Cash shortage sending Canadian digital startups south

The founder of Lavalife says Canadian tech startups are starved for venture capital, and that needs to change.

 Lavalife founder Bruce Croxon gets riled up when he talks about the lack of homegrown support for online start-ups. 

"I'm watching good Canadian companies go to the States to get their money or languish on the shelf because there isn’t the support here," he fumes.  "It’s ridiculous!  Our entrepreneurs are as smart, or smarter, than anywhere in the world."

Croxon is well aware that the dot-com fiasco of 2000 is still a bitter memory for many big investors, but says those entrepreneurs that survived the meltdown are tougher, smarter and more realistic than ever.  Plus, there are exciting new players that could be excellent investments.  But try telling that to cautious Canadians.

"In 20 years, I’ve never seen the gap between good fundable digital entrepreneurs and available capital to back them [be] as large as it is right now," he laments. 

Croxon is trying to raise a $100 million dollar venture capital fund from big institutional investors in order to fuel those enterprises and generate good returns, but he says it’s not an easy sell. 

Dragons' Den star and tech entrepreneur Bruce Croxon says startups need more support.

"This is just me talking, but I think as a business community we’re more conservative," says Croxon, who sold Lavalife in 2008, and now runs Round 13 Capital out of Toronto. 

"We’re slower to get on the bandwagon.  I think that conservative approach has served us well during recessionary times — we looked like superstars.  But we’re coming out of it and there’s a lot of money being made in technology.  If you think tech is going to be here for a while, it’s time to get in on it."

Canadian investors have slowly been warming up again to digital ventures.  The global economic crisis hit in 2008 pretty much knocked the socks off people’s willingness to take financial risks.  But last year the amount of venture capital invested in Canada did increase, to $1.5 billion.  Even so, that’s still well down from the $2.1 billion invested in 2007, according to Canada’s Venture Capital and Private Equity Association. 

Meanwhile, American start-ups collected over $18 billion last year, according to the National Venture Capital Association based in Arlington Virginia. 

If you consider that the usual comparison between Canada and the U.S. uses a 10:1 ratio, given that America’s population is roughly ten times ours, then this 18:1 ratio for venture capital shows just how far off the mark we are in that regard.   

No surprise then that Canada’s sharpest digital entrepreneurs are heading south.  It’s very similar to Canadian actors going to New York or Hollywood to make it big, or financial wizards de-camping for Wall Street.  Many of Canada’s most creative entrepreneurs head to California to make their mark on the new economy. 

One estimate puts Silicon Valley’s Canadian population at 350,000 — people who’ve decided that’s the best environment in which to cultivate their ambitions. 

Debbie Landa thinks there’s absolutely nothing wrong with that. 

Landa is a native of Saskatoon who works out of San Francisco.  Her company, Dealmaker Media, acts as a type of match-maker between entrepreneurs and investors, organizing events and conferences in the U.S. and Canada.  The focus is on bringing innovators and their angels together. 

She’s also a co-founder of the GrowLab Incubator in Vancouver.

"Canadian culture for as long as I’ve known, it’s always been discouraged that you should go to the U.S.  The thinking seems to be ‘then you’ll be leaving us,’" she says. 

"Entrepreneurs should be told go down, get connected to everyone in Silicon Valley, sell their company for tons of money and then come back and start something here.  Make it even bigger next time."

More support needed

Landa praises Bruce Croxon for starting his new fund.  "So he should," she says, "That’s perfect."  She notes that there simply aren’t enough successful digital entrepreneurs like Croxon in Canada, to play that type of rallying role.  And she agrees there are more great ideas here than financiers to fund them.

"The challenge for VCs or investors in Canada is that the people who have the money are not necessarily internet-savvy.  They may have run old school traditional businesses, but unless you understand what it takes to build a company online, you can’t be that helpful.  Getting something launched online is a completely different tool-set.  You have to know what’s happened in the last 8 to 10 years, not 20 to 30 years."

And Landa believes coming to the U.S. is a great step.  She lists off a number of Canadians who have attracted big investment there, and points to Dan Martell of Moncton as a conquering hero who’s returned to Canada. 

Martell sold his first start-up, computer consulting firm Spheric Enterprises, to a Washington DC based company in 2008.  His next enterprise, Flowtown, was acquired by an Internet firm in San Francisco in 2011.  Now he’s launched his latest venture back in his New Brunswick hometown. 

Clarity will connect entrepreneurs who’ve been successful in building a business with those trying it for the first time, via a phone call.

Martell came back to Canada for family reasons. "There’s no point having success if the people you love and care about are somewhere else.  I have two brothers and a sister, all in Moncton, and they’re having kids," explains Martell.  "I worked so hard when I was younger to have options, and to not exercise those options is crazy."

As I listen to him, and think about Debbie Landa’s enthusiasm and logic about how a trip to the U.S. can actually boost success in Canada, I start to buy in to their thinking.  It’s a natural situation:  Canada does have a smaller population and therefore fewer players to make it happen.  Who can blame these upstarts from going where the money is?  And as the story of Martell illustrates, some will bring their next enterprise to Canada. 

But Bruce Croxon isn’t buying that point of view for a minute.

"You can go anywhere and start a business," he says.  "It just depends on whether you believe Canada is a place that can pull it off.  And we’d do better to keep the jobs here.  We can develop the infrastructure and spin-off jobs to make this a hub as well.  Why should we have to leave the country to do that?" 

Then Croxon starts to get riled up again.  "And why should we let the Americans make all the money off of our brains?  That makes no sense to me!  So we should go down there, let them make all the money and then come back here and buy a cottage?  That’s ridiculous!"

He’s a keen nationalist, no doubt.  But until more big investors see the opportunities in technology, this new type of ‘tech brain drain’ will continue.


Dianne Buckner has reported on entrepreneurs for two decades. She hosts Dragons' Den on CBC Television and is part of the business news team at CBC News Network.