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down in the valley

Man boarding a plane, in this case used for illustrative purposes.John Lehmann/The Globe and Mail

Cathy Han moved her Toronto-based retail data startup, 42 Technologies Inc., to Silicon Valley after it was accepted into one of the world's most renowned startup accelerators.

Few could blame the young entrepreneur for wanting to be a part of the Y Combinator accelerator, which has aided Internet behemoths such as Airbnb, Reddit, and DropBox.

"If you want to be a movie star you move to Hollywood, if you want to be a tech founder you move to Silicon Valley," Han says. "The community has been around longer, there's more resources and support here, and we really thought we could accelerate the growth of the company (by moving)."

Ms. Han is just one of the estimated 350,000 Canadians living in the Valley – more than 1 per cent of Canada's population – which has raised some concern for startup founders north of the border. As some of the country's best and brightest make the pilgrimage to the mecca of the tech world, taking their talent and future tax revenues with them, the remaining entrepreneurs, accelerators and venture capitalists (VCs) must wonder how they're going to keep future rising stars from leaving.

"We are losing significant talent and income potential for this country by not taking care of its startups," says Alex Haditaghi, a serial entrepreneur who founded the Pacific Mortgage Group before starting MoPals, a Toronto-based social media loyalty program.

"Canadian VCs are definitely failing startups. We have great young talent in this country, lots of smart people who work hard and are very passionate, and we really don't care about them as much. They offer them less money and want more ownership from them."

Haditaghi cites a Money Tree Report out of the U.S., from PricewaterhouseCoopers and the National Venture Capital Association, which found that early stage companies in Silicon Valley alone raised nearly $700-million (U.S.) in the first quarter of 2014. Canadian startups, meanwhile, raised a combined $71 million (Canadian) in the same period of time, according to Industry Canada.

Mr. Haditaghi says he decided to take MoPals public last year, only seven months after the company's establishment, as a direct result of being unsatisfied with the valuation offered by Canadian investors.

"By taking it public I was able to get a great board of directors," he explains. "We were able to raise money at $0.25 a share, a $12.5-million valuation, which would be impossible if we were private."

But comparing any startup environment with the United States as a whole is unfair, argues Boris Wertz, CEO of Vancouver-based venture capital firm Version One Ventures.

"A lot of people talk about the U.S., but we need to specifically talk about Silicon Valley, because every other small ecosystem in the U.S. – whether it's Denver or Austin or Seattle or Portland or L.A. or New York – have very much the same problems that Canadian ecosystems have. Having said that, I have yet to see a great company in Canada that didn't get funding.

"It might have taken longer, it might not have gotten the same valuation that it would have gotten in the Valley, but there's no great entrepreneur that went unfunded."

Wertz points to Canadian success stories such as Shopify, HootSuite and WattPad as prime examples of how well-managed startups can grow to become category leaders without leaving their home country. He also emphasizes that a majority of Silicon Valley-based founders were born in other parts of the country, and Canada isn't the only territory experiencing a brain drain.

"Look at the best founders that have built startups in the Valley," he says. "Sergey Brin of Google came from Michigan, Jack Dorsey who made Twitter and Square is from Missouri, Mark Zuckerberg started Facebook in Boston."

The problem for all other startup environments, says Wertz, is that the Silicon Valley startup ecosystem is more established, providing young entrepreneurs with a level of funding, mentorship, and resources unmatched anywhere else.

In an effort to grow the local startup ecosystem, Wertz and a number of prominent investors and entrepreneurs are backing Highline, the recently announced pan-Canadian accelerator program that merges Vancouver's GrowLab Ventures and Toronto's Extreme Startups.

"I think that announcement is almost a cry for help, because accelerators realize that merging their organizations will create an economy of scale," says Haditaghi, adding that Silicon Valley accelerators such as Y Combinator give each founder $120,000 in exchange for 7-per-cent equity. "With the Canadian accelerator system, they give you a $25,000 cheque and they want 10 per cent of your company, and to me that's a lot to give away at an early stage."

Silicon Valley-based startups have an undeniable advantage, in large part because the ecosystem has had more time to grow. Though Canada isn't quite at the same level yet, Marcus Daniels, Highline's new CEO and co-founder, says he believes the country is taking the right steps to catch up.

"Our founders now have a viable option where they don't have to think about moving down south to get their institutional capital, they can live in Canada, which is one of the best places to build a digital product given all the advantages we have as a country," he says, adding that Canadian startups benefit from less overhead and employee turnover than the Valley. "It's going to be interesting, over the next five years, to see how this grows and how the market responds to it."

Even Han, who moved her company to Silicon Valley, is optimistic about the future of Canada's startup landscape.

"The talent in Canada and the States is equally as good," she says. "But the environment is different, so having people moving forward in this direction, creating a better environment and recognizing we're not there yet is a good thing. There's no point in sugarcoating the situation as is, because there is a lot of room to grow, and we're not where we need to be, but we're definitely on the right path to getting there."

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