Burgeoning tech companies are on the rise in Canada, attracting funding and IPO buzz in hubs across the country. Our occasional series explores how each locale nurtures its entrepreneurs, the challenges they face and the rising stars we’re watching.
Waterloo’s Next Wave
AS BLACKBERRY FADES TO A SHADOW OF ITS FORMER SELF, A NEW GENERATION OF ENTREPRENEURS IS RISING OUT OF THE WATERLOO REGION. AT ITS CENTRE IS AN INDISPENSABLE INSTITUTION, TALENTED INVENTORS AND A DEDICATED GROUP OF COMMUNITY LEADERS CO-OPERATING TO SUPPORT THE HUB’S AMBITION TO BECOME A WORLD-CLASS TECHNOLOGY CENTRE
On a sticky August Saturday in 2008, Steven Woods got a call on his cellphone. The Saskatchewan-native had just moved from Silicon Valley to Waterloo, Ont., to serve as Google Inc.’s site director for an outpost of engineering excellence in the mid-sized Canadian city. He was surprised to get a call while he was unpacking boxes in his new house, on a phone he’d received that day. On the line was Iain Klugman, the CEO of a local organization called Communitech, a private not-for-profit company devoted to supporting startups, inviting him out for dinner. Still reeling from the stresses of the move, Mr. Woods suggested they talk Monday and figure something out. Mr. Klugman was in more of a hurry, and suggested the next night, a Sunday.
The following night, Mr. Woods arrived at a local restaurant to find a group of people with a mission. “I get there, it was Iain, Tom Jenkins from OpenText, David Johnston from the University of Waterloo [now Canada’s Governor General], and a couple others,” says Mr. Woods. “And it was like, ‘Welcome, here’s a glass of wine. Okay: What are you doing for us?’ Seriously, within five minutes the conversation was ‘we need to talk about what Google is doing for us in town.’”
Mr. Klugman makes no apologies for his cajoling, and his efforts have been paying off. Waterloo, long considered little more than the home of BlackBerry, has become one of Canada’s technology hot spots, attracting some of the biggest rainmakers in the business.
Canada has its share of startup hubs where an entrepreneur can set up shop: Toronto, Montreal, Ottawa, Vancouver, and, to a degree, Calgary and Halifax. The Kitchener-Waterloo region is among the smallest by population, with about 550,000 people. But the Southern Ontario centres are among the most successful.
“Internationally, their reputation is off the charts. I’m not sure Canadians understand that,” says Mr. Woods, who has a PhD and a master’s from the University of Waterloo. In just the past five years, 1,845 new technology startups have formed in the area many call KW, raising at least $650-million in investment.
If technology and innovation are the future of the Canadian economy, then the group of dreamers, toilers, coders and entrepreneurs who live 100 kilometres away from Canada’s biggest city think they have the inside track.
“We believe there’s this future where Waterloo is one of the top cities for technology in the world,” says Ted Livingston, CEO of chat app Kik, Canada’s largest homegrown social media company, headquartered in Waterloo. “Right now, for those of us inside, that’s already true.”
‘ONE OF THE BEST PLACES IN THE WORLD TO BUILD A TECHNOLOGY COMPANY’
The names Research In Motion and BlackBerry will always define Waterloo, and former co-chief executives Mike Lazaridis and Jim Balsillie still make their presence felt in the city: Mr. Lazaridis’s Perimeter Institute is harnessing theoretical physics to discover the next generation of technological breakthroughs; Mr. Balsillie is still an active investor in the area.
But this isn’t a story about how Waterloo has been defined by BlackBerry. This is about a generation that grew up alongside BlackBerry and seeks to forge a new identity for the city. At the centre are an indispensable institution, the University of Waterloo, a bunch of young people starting companies, and a dedicated group of community leaders eager to support the region’s ambition to become a world-class technology centre.
Leading this rebirth is Communitech. Founded in 1997 by local tech leaders including Mr. Balsillie, Communitech is funded by all three levels of government, by member companies and by corporate partners. It operates as a hybrid economic development agency, marketing board and business support network.
