How Ontario Plans to Become the World’s Top Technology Hub

Large Solar panelsCanadians: humble, mild, polite, with a global reputation for being  non-aggressive.

Except, of course, at a hockey game. And, increasingly, in Ontario, where  startups, government, industry, universities, angels, and venture capitalists  are working aggressively to try to create the world’s leading technology  hub.

Inside Waterloo, Ontario's new $160M center for quantum computing.

Inside Waterloo, Ontario’s new $160M center for  quantum computing.

“We want the world’s next biggest tech company to be built in Ontario,” the  most populous Canadian province’s minister of research and innovation, Reza  Moridi, told a small group of journalists recently in Toronto.

That’s aggression — even if spoken in a kinder, gentler way by an urbane,  mild-mannered politician.

It also might strike some as hubris, given that Ontario’s biggest technology  story to date is that of a dying smartphone manufacturer, BlackBerry (formerly  known as Research In Motion).

But it’s not just words, and it’s not just the government that’s behind this  effort.

Ontario’s reverse brain drain

Ontario is home to about 40 percent of Canada’s population and accounts for  48 percent of Canada’s gross domestic product. It’s the fourth-largest  population center in North America, after Mexico City, New York, and Los  Angeles, and it produces more cars than any other region in North America,  including Michigan. Ontario also has the Americas’ second-biggest financial  services sector, after New York.

More to the point, it’s North America’s second-leading cluster for technology  companies, after California, and has the third-largest concentration of life  sciences companies on the continent.

Google bought local startup BufferBox in late 2012

Google bought local startup BufferBox in late  2012

The government has invested $3.6 billion in those sectors, primarily, over  the last decade, with two-thirds going to research and development, and  one-third focused on building the entrepreneurship ecosystem.

That money has had an impact.

For years, countries like Canada and the U.K. have complained about a brain  drain, with the best talent heading stateside for more options and better pay.  Not anymore. In fact, quite the reverse.

“My co-founder left Silicon Valley to come here,” CEO Kateline  McGregor told me.

She’s starting her company at Communitech, a thriving, almost frenetic  community of startups, accelerators, massive technology companies, students, and  coworkers in Waterloo, Ontario. An hour’s drive up the 401 from Toronto,  Waterloo is a city of 98,000 that saw more than 500 startups take root in 2012.  And the massive burst of innovation has not gone unnoticed.

“Something very interesting is happening here,” Google’s top Canadian  employee, Steve Woods, told me. “This area has a very high proportion of  startups to population. Google loves startups … and we love to hire entrepreneurial people.”


Woods himself is a Silicon Valley refugee, returning home to Canada after  building several companies in the Valley. Google recruited him over the course  of several years to lead its Canadian operations.

He points directly to U.S.  immigration policies that pose a critical problem for both startups and  large, wealthy corporations such as Google. Getting into the U.S. to build a  company or join a startup is notoriously difficult and expensive.

Where Woods works: This  Google office has a real fireman’s pole, slide, cattle walkway, and more  (gallery)

Meanwhile, Canada has just recently taken even more steps — such as the Startup  Visa — to make it simpler, quicker, and cheaper to come to Canada.

“Because of visa situations, Canada has received a disproportionate amount of  the talent that is coming into North America,” Woods said.

All of that translates into a significant competitive advantage for Canadian  startups and tech companies.

More education, more startups

Another competitive advantage, particularly in the Waterloo region, is the  constant stream of high-quality students coming out of engineering, math, and  computer science schools. I heard this ad nauseam from government  representatives I met with, and credible sources in the industry confirmed  it.

University of Waterloo students build startups at Velocity Garage, a for-credit accelerator-like program.

University of Waterloo students build startups at  Velocity Garage, a for-credit accelerator-like program.

Waterloo University produces an amazing kind of talent,” Woods told me. “It  gives students a great grounding in computer science, but also by the time they  graduate they’ve passed through four summers of co-op programs, so they’ve  worked at Facebook, at Google, Microsoft, BlackBerry, or other companies.”

Ontario’s 44 universities produce about 30,000 computer science and  engineering graduates each year, a steady flow of new talent for the province’s  startups as well as established IT, life sciences, and aerospace companies.

By contrast, California — a state with about three times the population of  Ontario — produces only 21,000  STEM graduates per year. The results are clear, at least for Woods.

“People that come into Google from the University of Waterloo do  disproportionately well,” Woods says.

One of the meeting rooms at Communitech, a startup mecca in Waterloo, Ontario. Google also has 200 employees here.

One of the meeting rooms at Communitech, a startup  mecca in Waterloo, Ontario. Google also has an office here.

Rob Crowe, executive-in-residence for Waterloo-based Institute for Quantum  Computing, the second-largest quantum computing research center in the world,  agrees.  And he points out another advantage that translates to more  startups coming out of key Canadian universities.

According to Crowe, a key difference between the U.S. and Canada is that many  Canadian universities have followed the European model of education-funded  research and development. Essentially, professors and researchers at the  University of Waterloo own any intellectual property they develop, not the  institution they work and teach for. That’s an incentive for academics to put  their best foot forward while on faculty, and to kickstart companies when their  ideas result in a viable product or company.

“This is the university that throws off more startups than any other  university in the country,” Crowe told me.

Less tax, more benefits, more investment

All of the above regional traits are excellent for students, researchers, and  startups, but there’s also good news for investors. Moridi’s ministry of  research and innovation has helped reduce corporate tax, while also providing  significant tax credits for companies doing innovative work.

