Canada's place on the map of high-tech North America is
changing and growing

By CHRIS TURNER - Time Magazine - Canadian edition

June 11, 2001
 

The Mohr, Davidow glad-hander was part of a tectonic shift in the relationship between Canada's high-tech industries and Silicon Valley: after decades, the mountain was coming to Muhammad.

For years the routine for Canadian high-tech start-ups has included humbling trips to California to beg for financing from Valley VCs, the Masters of the New Economic Universe. Now the VCs are starting to make the trek in the other direction. In the case of Mohr, Davidow, the aim is to consolidate the firm's growing interest in Ottawa's vibrant tech sector, especially in the hot area of fiber-optic transmission, or photonics. "We're taking a more long-term view of the area," says Rob Chaplinsky, a partner at Mohr, Davidow, which last fall invested nearly $13 million in two Ottawa optical-networking firms, Quake Technologies and Trillium Photonics. "And we're hosting this event to reiterate our interest."

The Mohr, Davidow meeting isn't the start of a mass pilgrimage of tanned supplicants to the Ottawa Valley. But just weeks before this particular party, Newbury Ventures, a firm whose previous investments have included high-tech giants like Oracle and PMC-Sierra, became the first U.S. venture-capital firm to open a Canadian office, also in Ottawa. And last October, another Silicon Valley VC giant, Greylock, put on a business-card cocktail party to strengthen its own ties to the area.

What is changing is a balance of power--between buyers and sellers, between venture capitalists and entrepreneurs with hot ideas, and ultimately between Silicon Valley and the Canadian high-tech industry. Until recently, Valley VCs liked to joke that they didn't need to pay much attention to what was happening in neighboring Fremont--directly opposite the Valley, on the wrong side of San Francisco Bay--let alone keep tabs on the tech scene in remote northern places like Canada. After all,
the thinking went, any tech company that stood a chance of going global would first have to set up sales and marketing offices--if not headquarters--in the center of the tech world clustered around San Jose, Calif. And the world's best minds? They were living six to a two-bedroom bungalow in Palo Alto and Sunnyvale, sleeping sound in the knowledge that whatever happened next in the tech world would happen first in their community.

To a large extent, this remains a safe bet. But a new map of the tech world is being created, of a decentralized world, in which international centers of excellence like Ottawa's photonic breeding ground are recognized not only as promising sites of creativity but also as strategic centers in their own right. This is why big-name financiers like Mohr, Davidow are doing serious courting in the Ottawa Valley. Canada's high-tech centers are a recognized factor in North America, on their way to becoming as fixed and immutable as Boston's Highway 128 and Manhattan's Silicon Alley. This development may be a sign that the drainage of high-tech and
entrepreneurial talent from Canada may have reached a new balance point. In the integrated tech world of North America, staying at home in Canada and getting financial support from elsewhere is an option.

Ottawa's meteoric rise as a hub for fiber-optic networking companies has attracted the most attention. But in Calgary and Waterloo and Montreal and Toronto, and in other areas, Canadian firms have attracted multimillion-dollar buyout offers and venture-financing offers by Silicon Valley tech and finance firms. In the process, new relationships have been forged between financiers and established tech moguls who know a good thing when they see one, and the lands of opportunity they have
discovered. Thousands of Canadians who flocked to Silicon Valley in past years to get rich or at least gain experience are bringing home their knowledge and their contacts--either by returning to Canada or by sharing their expertise and Rolodexes with U.S. and Canadian colleagues.

The result: unprecedented amounts of funding are available for entrepreneurs across Canada. Even the domestic venture-capital industry, still dwarfed by Silicon Valley's venture-financing juggernaut, is flush with cash--thanks in part to the realignment by the Canadian sector of its business practices to more closely resemble the Valley's. Toss in the international success of homemade giants like JDS Uniphase and PMC-Sierra and the dozens of acquisitions of Canadian start-ups by world
leaders such as Cisco Systems and Alcatel, and reasons for Canada's increased profile in the Valley become clearer. "All those factors have absolutely opened everyone's eyes to the fact that things are really happening in Canada," says Eric Gonzales, partner at Doll Capital Management, a $450 million Silicon Valley venture firm that recently invested in start-up Cordiant of Montreal, an e-business service provider. "It can't be ignored."

Canadian tech-industry analyst Mary Macdonald seconds the notion. She points out that the 50th-ranked Canadian company on her firm's list of the biggest financing deals of the past year attracted $20 million in funding from VCs--a sum, she emphasized, that even three years ago would have come only after the firm picked up stakes and moved to the U.S. "It's just so exciting," she told a meeting of Canadian tech entrepreneurs in Toronto last month. "This is the infrastructure we've been trying to build for the past two decades."

