Who will be Canada's next tech darling?
In the past seven days, at least six takeovers of Canadian technology companies were announced.
Those are six companies that will no longer be on the list of candidates to seize the top-dog mantle from Research In Motion (RIM), should it continue to falter. And it also illustrates one of the big challenges in the technology sector to come up with Canada's next high-tech darling.
Vancouver's Singular Software, Ottawa's Headwall Software and Halifax's GoInstant were acquired by larger U.S. companies, while Toronto's Scriptlance was taken over by the largest company in its field — the outsourcing and crowdsourcing marketplace — Freelancer.com, which is based in Australia
Takeovers are endemic of course — and much discussed within Canada's vibrant tech startup community.
But as entrepreneur John Philip Green says, although there are "a lot of great stories to be told, a lot of people working really hard, really smart people doing world beater sort of stuff, the biggest obstacle to being the next RIM is just that people sell out so quickly."
Canada's tech giants
The problems at RIM have observers debating the health of the Canadian tech sector and wondering if and when the next tech darling will emerge.
The sector has had a diverse list of world-class companies over the last couple of decades, including Nortel, Mitel and Newbridge Networks in networking, as well as Corel (software), Delrina (fax), and ATI (graphics cards).
While some worry that RIM will join that faded list, there are other billion-dollar-plus Canadian tech companies, such as CGI Group, Open Text Corporation, CAE, Constellation Software, and Celestica, that are still performing well.
While some of them may yet overtake RIM in market capitalization, none of them seem to be contenders for the tech darling honours that RIM may relinquish.
Green has helped found and lead tech startups in Canada, the U.S. and India and is currently entrepreneur in residence with Hedgewood Inc., a private venture capital firm that focuses on the dot-com sector.
And while he observes that some of these recent takeovers may have resulted in impressive gains for their owners and investors (two-year-old GoInstant sold for a reported $70 million for example), they bring with them huge concerns about ultimate ownership and direction.
In 2010-2011, 77 Canadian tech firms were acquired by foreign companies, mostly American, according to Branham Group, a research firm that closely follows the tech sector.
San Francisco-based Salesforce.com, a leader in business software, has purchased other Canadian companies besides Goinstant. Last year, Salesforce acquired Toronto software company Rypple and Fredericton-based Radian6, which specializes in digital marketing.
For Green, who's been watching GoInstant since its earliest days, "it had the potential to be the next salesforce.com or RIM or Nortel, to be a big company. But it got snatched up by this U.S. company before it could hit maturity."
Experiencing a takeover
Chris Adams and Krista LaRiviere have been through this themselves. In 2006, they were trying to raise more money for their company, Hot Banana Software.
Lyris, an American company, came along and told them, according to LaRiviere, "We love what you’re doing, why don’t you come and be part of our family?" For her and Adams, "it was a real easy answer."
Lyris also bought cgk Technologies Group, which Adams and LaRiviere had founded five years before Hot Banana
Canadian venture capitalists "were more difficult to convince," she says.
But Green says the situation has improved since then and now there's "probably sufficient venture capital" available in this country for Canadian tech startups.
In fact, the IESE business school in Spain just released their Global Venture Capital and Private Equity Index in which Canada ranks second overall, after the U.S. In a separate category, Canada also improved its ranking for economic activity related to venture capital by 26 places from the 2008 survey, finishing 22nd.
Develop, sell and start again
Finding Canada's next big tech darling among today's nifty startups can be problematic on other fronts, too, aside from any perceived shortfalls in financing.
As writer Mike Dover puts it, many of the tech entrepreneurs he has come to know are people "who like to generate ideas and build something. But I don't think they're suited to running a big organization or inspired to do so."
According to Dover, " They like developing something and selling it and moving on and then doing the next thing."
Dover is the author of Marketing Wikibrands: Reinventing Your Company in a Customer-Driven Marketplace and research director at the J.C. Williams Group.
For startup entrepreneurs like Adams and LaRiviere, they used the proceeds from the sale of Hot Banana to get gShift Labs, their current company, "off the ground more swiftly than we could have done otherwise."
