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How Canadian Start-Ups Can Transform our Economy

Text from a speech I delivered at the first annual National Crowd Funding Summit on Tuesday March 3.

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Good evening, and thank you all for sticking with me until the end of the day. And since I know that I’m the second last speaker between you and the cocktail hour, I will keep my comments brief.

I live in Kitchener-Waterloo. Last Friday morning, this was the headline of our local paper, The Record. Schneiders – the meat packers that have operated for 125 years – are shutting down their Kitchener operation. John Metz Schneider founded the company in 1886 after an accident at the button factory where he worked left him unemployed. He, his wife, and his mum began making sausages, and selling them door to door. It was an 1880’s start-up, which thrived, grew, survived the great depression and became one of the largest meat producers in Canada. J.M. Schneider was an entrepreneur who started a company, and transformed his local economy in the process.

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And last Friday Maple Leaf Meats, who have owned Schneiders for the last decade, shuttered the doors in Kitchener. The paper was full of images from that day.

The last rack of bologna.

The last package of sliced bologna making it’s way down the conveyor.   Incidentally, this particular package is going to the local museum.   I know there’s a joke in there about preserved sausage…

This story does have a silver lining. It’s about the march of technology. The production from Kitchener is being taken up by a new state-of-the-art factory in Hamilton, where robotic sausage makers will be able to output six times as many sausages per worker as the aging Kitchener infrastructure.

This next photograph was taken inside the remains of the Kitchener Frame plant on Homer Watson Boulevard. Kitchener Frame, or as it was known when I first moved into the area in the 1980’s as Budd Automotive, made automobile frames and bodies. It was a product of the 1967 auto pact that permitted US autos to be sold in Canada, provided that as many cars as were sold here were manufactured here.   Budd took advantage of the auto pact, purchased a plot of land for 300,000 dollars, and hired 700 people to build car frames.

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This sprawling 50-hectare site prospered in the 1970’s and 80’s. You could drive by on any day and see railway cars stacked full of frames for AMC, GM, Ford, Mercedes and Chrysler. Subdivisions grew up around it. Budd transformed the local economy through entrepreneurship.

In the late 1990’s a series of expensive plant upgrades, followed by cancelled contracts as automotive manufacturing moved offshore, resulted in disastrous losses, layoffs, and ultimately the closure of the plant.

Right now, in an act of urban renewal, this massive iconic site is being dismantled to make way for a new industrial, commercial and retail site.

Our economy is in the throes of change. Yes, it has been said before, but it has never been more apparent than today, when the shock of falling oil revenues from the prairies, confront the reality that revenues from the shrinking manufacturing sector in the heartland of Canada can’t make up the difference

This next photograph is where I hang out most days. This is the Communitech Hub, and Microsoft has a space here. Communitech is an industry organization like MaRS here in Toronto. Communitech works with about 1,000 local technology companies, and provides co-working space, space for the Velocity, Launchpad, and REV incubators and accelerators, event space, and more. It’s a space for today’s generation of entrepreneurs – today’s J.M. Schneiders – today’s start-up founders.

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This is a pretty cool site. And the story of the site is just as cool.

In 1849, Reinhold Lang came to Berlin Ontario (which is modern day Kitchener) and with his son George established a small tannery. The Lang Tanning Company then went on to become the largest producer of sole leather in the British Empire. During the First World War, Lang Tanning also produced saddle leather. During the Second World War, it supplied sole leather and leather linings for aircraft gasoline tanks.

Reinhold Lang was an entrepreneur too. In fact, it’s likely that he bought hides from J.M. Schneider for his tanning business – an 1880’s version of what we in our industry today would call an ecosystem. Reinhold Lang understood the transformative power of starting a business, and built a local economy that supported families, businesses, restaurants and more.

The Lang Tannery was put under by the rise of synthetic materials. The building survived however, and today its high ceilings and exposed brick are a fantastic environment for a new breed of entrepreneurs – technology entrepreneurs.

In fact, that entire part of the Kitchener downtown, which used to be dominated by factories producing rubber, felt, tires, leather, buttons, hockey skates and shoes, is now being transformed by today’s tech start-ups into desirable urban living and working spaces with restaurants, offices, bars, galleries and entertainments.

It’s an example of the transformative power of start-ups in our economy.   And you see it everywhere across Canada, whether it’s in Kitchener-Waterloo, the old harbour in Montreal, King West and Liberty Village in Toronto, or downtown Vancouver. We are changing the economy, one neighbourhood at a time.

Some of you may be aware that I’ve only been with Microsoft for the past month. My role is to work with the Canadian Start-up Community. So for the last few weeks I’ve been speaking with start-ups, investors, angel groups and community organizations like MaRS and Communitech. In these conversations there is no topic where there is more difference of opinion than the topic of financing. Some say there isn’t enough. Some say there’s plenty. Some say it’s not there at the right stage.

In 2014, $1.9 billion was invested in Canadian start-ups. In fact, we’ve seen year over year increases in investment since 2008, and it wasn’t so long ago that annual Canadian venture investments were less than half what we saw last year. It looks like a great time to build a company, right?

For context, last year US venture investors financed 3,900 startups, and invested around $29 billion. A nation with ten times the population of ours financed 10 times as many companies, and while investment rounds were larger than here, US start-ups don’t have the same advantages economically that we do – programs like SRED, FedDev, and of course the benefits that come from living in Canada – like Universal Health Care – that start-ups in the Valley have to pay for out of pocket.