That infrastructure--a network of venture capitalists and entrepreneurs, bankers and engineers, plus lawyers and accountants who know how to work with high-tech start-ups--didn't exist in Canada even five years ago. What's more, this emerging pool of contacts, experience and capital may help complete the fundamental restructuring of Canadian-American industrial relations ignited by the tech sector's huge, decade-long growth.

Redressing the weakness of Canada's tech sector has been a mantra of the federal government since January's Throne Speech. And with good reason. Canadian industry, including high tech, has had some of the lowest rates of research and development in the world. Through blue-ribbon panels on e-commerce, online learning and broadband infrastructure, grant money for "smart community" projects, and budget allocations to improve its own online services, Ottawa--particularly Industry
Canada--has been pushing hard to secure Canada's place in the digital future.

But market forces are also at play, and they have had the most important impact on turning the situation around. In effect, the boom in advanced technology enterprises over the past decade has created a highly integrated and much more fluid North American tech economy, with venture capital playing a leading role. Whether it's Mohr, Davidow dumping millions of dollars into an Ottawa fiber-optics firm like Quake Technologies or CIBC Capital Ventures setting up an office on
Sand Hill Road (the legendary address of Silicon Valley's most powerful VCs), venture capital has been flowing eagerly toward the best ideas, wherever they are and wherever they want to stay. With the money on the move, new relationships between Silicon Valley and the rest of the tech economy have crystallized.

Take the case of Workfire Technologies, a small software start-up based in Kelowna, B.C. Workfire came up with an ingenious way to make websites run faster using existing servers. Last September the company was bought by a much larger Silicon Valley firm, Packeteer. Today most of Workfire's staff can be found in the boardroom of Packeteer's head office in Cupertino, Calif., every Friday--but only on a television screen connected live to their office in Kelowna. They continue to work on the same cutting-edge R. & D. as in the past, plus new projects started by Packeteer. In fact, the only things that have changed at Workfire are the company name and the size of the staff, which has more than doubled, to roughly 25. Packeteer executives admit that they briefly considered moving their new division closer to home but backed off. "It's difficult to attract people to come to Silicon Valley because it's so expensive," says Packeteer ceo Craig Elliot. "Kelowna had an advantage
there."

The mutual benefits of this cross-border organization aren't hard to grasp: the U.S. parent has a ready-made product and an injection of talent--which is still a rare commodity, even in a tech economy slowdown. The Canadian company, meanwhile, sees its bright ideas taken to a global market and gets a huge windfall from the buyout. This in turn spawns more innovation. "These acquisitions have resulted in a distribution of wealth that enables a lot of technology professionals to go off and launch new companies," says Peter Standeven, president of CanadaIT.com, an online clearinghouse of information about the Canadian tech industry. In the long run, these sorts of fiscal injections through buyouts can produce the critical mass that is essential to a full-blown tech boom.

No place in Canada has come as far as Ottawa in reaching this takeoff point, largely because of the international importance of JDS and even shrunken Nortel. In 2000 alone, Ottawa tech start-ups raked in more than $1 billion in venture money, and multimillion-dollar buyouts of older Ottawa companies have given rise to a powerful local VC industry. Billionaire entrepreneur Terry Matthews, for example, used buyout money to create Celtic House International--one of the region's most powerful
VC firms, with more than $100 million to invest.

Even so, many Canadian computer whizzes with big ideas still need to trek to Silicon Valley and cajole big-shot VCs into hearing their pitches. But the days of the cold call and the dreaded "VC two-step"--Valley slang for backpedaling practiced by financiers to avoid overzealous suitors--have gone. That's in part because new arrangements to nurture Canadian start-up companies have sprung up in Silicon Valley. They link Canadian expatriates, local moneymen and Canadian government experts in a offshore incubating network to help give entrepreneurs with bankable ideas the chance to build their firms back home. Taken as a whole, these new networks are giving additional substance to the ties between Canada's tech sector and Silicon Valley and are giving Canadian innovators unprecedented access to high-tech's premier power brokers.

Ottawa's Deborah Sterling, 47, a longtime computer coder for the likes of Nortel and Nokia, is a recent entrant to the process. In February she saw an opportunity in Internet-traffic management and started looking for backing. Sterling's brainchild, Cascadia Networks, consisted of two partners, their home offices in Victoria and Surrey, B.C., and a single Internet Web page bearing the company's crude logo. She and her partner, Terry Holmes, ended up sending their business plan to 333 West
San Carlos St. in San Jose, home of the Canadian Consulate Trade Office. It became one of the rare business plans to make it past screening by the trade office's staff.

