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Postcards from the Future Overflowing with money, hype and hope, Silicon Valley is the epicentre of the New Economy and testing ground for the world's best entrepreneurs. Here's how Canadians are making the cut — and how you can, too. By IAN PORTSMOUTH - Profit |
| Stroll the 6th floor
of the dull grey office tower at 111 N. Market St. in downtown San Jose,
Calif., and you could easily mistake it for the United Nations. The flags of Scotland and Belgium hang from doors. A rainbow of skin colors occupies cramped offices and squat cubicles. Pause by the copy machine, and you might hear the accents of Mexicans chatting with Sri Lankans and Finns conversing with Japanese. But their cause isn't international diplomacy, peacekeeping or debt relief. They're here in the name of risk, competition and opportunity. They're here because this is Silicon Valley — and this is the place to be. The 38 firms inside the International Business Incubator have come to Silicon Valley to build their launching pad to entrepreneurial success. Foreign governments have carved out permanent spaces at the IBI, reserved for domestic outfits they want to expose to the Valley's spirit, technology — and cash. Still more firms keep "virtual offices" at the IBI, just for the address and area code. At monthly rents of $500 per cubicle, the price is right. "There's a huge demand for this," says IBI assistant director Ingrid Rosten. "We're completely sold out, and there's a waiting list." Everyone wants a piece of Silicon Valley. Once a quiet strip of farmland nestled between San Francisco Bay and the coastal mountains south of San Francisco, today "the Valley" is the epicentre of the New Economy, the place where dreams, ideas and money collide to produce innovation and wealth on a scale the world has never seen before. "This is the mecca of technology and one of the driving forces behind business trends today," says Martyn Lewis, a former Torontonian who now runs Market Partners Inc., a sales-consulting firm based in San Jose. Lewis is just one of many Canadians looking to tap the Valley's powerful potion of capital, contacts and camaraderie. But doing business with one foot in the future brings many surprises and challenges. Every dollar raised, alliance struck, or employee retained is just one step in the frantic race to build companies that can dominate age-old industries or sectors six months old. Second-best is rarely tolerated; the mediocre get obliterated. But with strong teams, a stomach for risk and the passion to see their plans through, the Canadians in the Valley are winning some big battles — and demonstrating to the rest of us how to win at business in the 21st century. Silicon Valley's ability to attract the best and brightest is responsible for much of its staggering success. Through June, the market capitalization of the Bay area's public technology companies was US$2.6 trillion — up 470% from five years ago. "We're brain-draining the whole world to keep this place going," says Richard Carlson, a futurist and chairman of Spectrum Economics in Palo Alto. Anyone visiting the Valley for the first time will be hard pressed to detect any Canadian contribution. But stick around a little while, and you'll be bumping into ex-pats at every turn. It's estimated that 250,000 to 350,000 Canadians reside in the Valley, comprising the Bay Area's largest invisible minority. Given their familiarity with U.S. customs and culture (not to mention the language), Canadians aren't prone to hanging out in groups — unless there's an occasion. Last month, 140 Canadians attended a Thanksgiving feast put on by the Digital Moose Lounge, a fledgling organization dedicated to bringing silicon snowbirds together for socializing and networking. DML — which has 600 members ranging from bottom-rung techies to CEOs — holds Canuck-flavored events once a month. And at every gathering, the conversation inevitably turns to hockey, Coffee Crisp bars, Tim Hortons coffee and the Valley's Canadian heroes. Take Rob Burgess. Raised in Toronto and educated at Hamilton's McMaster University, the 43-year-old has been described by U.S. tech magnate Jim Clark as "a kick-ass kind of guy." Burgess is largely responsible for turning San Francisco-based Macromedia Inc. from a bleeding producer of CD-ROM software into a stock-market star and creator of the Web-animation technologies Shockwave and Flash. Ever heard of eBay? As the first employee and first president of eBay Inc., Montreal-born Jeff Skoll is credited with developing the business plan that helped turn the online auctioneer into one of the Net's biggest brands. (When eBay grew too big for its founder's bedroom, it moved into Skoll's living room.) At just 35 years of age, Skoll is a billionaire. There are more. Kevin McCurdy and Howard Field left Toronto for