“Ontario has one of the lowest corporate tax rates in North America, at 22  percent,” says John Marshall, president and CEO of the Ontario Capital  Growth Corp., Ontario’s voice in two venture funds totaling about $500 million.  The funds were raised partially by government, which recently announced  intentions to pump in another $50 million, but mostly by venture capitalists and  institutional investors.

Google has invested significantly in Waterloo, Ontario.

Google has invested significantly in Waterloo,  Ontario, hiring 200 engineers for its Canadian engineering  headquarters.

The goal is simple: Invest in potential high-growth venture-stage startups in  Ontario via a fund-of-funds approach that ensures industry participation and  leadership in every specific investment. In other words, Marshall puts money  into funds assembled by local VCs such as Omers, Northleaf Capital Partners, and  Rho Canada. Those VCs in turn drive the actual investments into companies like  Shopify, Desire2Learn (which recently closed an $80 million round), Polar  Mobile, and BlueCat Networks.

“Our overall aim is to build the ecosystem for innovation,” Marshall says. “That includes the demand side, with accelerators and startups, and the supply  side: seed funding, angel investors, and venture capitalists.”

The fund-of-funds strategy appears to be working. Two years ago the average  fund size in Canada was $60 million, compared to $180 million in the U.S., but  now the average Canadian VC fund is $90 million. Other venture entities, such as  Intel Capital and Samsung Venture Investment, are following the money and making  their own investments.

When that money gets into the hands of actual startups, it goes further,  according to the companies I talked to. The reason is Canada’s federal and  provincial research and development credits, which the Ontario government says  are “among the most generous of the OECD countries.”

Ontario had 500 startups in 2012 in Waterloo alone.

Ontario had 500 startups in 2012 in Waterloo  alone.

Taken as a whole, those credits can reduce the after-tax cost of $100 worth  of R&D to just $57 for corporations and just $39 for startups.

Fixmo CEO Rick Segal, an ex-patriate American, says those tax credits are one  of the key reasons he chose Toronto as the location for his latest mobile  security startup. The CEO of online advertising startup Chango, Chris Sukornyk,  told me the same thing.

Marshall says that the credits simply add on to a startup environment that  has long stretched every single dollar as far as it can go.

“Our entrepreneurs have already been so capital efficient by necessity,” he  says, adding that now that Ontario’s entrepreneurs have access to more money,  they’re still using it wisely.

That capital is starting to flow more freely lately, with VC investment up in  Ontario in the past few years. But startups, who benefit most from the R&D  tax credits, also have additional benefits. Almost every startup that graduates  from a major Canadian accelerator such as Hyperdrive and Extreme Startups in  Ontario, FounderFuel in Montréal, and GrowLabs in Vancouver, gets offered a  $500,000 convertible note by the Business Development Bank of Canada.

That’s cheap and none-dilutive money, and provides more runway for startups.  Most of which, realistically, need more than a three-month stint in an  accelerator program to become real companies.

Ambition, meet reality

There’s no doubt that Ontario is taking smart steps with the ultimate goal of  dominating the business of technology. But can it really out-innovate the  innovation capital of the world, Silicon Valley?

Toronto currently ranks eighth on the Startup  Genome’s list of global startup ecosystems, just above another Canadian  technology hub, Vancouver. Tiny Waterloo ranks 16th with its population of just  under 100,000, bringing to mind Tel Aviv, the super-fertile startup ecosystem of  400,000 people that currently holds third place.

Toronto's CN Tower

Toronto’s CN Tower

In addition, Ontario officials quietly let me know that they believe Ottawa  would have won a spot in the top 20 as well, if Startup Genome had analyzed the  data just a bit differently. That would, of course, have given Ontario three  cities in the global top 20.

But even considering the province’s leading contender, there’s still a long  way between eighth and first. And every country in the world, seemingly, wants  to follow the Silicon Valley model to the yellow brick road of employment and  riches.

Few succeed.

VC investment in Canada overall is still just a fraction of that in the U.S., with  about $1.5 billion invested in the entire country over all sectors in 2012,  compared to $8.3 billion invested in the U.S.  in software alone, and  another $6.7 billion just in web-based startups. In Ontario specifically, VC  investment was just $603 million, compared to California’s U.S.-leading $14.1  billion.

And RIM, with revenues of $18 billion in fiscal 2012 dropping to $11.1  billion in fiscal 2013, is still probably the province’s biggest tech  company.

That’s not a good sign.

Turning to BlackBerry for inspiration

Despite the small numbers, startups are increasingly choosing Ontario as  home. Taxation and immigration policies as well as investments from blue-chip  funds like Union Square and Kleiner Perkins are having a massive cumulative  effect.

Even BlackBerry  is feeding the culture of innovation in Ontario, despite being in what are  perhaps its death throes.

Fixmo CEO Segal says BlackBerry has been an amazing influence in Ontario, and  continues to be influential. “There are lots of alumni from RIM, both voluntary  and involuntary,” he says with a wry grin.

Marshall says the growth of BlackBerry from nothing to its heights as the  first key innovator of the smartphone revolution has had its own impact,  regardless of the company’s current situation.

“Now you’ve got kids coming up who saw their parents do it,” he says. “So  they believe they can do it too.”

500 new startups in Waterloo in 2012 alone attest to that fact.

In the against-all-odds world of the startup, belief is the key ingredient of success.