A compact, tanned man with perpetual silver stubble, Mr. Klugman got his MBA at Wilfrid Laurier University, and his start in marketing at Nortel in the 1990s. Prior to joining Communitech in 2004 he worked in communications for the CBC and the Ontario government.
His job at Communitech is to help the community punch above its weight when it comes to providing support for startups.
“We feel that we have to try harder and work harder because we don’t have a lot of natural assets to work with – we don’t have an ocean or mountains or a beach,” Mr. Klugman says with a shake of his head. But what the region lacks in breathtaking scenery it makes up for with the talent of its residents. “We invented the smartphone here,” he adds, “we invented the foundation for search with Open Text, we invented the touchscreen display here, we were at the forefront of wearables here.”
Attempting to keep track of the startups setting up shop in town is one of many tasks Mr. Klugman performs. In 2010 some 155 startups registered with Communitech; that figure doubled the following year, and topped 500 in 2014. Some of those new ventures – Miovision, ClearPath Robotics, Aeryon Labs and Thalmic Labs, among others – have attracted a lot of buzz and investment. There have been stumbles, too, notably Communitech’s Hyperdrive accelerator that failed to take off.
If things were moving any faster, Mr. Klugman fears, a scarcity of talent might force companies to pump the brakes. “The first thing somebody does when they do a startup is they want to raise some money and hire three people. So you’re talking about 1,500 people immediately,” he says.
Indeed, a 2013 PriceWaterhouseCoopers survey attributes more than 20,000 jobs to the region’s innovation ecosystem.
Communitech’s efforts have included startup mentoring and peer-to-peer networking, and its latest plan is to give entrepreneurs a head start on building a sales strategy. It does all this by hosting events, encouraging executives of established firms to participate in its education sessions, luring venture capitalists and lobbying various levels of government. And fledgling firms needed the help because, says Mr. Livingston, “It’s a massive disadvantage in partnerships and funding and press not to be in Silicon Valley.”
But that’s changing. “Waterloo right now, I have to believe, is one of the best places in the world to build a technology company,” says Dave Caputo, CEO and co-founder of Sandvine Inc. which mixes hardware and software to optimize the flow of data over some of the world’s biggest telecom networks. And he would know: He’s done it twice in the past 20 years – first with PixStream, a video conferencing company, which he and his co-executives sold to Cisco Systems in 2001, and now Sandvine.
“I assumed that Communitech-like organizations were everywhere, but I’ve come to learn that they are relatively rare,” says Mr. Caputo.
For decades, global tech companies set up shop in Waterloo even if it was just to recruit and ship out talent. Intel, Electronic Arts, Google and SAP moved in alongside local enterprise tech companies such as OpenText, Descartes and Desire2Learn. Waterloo engineers can be found in large numbers in many of the biggest companies in the capital of global tech, Silicon Valley. But now, local players say, people with those skills have reason to stay.
“Let me say what’s changed here: It is now an absolute career alternative of students graduating from Wilfrid Laurier University and University of Waterloo to say, ‘I am gonna start off as an entrepreneur,’” Mr. Caputo says. “There was significantly less of that when I graduated university. The idea was, if you wanted to be in technology … go make your mistakes with some big technology company, and then eventually you might want to start a tech company.”
THE VALUE OF A CO-OP EDUCATION
Is there one thing that you could take away from KW that would make it disappear as a tech ecosystem? “To me, the answer to that question actually is yes,” says Mr. Livingston of Kik. “And that one thing, and one thing only, is the co-op program at the University of Waterloo.”
The school’s system is unique: It takes five years to do a four-year undergrad degree in many programs because students are expected to complete up to six co-op placements. Last year, the university filled 19,250 placements in 40 countries, and the students earned $225-million in wages. Not bad for a university with 35,000 full– and part-time students.
“There is no other institution in this world that does co-op like we do,” says university president Feridun Hamdullahpur. “We are leading in entrepreneurship and innovation that I don’t see anywhere else that is so successful.”