the Valley in 1998, three years after founding Bamboo.com, a provider of 3-D virtual tours of real estate properties. Within year of arriving in Palo Alto, Calif. — the birthplace of Hewlett-Packard, home of Stanford University and Sand Hill Road, hangout for the world's richest venture-capital firms — Bamboo.com secured US$25 million in venture funding, went public on NASDAQ and completed a US$800-million merger with Internet Pictures Corp. (iPix), its closest rival. Field's still with iPix, but McCurdy has moved on to form an incubator in Palo Alto that's already produced one Net startup, with a second in the works. McCurdy doubts it could have happened anywhere else. "If you want to be a star, you don't stay in Wichita Falls," he says. "You go to Hollywood." Now a new generation of Canadian entrepreneurs has come to high-tech's Hollywood, bent on leveraging Silicon Valley's pool of high-octane talent, venture capital and new economy infrastructure. But psyche is equally important to the Valley's success. "There's the absolute sense that you shouldn't be afraid of anything, and for an entrepreneur, that's an unbelievably exhilarating environment," says Toronto native Andrea Reisman, the 31-year-old co-founder and CEO of San Francisco's Petopia.com Inc. "If you think it through and find someone to back you, you can accomplish anything, and that's hugely empowering." That has empowered Reisman to do battle in the world of online pet supplies, one of the Web's fiercest battlegrounds. In little more than 18 months, the daughter of Indigo Books boss Heather Reisman has raised more than US$100 million in financing, formed a partnership with a $1-billion-a-year pet-supply retailer, and even landed a weekly TV show through an alliance with NBC. Despite such achievements, Reisman still finds herself running neck-and-neck with competitors backed by heavyweights of the online and offline worlds. It's a risky business — but that's what fuels the engine of the new economy. "Risk is really pushed and accepted, and failure is a part of the game," says Jonathan Ehrlich, a Toronto native and co-founder of MobShop Inc. in San Francisco. "That's why San Francisco is a hotbed for this kind of activity — people buy into these conceptual-type companies, and a lot of wonderful companies are started." But the stakes are getting higher as Silicon Valley experiences the growing pains that success brings. The Valley's IPO-fuelled nouveau richness has sent prices of everything from fast food to real estate soaring, making it increasing difficult to pay employees what they need to survive. "If you're making $150,000 a year here, you're not even close to being well-off," says Mark Singer, a Canadian systems analyst at NEC Corp. in Santa Clara. A decent three-bedroom flat in San Francisco can set you back US$5,000 a month; one bedroom in the suburban sprawl of the lower Valley runs US$1,500. On the Valley's central freeway — Highway 101 — you'll find billboards advertising "Single-family homes from the low $500,000s!" The prices are forcing workers to live far south of San Jose or east of the Bay; three-hour commutes (one way) aren't unusual. All those microchip plants and humming computers often thirst for more electricity than the Valley's ageing power grid can supply, forcing some companies to build private power plants. The strain on public infrastructure has even prompted communities such as Redwood City (home of Oracle), Palo Alto and Menlo Park to adopt or consider moratoriums on some types of commercial development. It makes growing a business at Net speed that much tougher. Former Montrealer Mark Cahsens can attest to how fast the race is run. Young, intelligent and ambitious, Cahsens is a typical Valley entrepreneur — even if he is on his fifth startup. And for the past year, he's lived inside the tornado. "That's why I'm here," says Cahsens, 32. "There's so much going on." Cahsens' road to the Valley began at the University of Western Ontario, where he studied math and helped to launch a service that matched North American teachers with jobs at English-language schools in Japan. Upon graduating in 1990 Cahsens left for Japan, but by 1993 he was back in Montreal at the helm of his second startup, a developer of electronic kiosks used to display real estate. He sold out to his partner in 1995, earned his MBA from MIT, then got a job as sales and marketing director for a Boston startup. That firm didn't grow fast enough for Cahsens, so in 1998 he looked to the Valley. Needing a steady salary to pay off student loans, he settled for a job at management consultants Mars & Co. in San Francisco. Cahsens' tenure as a mere employee was short. By August 1999, he and a Mars colleague, Shankar Khadye, had started BarterDog, an electronic marketplace facilitating the trading of small-ticket items such as books and CDs by