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The Research In Motion Ltd. company logo in front of one of their many buildings, in Waterloo, Ont. (DAVE CHIDLEY/THE CANADIAN PRESS)
The Research In Motion Ltd. company logo in front of one of their many buildings, in Waterloo, Ont. (DAVE CHIDLEY/THE CANADIAN PRESS)

Canada’s vanishing tech sector Add to ...

Worse, according to a damning 2009 study by Impact Group of 18 early-stage tech companies that died or were bought out, the few Canadian venture capital firms that do take on tech investments tend to lack the experience, appetite for risk and know-how to help their portfolio companies – unlike U.S. venture capital firms, which typically employ one or more successful entrepreneurs. Canadian VCs also lack the financing to help take their companies through the full investing “life-cycle” until they become self-sustaining. “In Canada we don’t have the ability to take companies from the beginning to the end,” said Scott Clark, managing partner with Covington Funds, one of Canada’s more successful VC firms. “The biggest challenge companies have is getting a second round of funds.”

As a result, Canadian tech startups typically raise only about one-third of what their American counterparts do, and are often pushed by risk-averse investors to sell out just when they could be making the investment to become something much bigger, Mr. Chowaniec said. He has experienced that first-hand as chairman of Belair Networks, a Kanata Wifi technology developer that grew to about $50-million in annual revenue.

“Belair was at the point of taking off and had potential to be an anchor, and needed $20-million to $40-million to get to the next level,” he said. That proved hard to find from private investors, and when the company approached Bay Street investment bankers to go public, it got a valuation of $80-million for the entire company – unacceptable, given that the company had already raised $70-million privately. Meanwhile, the company was too small for a U.S. listing.

So instead, the board sold the company to telecom giant Ericsson for $250-million earlier this year.

And if Belair had gone public? It likely would have encountered what Byron Capital’s Tom Astle calls “the Canuck Tech Discount.” Earlier this year, he calculated that Canadian software firms trade at a 23 per cent discount to U.S. peers, on average. The discount for hardware firms was 34 per cent – making them undervalued targets for acquisitive foreign rivals.

“The only real option for Canadian tech companies in the last few years has been to sell themselves to American competitors,” Mr. Lutke said. “I’m not sure how you’re supposed to create a billion-dollar company in such an environment.”

A reason for hope

Canada’s dwindling tech titans may be worried, but they haven’t given up. And there are a few signs of hope.

One is Code Cubitt. Earlier this year, the oddly-named Canadian-born venture capitalist was taking a year off from a successful career in the U.S. high-tech sector, including a stint managing venture capital money for Motorola, when he got a call from Invest Ottawa’s Mr. Lazenby. The two had never met, but Mr. Lazenby was looking for a Canadian who had made it in Silicon Valley to come up to Ottawa and start a venture capital fund.

The 40-year-old Mr. Cubitt was intrigued, came to the capital in April on a scouting mission and decided there was ample opportunity to launch a successful Ottawa-based VC fund. He has raised $2-million after two weeks, on his way to an initial goal of $10-million by fall.

“There’s no question there’s a lot of good, underfunded, talented companies in the region,” he said. “What I observed was clear underfunding of good talented companies, as good as anything I’d seen in the U.S. I’m getting a lot of serious interest from people who’ve made money in technology, and they’re telling me this is something we absolutely need more than anything else.”

In Waterloo, where about 9,000 people work for RIM, 300 companies have started up in the past year; typically, there are at least 1,000 unfulfilled tech positions in the region at any time. Even if RIM were to be broken up or to fail, the entrepreneurial kick-start provided to the city by the University of Waterloo would remain. Meanwhile, the steady flow of talent out of RIM has already started to populate many of the area’s startups, suggesting the region could yet launch new technology stars.

But fixing the financing chain is crucial for Canada, if those companies are to grow – before the entrepreneurs behind them decide to move to the U.S. to put their ideas into motion, or just sell out. “It would be a tragedy if the only way we could grow our companies is to move them to Chicago,” Mr. Chowaniec said.

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