—“and will totally disrupt the [fill in old-school industry here].” Acronyms, once popular, are on their way out, but TLDRtoo long, didn’t read—can still be applied disdainfully to an e-mail that stretches more than a screen. “My grandmother, God bless her, keeps sending me these TLDR e-mails...” Traction is what you hope your new app gets—meaning users, buzz—which in turn gives you promising metrics to boast about as you secure your seed, Round A and Round B funding. But if your project doesn’t get traction and solid metrics, you’ll hit a moment of crisis, where, without action, things could get worse—far worse—or they might not: You’ve hit an inflection point—a calculus term for where a downward-trending line can inflect back upward or swoop further down. At the inflection point, you don’t panic; you arrange for a meet-up or two with your advisers and investors, your angels and a VC you know, to get their input. And then, with their advice, you pivot—of course you do—toward a more viable approach. You might be down, wallowing in what PG—Silicon Valley guru Paul Graham—calls the Trough of Sorrow, but you’re not out. In this world, you’re never out.

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