consumers. "We launched a company in a space that was completely untapped, so that we were almost educating the VCs, and within several weeks other companies were launching with the same concept, so we were then differentiating ourselves for the VCs," says Cahsens. "Eventually things changed such that we actually had to defend ourselves because our space wasn't getting much traction." The pair dropped BarterDog. Elapsed time: four months. "We realized that we weren't taking advantage of that fact that there were enthusiasts out there who wanted to be amongst fellow enthusiasts," explains Cahsens. So they set out to build a series of vertical marketplaces based on their original market platform, but extended to sales and rentals of anything from motorcycles and yachts to vacation properties. In a transaction typical of the new economy, they traded a small share in their new firm — Ebuddies.com — for the rights to the URL. At the same time, they spun off some cool technology at the core of BarterDog: online appraisal software that helps Web surfers gauge the value of products and services, from used cars to their own jobs. The new firm, Invizible Hand, soon generated amazing buzz — and a story that could only come from the Valley. Last March, Cahsens was one of 20 companies giving two-minute pitches to an audience of investors at a local venture fair. Wary of divulging too much information, Cahsens dropped only his company's moniker, category and the names of its investors. Cahsens sat back down to a mob of suitors, including one who wrote an IOU for US$100,000 on the spot; a cheque arrived the following day. "But he had no idea what [Invizible Hand] was doing," says Cahsens. "That probably cannot happen anywhere else." Last month eBuddies.com launched along with the first channel within it: timesharebuddies.com (one of 60 URLs the company owns). Meanwhile, Invizible Hand was about to close a supplementary seed round of US$1 million as it zeroes in on deals with Net properties such as eBay and AOL; Cahsens is holding back on an institutional round until such marquee partners are on board. Still, he isn't running as fast as he'd like. "If we had access to as much money as we needed, I wouldn't have to go on the road and give pitches and educate," says Cahsens, who plays CEO at both firms. "I could get down to building the product and working with the engineers and designers, and spend more time with my partners." The dilemma is typical for Silicon Valley CEOs, who address it with strong management teams with little or no hierarchy. At Invizible Hand, for instance, Khadye, chief technology officer, is charged with managing the firm's technical team, while chief operating officer Alex Ip — their old boss from Mars — concentrates on strategic partnerships and customer acquisition. The trio hold formal meetings on a weekly basis, but things get discussed by the minute. "We all sit in the same room," says Cahsens, "so if there's an issue to be resolved, we resolve it." Cahsens and Khadye split one of the four small rooms they rent in a one-floor office complex shared by 25 startups in San Bruno, a small but modern town in the foothills just west of San Francisco International Airport. Despite Cahsens' cash crunch, there's no shortage of capital in the Valley. "There's probably more money at 3000 Sand Hill Rd. than in all of Canada," quips Miche‡l Kelly, dean of the University of Ottawa's faculty of administration and an expert on the Valley's venture-capital industry. In 1999, American VCs put US$8.1 billion — nearly one quarter of their disbursements for the year — into the Valley's Net firms. The spring market correction did little to temper investor appetites: in the second quarter of 2000, U.S. VCs plugged $14.8 billion into Net plays, just off the $15.4 billion they spent in the first quarter. Kelly says the pie is only getting bigger, thanks to about 150 corporations that have launched venture-investing arms. Among them: Sony, Nokia and Intel, which alone has made investments worth US$1 billion. The paradox: all that money, and it's still hard to get. The Valley is awash in thousands of firms hungrily chasing VC funding. And that forces VCs to live with blinders on. "Being a VC is practicing the art of disengagement at every turn," says Handol Kim, Canada's trade commissioner in San Jose. "A leading VC has to spend $100 million each year, so even if they spend $10 million on each deal, they'll end up sitting on 10 boards. They're also winding out of old commitments, getting 200 e-mails a day, getting 100 voice mails a day, and when they go to an event, they get mobbed." On Sand Hill Road, cold-calling is taboo — fundraisers must be presented to VCs like meat on a platter. That's why Jason Smith has spent every other week since March bunkered in a Sunnyvale hotel just blocks from Intel and Nortel, but a