One measure of the co-ops’ effectiveness can be seen in the statistics the university collects on employment outcomes. The university claims a 98-per-cent employment rate within two years of graduation. Some 74 per cent of 2011’s co-op grads were earning more than $50,000 a year by 2014, compared with 39 per cent for all Ontario graduates. Waterloo’s student debt default rate is among the lowest in the country: 1.7 per cent of grads couldn’t pay their debts two years after graduation. The second-lowest rate in Ontario is the University of Toronto at 4 per cent, and at most post-secondary institutions it’s more like 10 per cent.
Kitchener-Waterloo benefits enormously from the placement of all those talented students. In 2015, 3,374 work terms were served in the area.
Mr. Livingston, who did his co-op placement at BlackBerry, says the international success of his company’s popular app means he has every reason to relocate. “And yet we still stay here, and it’s because of this access to the co-op talent, period, full stop,” he says.
“We invented the smartphone here, … we invented the touchscreen display here, we were at the forefront of wearables here.”
The university also operates one of the key breeding grounds for some of the region’s most famous tech startups. More than 100 companies have been created out of the university’s Velocity program, a non-academic hub that started in 2008 with the Velocity residence, a dormatory the university filled with its most entrepreneurial students.
Among other services, Velocity offers students free office space for a period of time, and lab space on the university grounds. There’s also the Velocity Fund, a pool of money made up of university cash and donations. It distributes $125,000 to seven startups three times a year.
“Velocity is really unique in that everything non-academic is Velocity. Everything we do on campus is about creating awareness and creating the experience of entrepreneurship,” says Mike Kirkup, who heads the Velocity program. “What a lot of other universities really struggle with, they’ve only built a piece of the puzzle. Berkeley has eight different entrepreneurship programs, one in engineering, one in business, so they don’t connect all the pieces together.”
“Most of the items we deploy focus on lessons learned from others and our own challenges or opportunities,” he adds.
Among the early Velocity participants was Eric Migicovsky, maker of the most talked about non-Apple smartwatch, Pebble, which holds the crowdfunding record from U.S. site Kickstarter.
A more recent grad is Rachel Pautler. She and her two co-founders came to the University of Waterloo for one of North America’s only undergraduate degree engineering programs specializing in nanotechnology.
“We honestly all applied to nano because it had the highest admission average and we thought we wanted that. You need over a 95 [grade average] out of high school,” says the 23-year-old from nearby Cambridge, Ont.
Ms. Pautler believed she was going to be a professor, but it only took her three co-op terms doing nano lab work to realize she hated pure research.
Engineering students at UW have to do something called a capstone project in their senior year. Some people build solar cars, others build new highly sensitive radio sensors, but Ms. Pautler had a problem to solve: “I get sunburned super easy, and I hate it because I get sunburned wearing sunscreen,” she says.
After a session of yelling at each other in a room with a white board, Ms. Pautler’s team came up with a concept: not a new sunscreen, but a type of ink that that would change colour when it sensed UV rays, which would tell you when it was time to re-apply.
“We took it to a professor, he said, ‘That’s awesome. You should start a company.’”
They did and their company, Suncayr, has become an example of the many supports in the university’s startup ecosystem. The co-founders used some of their co-op sessions to develop their idea. They perfected the product at the Velocity lab, won several cash awards from the university and met drug-company sales reps and retail buyers during networking events at Communitech. After graduating this year, Ms. Pautler’s Suncayr team moved into the Velocity Foundry space, with plans to stay in the region for at least the next few years.
“The education of the future engineer is based on three main beliefs,” says Pearl Sullivan, the university’s dean of engineering. “Experience early – that’s what co-op does. Innovate early – if you have an idea, go for it. Finally, incubate early – if we can help you take your idea to the next level, we will help you.”
“The lesson here is that maybe the role of university is not to just to complete a five-year program in engineering,” she says. “Maybe the role is to ensure the ideas they have go beyond the academic program and help them to deploy them so it is a successful venture, so they can strengthen the ecosystem, and the economy of the country.”