Based in Barrie, Ont., gShift is a rising star in digital marketing as it helps companies monitor their search rankings and use search engine optimization to improve marketing campaigns.
To get started, gShift easily raised $2.1 million in financing, and LaRiviere points out that this can be seen as the flipside to U.S. companies acquiring Canadian startups: the influx of money creates wealth for Canada and "Canadian entrepreneurs turn into early-stage angel investors who fuel the Canadian startup scene, and that's super important."
Dover would appear to agree. He feels that Canadian tech entrepreneurs are still better off developing something, monetizing it and then moving on, rather than trying to build the next RIM.
Though he does concede that his view could be because "the big Canadian things we've seen haven't kept going."
Tech sectors to watch
Today, the tech sectors to watch are mobile, social media and e-commerce. That's also where the money is flowing.
Dover does not expect another big company to emerge out the mobile sector but both he and LaRiviere credit RIM's influence for Canada's strong performance in mobile.
Dover notes that with all the action around apps for mobile phones a company "can go from development to operation in weeks," resulting in many successful, but small, Canadian enterprises.
Polar builds smartphone and tablet apps for media companies around the world. Under CEO Kunal Gupta, the five-year-old company has built over 1,200 apps and now employs about 40 people.
BNotions is about the same size and also builds apps for others and writes programming for social media and the web.
When it comes to social media, Vancouver-based HootSuite is the best-known, and a contender for tech-darling honours.
Hootsuite has about 200 employees under CEO and founder Ryan Holmes. Its social media dashboard is used by 79 of the Fortune 100 international companies.
Green says Wattpad is another social media company to watch. The Toronto-based web publisher claims to have eight million unique visitors per month who spend more time on the website than users spend on Pinterest, the popular new photo-sharing site. Founder and CEO Allen Lau claims Wattpad is one of the largest social networks.
Margaret Atwood wrote on The Guardian website on July 6 about why she loves using Wattpad, garnering the six-year-old company international media attention.
Potential tech darlings in e-commerce
Tobias Lutke's Shopify started out in 2004 selling snowboarding equipment online. Other online retailers liked the e-commerce platform that Lutke had designed and now Shopify is used by over 26,000 businesses as their online storefront. It had sales of $280 million in gross merchandise in 2011.
Last week, Shopify launched its 2012 build-a-business contest in which e-commerce startups try to out-earn each other in order to win investment money.
Both Green and Dover are impressed with how fast Shopify is growing and how Lutke built the company with little outside financing until the past year or so. Dover says "their growth is chiefly all word of mouth, word of web."
FreshBooks take the hassle out of invoicing
In interviews with CBC News, Dover, Green, Adams and LaRiviere all spoke highly of Freshbooks, which offers businesses a new way of online invoicing.
FreshBooks is a way to send and track invoices online and to track expenses and time. According to BusinessInsider.com, "Freshbooks is one of the most wonderful invoicing systems on the planet."
Adams said that founder and CEO Mike McDerment has made FreshBooks into a key leader in the tech community in Toronto.
In 2011, FreshBooks hired the former chief marketing officer for the big online travel website Expedia, Stuart MacDonald.
Dover is impressed with their business model, which allows very small businesses to start out using FreshBooks for free, knowing that those companies will either dissipate or grow into valued customers.
Two other Canadian e-commerce companies are also on the radar.
Shopcastr is a social marketplace for local retailers and shoppers. The retailers use it to manage their web and social media presence, and to increase foot traffic into their stores.
Over 650 businesses have signed up in Toronto, where Shopcastr is based. Last week Shopcaster announced it has secured an additional $1 million in financing. CEO Matt O'Leary, Aron Jones and Judy Sims founded Shopcastr in 2011.
Shop.ca is a just-launched challenger for Amazon as a general online marketplace. Shoppers in Canada will get free shipping for their purchases.
The company has secured financing of an impressive $27.4 million, with Torstar, the parent company of the Toronto Star, as a major investor. (Shop.ca's founder and CEO is Drew Green, John Philip Green's brother.)
- A Shopcastr co-founder was wrongly identifed in this story as Judy Stein. The company co-founder is Judy Sims.Jul 16, 2012 11:01 AM ET