world away from his wife and three children in St. Catharines, Ont. "It gets lonely and sometimes you wonder what the hell you're doing," says Smith. Smith is hunting for US$11 million in first-round venture capital for Parttrackers.com, a fledgling e-marketplace that allows buyers of autoparts to request quotes from vendors. If it catches on, Smith is in for a slice of the U.S. do-it-yourself and collision-repair autoparts markets, worth US$82 billion a year. Although Smith has one profitable startup under his belt — Cartrackers.com, a consumer automotive site launched in 1995 that receives nearly 700,000 unique visitors a month — his fundraising efforts have yet to bear fruit. He's had serious nibbles from two VC firms, but no bites. "It's more because they have to bail out other investments instead of investing in new companies," Smith explains. And with the current market turbulence, it's likely VCs will continue to focus funds on carrying their investments to the exit stage. Is Smith moving fast enough? "No," he deadpans. "But I don't see any of our competitors raising money that we're not." Still, Smith's work hasn't gone to waste. "On our first five trips to the Valley we met with one VC," he says. "We spent the rest of our time meeting with people who knew the VCs and had earned their trust." An acquaintance of an acquaintance led to a meeting with Mario Rosati of Wilson Sonsini Goodrich & Rosati, the Valley's top law firm with more than 700 lawyers. "It wasn't like going to see a lawyer for legal counsel," says Smith. "We went in and pitched our business plan, like you would to an investor." Rosati liked what he heard, and joined Parttrackers.com as an advisor. "He's opened so many doors for us," says Smith, including two more meetings with prominent West Coast VCs scheduled for the fall. A word of warning: in good or bad markets, Valley expectations are extraordinary. "The rap on Canadian companies, and it's not so true anymore, is that when Silicon Valley VCs looked at Canadian companies, the VCs found they were too modest," says Kelly. "The VCs want to see a higher growth curve than the companies were offering." Kim spends a lot of time schooling Canadian firms about these expectations. "You can't forecast revs of $40 million after five years in a market that's worth $300 million globally," he says. "It's not because you can't be a good business, but because people here are looking for home runs." The guys at MobShop Inc. knew the rules going in. Founders Jonathan Ehrlich, Salim Teja and Jim Rose had some Silicon Valley experience behind them: Ehrlich headed a San Fran startup hatched by prominent Toronto Web developer Cyberplex Inc.; Rose consulted Valley startups for Seattle-based MSI Consulting Group; and Teja had worked at both firms. "You only want to bet on winners, and you only want to bet on something that's going to be large," says Ehrlich, vice-president in charge of operations. "We knew we were going to be large, but we had to convince everybody else." Looking big was a huge challenge for three guys starting out of a Toronto bedroom in October 1998, especially when the service being offered — online buyer aggregation — was unknown. (Retailers offer their products for sale through MobShop's website, where consumers bid on items from sidewalk scooters to PalmPilots; the more who commit to buy, the lower the price.) "It really is a revolution in the way people will be purchasing things and the nature of commerce," says Ehrlich, 32. MobShop has proven the value of PR. The MobShoppers spent six months calling analysts, media and potential partners before getting their big break in March 1999: a spot among three startups presenting their business models at a New York conference sponsored by Net research giant Jupiter Communications. The demo led to a next-day meeting with Forbes publisher Rich Karlgaard, who invested right away. In June 1999, MobShop closed a US$3.7-million institutional round led by Valley VC firm The Mayfield Fund. Then Netscape co-founder Marc Andreesen dropped in — by e-mail. After reading a story about MobShop, Andreesen congratulated the company on its plan and offered to invest. MobShop jumped at the chance to tap Andreesen's experience and personal network, giving him a minority stake and seat on the board. MobShop has since raised US$43 million, and Ehrlich gives much of the credit to CEO Rose, an American. "I've learned from Jim that you just have to go out and sell the future, because it's going to happen — you're going to make it happen," he says. "Americans are generally very good salespeople." While MobShop remains private and won't release sales figures, it seems to be getting the job done. Last summer MobShop launched a German affiliate, and was ranked as one of America's most promising e-commerce businesses. In June, it landed a contract to power