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State of the Nation

Why Canadian tech firms need to play ‘the Valley card’ Add to ...

Technology is a global market, but Silicon Valley has never been more important as a crucible of customers, capital and talent for Canadian startups developing deep information and communications technology (ICT).

“Playing the Valley card” as a Canadian ICT startup is often the difference between modest success and a clear win. Any opportunity big enough to generate venture-capital returns is being pursued there, typically headed by accomplished business founders with several tours of duty at both large and small companies.

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Perhaps most significantly, the customers of the products and the companies themselves will be somewhere along Highway 101, the major north-south link that runs through California. Since the centres of Canadian technology are at least a flight away, it makes sense to have a business strategy that is somewhere between acknowledging what's going on in the Valley and moving there lock, stock and barrel.

Here are some of the ways companies in our Canadian investment firm’s portfolio are pursuing competitive advantage in the shadow of Palo Alto:

  • From inception, they are establishing a presence in the Valley through face-to-face networking. The core group of company leaders have commited to spending a third of their time there. This can evolve into a full-time presence by one or more members of the team as customer and capital pull demands. Establishing credibility as an “outsider” in the Valley demands exceptional technical depth, architectural vision, and force of personality. Canadian startups seeking to build a globally significant product can't afford weakness on any of these fronts.
  • “Constraint drives creativity” is an adage recently spotted on a T-shirt in Toronto. This certainly applies to Canadian startups that must bring products to market faster and cheaper than their counterparts south of the border. They have to be radical in their approaches to product development and the sales models they choose. Conventional tactics will almost always leave them outgunned. It’s risky, but it’s risk of the right sort. It requires technical leadership of the best architects, ones who have built successive generations of products – typically at the branch-plant design centres at the major tech hubs in Canada – and then choosing to do things differently. It also means reverse engineering the new sales models, which are being relentlessly pursued and modified around the world, and adapting them to the deep technology platforms that continue to be built by Canadian startups.
  • The Canadian capital markets are eager for new, high-quality technology issuers. The resource sector is seen as dead money, while renewed interest in tech companies has underpinned recent Toronto Stock Exchange initial public offering (IPO) activity spanning semiconductors (such as ViXS Systems) and software (Halogen). Quite a few private companies have successfully raised significant amounts of capital (including Desire2Learn, Shopify, HootSuite, and Diablo), often with a mix of U.S. and Canadian investors. Critical mass is an important consideration in any public market capital raise, so pursuing mergers and acquisitions to get there should be top of mind for any Canadian tech CEO.
  • Quantitative easing continues to reduce the cost of capital for large companies to historically low levels. As a result, they are looking for attractive ways to deploy that capital. Corporate strategic venture funds in ICT are at historically high levels in terms of their number and their breadth. Canada is viewed as an attractive place to build technology startups of comparable, if not better, quality than those in the Valley. The relative undercapitalization of Canadian ICT is seen as an opportunity. There’s an art to strategic investment from a startup perspective – keeping the big company close but not too close. Having multiple, contiguous strategic investors is ideal situation.

Every decade has seen the emergence of at least one Canadian ICT company that, in Steve Job’s words, has made a dent in the universe. Given the talent and drive our firm sees (and invests in) we expect the coming years to be exciting.

Dr. Tomas Valis is a partner at Celtic House Venture Partners, an independent Canadian investment firm. It has collaborated with management teams and repeat entrepreneurs to develop technology companies from inception to exit, generating 25 initial public offerings and successful acquisitions. From offices in Toronto and Ottawa, Celtic House manages in excess of $425 million across three funds.

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