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You can see from this map that the economic benefits of the start-up economy are spread across the country too. Of course there are large centers in BC, Ontario and Quebec. Those are the most densely populated areas.   British Columbia is dramatically punching above it’s weight with almost half as many start-ups as Ontario, and more than 50% of the funds raised, despite having just 1/3 of the population.   And of course, you can see the impact that oil production has had on venture-funded innovation in Alberta – money is going to oil there, not tech.

So is there enough funding? Well, there’s definitely a gap. Innovation in fundraising, like crowdfunding for example, may pave the way to closing that gap. And, of course, the US Venture industry itself is beginning to take note of what’s happening here and starting to finance Canadian innovators. For example, Kik Interactive raised another $38 million last November, in a round led by San Francisco based Valiant Capital Partners.

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Here’s another take on whether there’s enough funding. Los Angeles based VC Mark Suster put together this chart in 2012 to explain how the cost of launching a start-up had fallen so dramatically.

  • In the year 2000, starting an internet company meant buying expensive proprietary servers from a company like Sun Microsystems, or IBM, and kitting them out with proprietary software.
  • By 2005, open source, combined with low cost commodity hardware, cut that cost by a factor of 10.
  • Just four years later, the ability to purchase fractional cycles of commodity servers from cloud providers cut that cost by a factor of 10 again.
  • And then entrepreneurship programs at schools like Waterloo and Stanford taught skilled developers how to build companies in their spare time… you didn’t even need to raise money to pay a staff anymore. You could just bootstrap, and still build a product.

So it has never been cheaper, never been easier to start a company. And that’s true whether you’re based in Waterloo, Toronto, Bangalore, Shanghai, or Capetown.

And it has never been more exciting to be part of this start-up economy, because every one of those businesses, in small and large ways, can contribute to the local economy, and can transform the lives of the people around you.   Seriously! Whether you’re Ted Livingston trying to take on WeChat from his headquarters in Waterloo, or my Shanghai-based friend Jonah Lin who built his company MMMOOO over the last five years, in communist china, that supports 30 people and their families to build apps… entrepreneurs like you, in this room, are starting companies, and transforming economies.

I told you earlier that I worked for Microsoft, and that my job is to work with start-ups in Canada. Many of you in this room, like me, probably didn’t think that Microsoft was doing much in Canada with Start-ups. Probably unlike many of you, however, I picked up the phone and gave them a call, and offered my help. Yes… I have a bit of an ego. They took me up on my offer… and that’s how I ended up here, talking to you about start-ups and the power of start-ups to transform economies.

And I have to eat a little crow. It turns out Microsoft has quite a history of working with innovative start-ups. In 2008 we launched BizSpark, which is a program that gives start-ups $150/mo of free credit on Azure (our cloud service), plus free software and tools like MSDN subscriptions and Office365. And qualifying high consumption start-ups can get up to $60,000 annually in Azure credit under the BizSpark + program. The Imagine Cup is a contest for Student Entrepreneurs as well, and of course we have over 100 Microsoft Innovation Centres, we partner with over 200 local accelerators, and we have actually got 7 Microsoft Ventures Accelerators as well.

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And, the local team here in Canada has partnered with over 2,800 start-ups for BizSpark and Microsoft Azure.

So we do a lot with start-ups. We’re just uncharacteristically humble about talking about them. Who would have thought?

How many of you have heard about the Canadian Narwhal club? No? Maybe you’ve heard about the so-called Unicorn Club? Unicorns are start-ups incorporated since 2000 with a worth of more than $1 billion. This label was created by the Wall Street Journal to describe the hyper successful start-ups of today. I’m sure you know a few – like Uber, and AirBnB. At the end of last year there were about 40 in the United States.

Well, the good folks over at Galbraith Capital in Vancouver coined a term for a Canadian “unicorn”. A Narwhal. Personally, I like it. Narwhal’s are actually real!

In any case, Galbraith singled out 4 Canadian companies with value of more than $1 billion for that honour (there goes that 10% ratio again!) – Avigilon, HootSuite, Shopify and Slack. Even more interesting to me was the list of up and coming Narwhals that Galbraith put out – companies like Desire2Learn, RealMatters, and PointClickCare. Last week we took that list of Narwhal’s and Up and Coming Narwhal’s and compared them to the list of companies that we work with at Microsoft Canada. It turns out a very large percentage of them are partnered with us in one of the start-up programs that we run.

So the next time someone says “I’m from Microsoft and I’m here to help”… try not to laugh OK? It turns out we have a pretty good track record of helping.

And if you’d like to speak to us about how we can help, we’ve sponsored the cocktail hour this evening, and there will be a few of us cruising around there. So come and drink our liquor, socialize with the other attendees, and if you’re so inclined chat with us about what we can do to help you realize your goals.

I’ll leave you with one last thought. I started off by talking about J.M. Schneider – a man who sold sausages door to door in his neighbourhood, and in the process built one of the largest meat packing business in our country. And I ended this talk by talking about companies like HootSuite, and Desire2Learn. We are a nation of entrepreneurs, and we have been for our entire history, whether we’re making sausages, shoes, car parts, mobile phones or software. We’ve had some economic shocks recently, but it’s through entrepreneurship that we will recover from those shocks. And it’s never been a better time than now to build a company. So hat’s off to you, whether your ambition is to build a great local restaurant, a socially relevant non-profit, or the next Narwhal. And hats off to the funders in this room, who are backing this generation of entrepreneurs!

Always remember that the work that you do, and the companies that you start, are the most transformative and powerful force in our economy today.

{ 1 comment… add one }

  • John Hayden March 6, 2015, 1:18 pm

    Alec, this was a great presentation (especially as delivered in person at the Summit). Love your enthusiasm for next generation technology entrepreneurship in Ontario and what it promises for future economic transformation… while also keeping in mind important continuities with the past.

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