the group-buying website of the U.S. government's General Services Administration, which will allow thousands of civil servants to get volume discounts on low-ticket items. Like many e-commerce players, MobShop is changing its focus from B2C to B2B. Says Ehrlich: "The real opportunity we see for growth is against the enterprise and larger organizations." Meeting that challenge means staying aggressive as MobShop — which now counts 100 employees and enough cash, says Ehrlich, to last till August — matures. "We want the startup paranoia," says Ehrlich. "We want people to feed off the energy of startup life." Just a few blocks away at Petopia headquarters in San Francisco's SoMa, an old industrial area recently given over to dot-coms and chic cafŽs, team-building is top of mind. Like most Bay Area startups, Petopia puts equity in every pay packet. But communication is Reisman's key retention tool: "People want a really accurate perspective on where we are, where we're going, what they have to contribute to making that get done." Petopia holds weekly "happy hours", monthly financial briefings and semi-annual offsite meetings, supplemented by a regular newsletter. If Reisman's team is strong, the Harvard MBA grad also did an A-plus job assembling top-flight partners and investors. The task began in earnest in March 1999, when Reisman flew from New York to visit a Bay Area distributor — and learned a rival had already dropped by and was searching for funding. "I ended up sleeping on a friend's couch for six weeks," Reisman recalls. "We rolled up our sleeves and went out and raised money." Petopia secured US$9 million from a Valley VC in May 1999, but its next move helped accelerate all that followed. Petopia approached six potential investors for their expertise in areas from animal care to Web commerce. "All we wanted was enough money so they felt they had a stake in it," says Reisman. All six invested from US$50,000 to $100,000, but the personal benefit was crucial. For instance, one investor helped Petopia add 30-day-out clauses to contracts with portals such as Yahoo and Excite, allowing Petopia to withdraw as soon as the surge of new traffic generated by a portal presence died down. "It was great advice," says Reisman. But Petopia struck its key deal with San Diego-based Petco Animal Supplies Inc., second-largest pet-supplies retailer in the U.S. In 1999 Petco bought 20% of Petopia, which became Petco's online sales presence; Petopia got access to Petco's distribution points, customer database and buying power. Petopia now enjoys the highest gross margins in its industry. More deals followed. Last January, Petopia acquired U.S. catalog retailer In the Company of Dogs. Also in January, Petopia exchanged a minority stake for cash, advertising on NBC TV stations, and a weekly half-hour show on the Value Vision home-shopping network. Including investments from its strategic partners, Valley and international VCs and seed funding supplied by Toronto-based EcomPark Investments Inc., Petopia raised more than $100 million in a year, making it one of the hottest VC investments of 1999. Good thing: its IPO filings revealed the company lost US$41 million in the 10 months ended Jan. 1, 2000. But last year "was a very different world," says Reisman. In October she said that average order size has topped US$40, while gross margins exceed 20%. Analysts are impressed by the success of Petopia's "Bottomless Bowl" program, in which consumers automatically receive monthly supplies of pet supplies such as dog food and cat litter. Win or lose, Reisman feels she could never have got so far if she'd stayed in Canada. "At the time we were looking to build this, Canada wasn't ready to fund us to the tune that we needed to be funded. As a result, we really wouldn't have been likely to secure the Petco relationship, and as a result of that, we would have had a whole series of other challenges," says Reisman. "I think today things are different than they were a year and a half ago. I don't know that Canadians should be leaving home, rushing to start a business here." Reisman's fellow ex-pats would agree. "Canada has a very educated workforce, wonderful infrastructure, some fantastic companies and a growing entrepreneurial spirit that tolerates failure and encourages risk," says Ehrlich. "The challenge with Canada is that there aren't enough Cyberplexes to go around so that people like me can jump in and go to school at really smart entrepreneurial startups. But I think that's changing dramatically; Canada is really starting to get its legs. There's no reason why Canada can't become a global powerhouse." So maybe you can stay in Canada and build a world-class company. Just remember that Silicon Valley's take-no-prisoners business plans and hyper-preneurial, move-it-or-lose-it culture are on their way here — and everywhere. |