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Tech in Canada. The precursors of success are here.

Yesterday I wrote about Silicon Valley investment levels compared to Canadian, as well as the perception outside Canada that our tech sector is no longer innovative.  One could easily be left with the perception from those pieces that the Canadian technology sector is in deep trouble, and doing a lot wrong.  In actual fact, the conditions for a successful technology industry in Canada are mostly right.

The ecosystem of Silicon Valley is anchored in three key sectors – education, finance and industry. The educational institutions fund research and turn out high quality graduates that then become the leaders of industry. Stanford University, founded in 1876, is the Silicon Valley powerhouse that turns out industrial and academic leaders alike. 

When founded, one of the Stanford’s credos was that it would produce “cultured and useful citizens” when most universities of the day were only concerned with the former.  Stanford had a practical bent from the get go. Fifty years later, Stanford graduates David Packard and William Hewlett would found their company in a Palo Alto garage, beginning the industrial connection which is the other driver of Silicon Valley.  Today Stanford is a wealthy lynchpin in the Silicon Valley ecosystem, funded by endowments, royalties, and more and producing the leaders that the ecosystem needs to prosper.

The story is similar on the other side of the US in Boston, where Harvard and MIT were the educational underpinnings of the famous Route 128 tech corridor. 

Here in Canada there are two or three possible areas where a similar ecosystem could be built. 

  • In the Golden Triangle area, the University of Waterloo, Guelph University and McMaster University all turn out high quality graduates.  Waterloo, in particular, has borrowed (whether by accident or design) from Stanford’s model heavily with its focus on partnering with industry and the practical bent it has displayed from the start.  Moreover, Waterloo is the home to Research In Motion, the current darling of the Canadian tech sector. 
  • A similar ecosystem could also be built in Toronto, centered around the University of Toronto.  Waterloo has a lead on University of Toronto, in my opinion, but Toronto is the heart of the Canadian financial sector.
  • Montreal is another possibility.  Montreal has McGill University, and investment dollars have been flowing to Quebec companies the last few years after the McGuinty Government’s ill-considered decision to cancel the tax benefits associated with Labor Sponsered Funds in Ontario. 

And what of Ottawa?  A decade ago Ottawa was the heart of the Canadian technology sector. The collapse of telecom in 2001 dealt the city a harsh blow, which it has never recovered from.  Former tech sector employees opted for safer government work, or left the city altogether shrinking the labour pool. Hard hit companies were gobbled up by foreign competitors. Today Ottawa still employs more people in tech than anywhere else, but the number of Canadian success stories left in Ottawa is dwindling, and Waterloo is quickly moving to surpass Ottawa in terms of employment.

We have the educational institutions.  We have a few of the anchor companies.  The biggest missing ingredient to drive Canada’s technology industry is funding.   Venture, as an investment class, has returned poorly in recent years, while natural resources have provided stellar returns for investors. It’s not a surprise that the Canadian venture sector is shrinking, not growing.

It’s also worth remembering that every dollar diverted from venture toward digging resources out of the ground is a mortgage on the future of all Canadians. 

Addressing the venture funding gap should be a top priority for the Conservative government’s budget on January 26th. In fact, it should a top priority for every level of government from Federal to Provincial and even Municipal. We don’t necessarily need government funding for venture capital.  We do, however, need conditions that encourage a private sector venture industry to prosper.

{ 4 comments… add one }

  • Peter Childs January 20, 2009, 5:56 am

    Three excellent articles Alec.

    One hopes that the upcoming budget will lay the ground work for a revival in tech investment. This means adjusting the tax code to reflect the reality of tech investment:
    – stopping the taxation of unrealized gains 'deemed' to have occurred when options are granted instead of when they are realized. (Though in disfavor options are an excellent way to reward key employees without affecting the immediate cash position of the company as it grows – unfortunately CRA penalizes employees so this common tech tool is unworkable in Canada)
    – recognizing in kind (sweat equity) contributions in SRED and IRAP (by allowing recent pay levels as benchmarks for issuing grants against early profits)
    – Allowing higher right-offs for tech investment losses and lower tax rates for investment gains (the increased risk should be recognized as the civil benefit is greater than investing in "safer" areas)

    In terms of the nascent areas you've identified – I'd agree they form a core but I believe that unless they are united they will lack the population base and world wide connections to substantially change our world rankings.

    Innovation is in part due to educational and capital infrastructure but once those are in place it becomes a numbers game – where the potential number of personal connections increases the likely hood of team formation, transference of proven approaches from one industry to another and the completion between close groups that allows the subtle differences in implementation that often separates ‘winning’ and losing technologies.

    Instead of three areas I’d suggest that a technology corridor stretching between Quebec City and Windsor. Dealing with this area as a single economic hub would substantially advance Canada’s competitiveness especially if programs were designed to increase awareness between similar groups within the region and travel within the corridor was enhanced with high-speed rail.

  • Alec January 20, 2009, 10:10 am

    Thanks Peter!

    I agree that there’s a corridor between Quebec City and Windsor. My concern is that there might be an infrastructure challenge. One of the things that I think makes Silicon Valley so successful is the concentration of activity. A corridor from Quebec to Windsor represents over 12 hours of drive time.

    It would seem to make sense to me to focus on concentration in the key geographies and then expand.

    Most of all, though, the right kind of tax code changes and budgetary incentives have to be put in place.

  • Mack D. Male January 21, 2009, 1:44 pm

    I think you could make a case for many other areas in Canada as well. Vancouver with UBC and their previous tech successes, Edmonton with the UofA and a strong economy, etc.

  • Kevin Baggs January 22, 2009, 10:54 am

    Having spend last winter in Vancouver I was surprised to find a very tight knit technology community. I’m not sure if it is due to the proximity to Seattle, San Francisco and San Jose, or just the fact that Vancovuer is geographically a tight knit area. But there was definitely a sence of excitement around technology startups. Boris Mann talks a lot about VC funding at http://bmannconsulting.com/ There were serveral “Demo” type gatherings at http://barcamp.org/DemoCampVancouver. I was there 6 months and I think they had 3 WordCamps for Wordpress. They have an excellent unconference called Northern Voice in Feb. http://2009.northernvoice.ca/. And I couldn’t finish this without a link to one of my favorite blogs http://www.miss604.com (can you tell I miss the west coast?)

    Toronto seems too busy and too stressed to embrace a tech community without ROI and EBITDA as the first page of that Powerpoint presentation.

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