One of the key elements of the Kitchener-Waterloo startup ecosystem is the impact it has had in shaping local infrastructure.
Under David Johnston, who served as the university’s president from 1999 to 2010, the school was a major player in helping launch a project to remake the downtown of Kitchener. It’s an area that 28-year-old Michael Litt, CEO of video marketing startup Vidyard, says was “the place where I was not allowed to go growing up.”
“In 2005 when I started with the city, you could shoot a cannon down the street any time of the day or night and not worry about hitting anybody – there was a lot of vacant retail space,” says Rod Regier, executive director of the city’s economic development team.
In 2004 the city set up a $110-million fund for an economic-development program financed through a 1.2 per cent property tax hike over a 10-year period. The university used $30-million out of the fund to help build a new pharmacy school in the downtown area. Other money went toward cleaning up industrial sites and transforming warehouses.
One of those sites was the Lang Tannery. Once the largest tannery in the British Empire, it stopped curing hides in the late-1950s, and its 450,000 square feet of space spread across more than 40 buildings stumbled through a number of iterations, including a paintball range. It was purchased by a Toronto-based developer in 2007, and the city spent almost $1-million of its strategic fund cleaning up contaminants on the site.
“The true genesis of that project came in May of 2007,” says Mr. Regier. “We held a meeting of half-a-dozen tech, university and Communitech leaders, here at City Hall, to ask what was the future? How could we leverage the assets of our creative industries?”
Indeed, the first anchor tenants for the redeveloped complex were Communitech, Google and education-software firm Desire2Learn. More tenants came along from the university’s Velocity program.
The impact has been transformative. In 2002, realtors told the city there was essentially no condo market for the downtown; now there are three newly opened condo developments, and more on the way.
“When we got down here, there were no startups,” says Google’s Mr. Woods. “There must be 500 startups within a couple of kilometres of here now. And at least 100 within two blocks.”
Among the notable startup tenants are Thalmic Labs, across the street from the Tannery, and offices for Vidyard, MappedIn, ReeBee, Igloo, Renomii, and Sweet Tooth are all in what the city now calls its “Innovation District.” According to Kitchener’s planning agency, 1,300 jobs moved downtown between June 2013 and June 2014.
The city, province and federal government are also spending more than $800-million on a new light-rail transit line to connect downtown Kitchener to the University of Waterloo campus. And there are plans for a new train service between Kitchener and Toronto, which Mr. Klugman and his peers hope will help create a “super-cluster.”
Can startup activity pay for all this infrastructure?
“If you add up all the development sites within a five-minute walk of the [train] station, we’re going to put together at least five-million square feet of new development in the next 10 to 15 years. That is essentially 10 Tanneries, maybe 4,000 new residents, in that pedestrian area,” says Mr. Regier.
To be sure, many challenges remain, and one of the biggest is financing for startups. Despite a string of local success stories, venture capital financing remains paltry in Canada. Recent studies show that the total amount of venture capital investments in the U.S. surpassed $48-billion (U.S.) last year, with 60 per cent of it being spent in California, mainly in the tech sector. In Canada, by contrast, the total amount raised in 2014 was about $2.4-billion (Canadian).
Access to capital is not the only metric worth measuring, but it can be a useful proxy to discuss scale. For a technology hub to rival Silicon Valley, it needs to at least get in the ballpark in terms of the level of investment. The other crucial metric, however, is human capital, and the region’s reputation starts with the quality of the locally grown talent. And that resource needs to keep growing.
One of Mr. Woods’s priorities in Waterloo has been to repatriate Canadians who are ready to come home after working abroad, and also to recruit non-Canadians to the region. “Mike Lazaridis made this argument, that if you bring 15 people in and one starts a company, you’ve paid the tax on all the others for a generation,” he says. “That’s what we need, that’s what Silicon Valley did. We definitely don’t want to slow the wonderful growth of this ecosystem through a lack of talent.”