After that vetting, Sterling made her pitch to the Venture Capital Advisory Board, a highly informal collection of Canadians who work at some of the Valley's most powerful VC firms. The board was the idea of Handol Kim, the office's trade commissioner until last month, who convened it initially a year ago to teach consular staff how to vet a business proposal. After a slow start, the project caught on like a virus. Says Kim, now director of special projects at Coradiant, a software start-up based in Montreal and Boston: "It got to the point where we had VCs asking to be on the board, and we had to turn them away because they weren't Canadian or they
weren't from Silicon Valley."

The board meets quarterly to view and evaluate the best pitches that come to the Consulate Trade Office and offer successful accelerated entree to the Valley's top financiers. "It has opened the door to the VC community here in Silicon Valley for entrepreneurs based in Canada," says board member Colleen Salo, a Newbury partner.

In early May, Sterling sat in a cramped conference room in Menlo Park, Calif., showing a Power Point synopsis of her idea to half a dozen or so top-tier venture capitalists. It was the kind of access that green entrepreneurs dream of: the firms represented on the VC Advisory Board control an estimated $15 billion in venture capital. Ultimately, Cascadia was deemed not yet ready for funding--Sterling didn't know enough about the marketing end of her business for the board's satisfaction. But she got two solid leads for future meetings, one-on-one consultations with some of the board members after the meeting and confirmation from a cross section of Silicon Valley investors that there was still venture money to be had and interest in companies like hers. "You really don't get that kind of access--period," says Sterling. "It's a unique forum."

The Advisory Board is just one of the expanding constellation of organizations and programs harnessing the enormous pool of highly skilled Canadians in Silicon Valley into a functional network. There are no solid figures on the size of the Canadian expat population in the Valley, but a conservative estimate is 80,000--making the Valley as large an employer of Canadian tech talent as the Ottawa region is. Moreover, the expats are people who have intimate connections to their U.S. colleagues
and peers, and in many cases are important U.S. decision makers in their own right. "It's such an untapped asset," says Kim. "We shouldn't be shy about making something of it."

Until he left the consulate for the private sector, Kim was the catalyst behind the Canadian government's efforts to leverage the expat talent pool. In addition to the Advisory Board, Kim and his colleagues began a series of so-called Next Level conferences, intended to school Canadian VCs and entrepreneurs in the rules of the Silicon Valley start-up game. The second conference, held last December, drew 353 attendees to seminars whose hosts were partners from top Silicon Valley venture firms and ceos from successful Canadian start-ups.

Along with its rainmaking and advisory roles, the consulate has created another important networking tool: the Digital Moose Lounge. It was born on Dec. 10, 1999, as an informal office party for recently arrived Canadian techies. Since then it has blossomed into a free-standing, registered nonprofit organization with more than 1,400 members that holds functions ranging from expeditions to San Jose Sharks hockey games to "toque parties" at local bars. But the Lounge is morphing into something
other than a way to party hearty. A handful of members of the VC Advisory Board came to the attention of the consulate via Moose Lounge events, and the Lounge's business aspect is primed to expand further. "The way we mapped out Digital Moose Lounge was that it would start with the social and fun side and play a community role," says Kim. "Now we're going to start focusing on the business side." In coming months, Kim and Jeff Popoff, co-founder of Toronto-based wireless-applications provider Redknee.com, will launch "Business/Venture Moose." Instead of going to hockey games, members of the new Moose will congregate at networking breakfasts, seminars, speaker panels, start-up contests and anything else that will encourage them to form profitable business relationships. The model for this next incarnation is a Valley outfit known as the Indus Entrepreneurs, or TiE, an association of some of the region's most powerful Indian expat techies--including Vinod Khosla, co-founder of Sun Microsystems and one of Silicon Valley's most influential venture capitalists. TiE members frequently invest directly in other
members' start-ups--a practice Business/Venture Moose hopes to emulate.

Another pillar of the consulate's networking effort is the Leaf Initiative, a non-profit organization established by eBay's Canadian co-founder, Jeff Skoll, and Toronto entrepreneur Michael Lewkowitz. The goal of the Initiative is to "champion" Canadian high-tech successes, and in December 2000 at a sort of high-tech Oscar gala, the Leafy Awards were handed out to a Who's Who of Canada's tech barons. "The Leaf Initiative has pulled in a lot of the luminaries of the Canadian high-tech economy,
especially the expats," says Skoll. "And it has become a sort of de facto angel network.

It provides introductions and access." Another portal aiming to strengthen links between Canada's tech industry and expats across the U.S. is TechnicallyHip.ca--an online information portal launched three months ago by CanadaIT.com's Standeven, who hopes the site will lure some talent back north.

"There is this genuine willingness on the part of Canadians working outside of Canada to help other Canadians," says Standeven. "It's not some kind of Pollyanna thing. It's real." The crisis formerly known as the brain drain, it seems, has been reborn as an enormous business opportunity. And on the map redrawn by the digital boom, San Jose is becoming as much a part of Wired Canada as is Ottawa or Waterloo.