Canada’s tech sector is in a bad place, but there’s hope

Our startups are solid, but they keep selling out. The good news, says industry advisor Brent Holliday, is that’s finally changing.

 
(Photo:  Richard Drury/Getty)

Brent Holliday, a partner at Vancouver-based Capital West Partners, has been watching the Canadian tech industry for two decades. He’s seen the good years and the bad, the rise and fall of Nortel, of Research In Motion. He saw venture capital drop off a cliff following the dotcom bust, and now, he says, he’s seeing things get better. It should be music to the ears of anyone following Canada’s tech industry; typically, more stories are written about RIM’s plummeting shares than about our promising startups.

I spoke with Holliday about what’s been the problem over the last 10 or so years, particularly when it comes to growing our tech companies, and why it’s finally starting to get better.

CB: In a nutshell, what’s wrong with Canada’s tech industry?

BH: The reason companies sold [at] between $10 and $50 million was simply that there was no access to growth-stage capital. It was also the fact that Americans, who had tons of growth capital, weren’t convinced that the teams here were the teams that could take a business from $10 to $100 million in sales…. So it’s really two things.

If you’re an entrepreneur [with] $5 to $10 million in sales… and somebody comes calling to buy you, you’re going to sell it for $50 million. You’re going to make a few bucks for your angel investors, you’re going to make a few bucks. Then you sell because the other alternative is to go out and seek growth-stage capital, which is too hard to find. So that mentality then got ingrained.

VCs couldn’t make a buck because you can’t have your entire portfolio sell for $20, $30, $40 million dollars. You need hits.  You need IPOs. You need massive sales. You need Radian6 in your portfolio [a New-Brunswick-based social media company that sold for $326 million last year]. That’s the kind of thing that you would need to make money as a VC. But because you as a VC don’t want to put more money in this company and there’s an offer on the table [to be acquired], that’s kind of how it all went for many, many years in Canada.

The cool thing is it’s changing. In the last three years, we’ve seen Tandem Expansion Fund and now OMERS Ventures step into that void as Canadian technologically-focused growth equity guys. And in the States we’re seeing more of the growth equity players come up and invest.… It’s not just the VCs. The growth equity guys are coming up, the later-stage players.

CB: Our startups are solid, but do we have the right talent to grow them?

BH: We’ve been through a few cycles of tech booms and busts now, and we know what it takes to grow bigger companies. We have access to capital, now we have people who have been there, done that, that have come out of companies or been through the startup cycles and know how to grow a big company. And now the money is coming back. The VCs are coming back. The end of this story, which has yet to be proven, is that we can grow much bigger companies that will either exit at much bigger values or will go public on the NASDAQ and become large, significant global technology companies. We gotta stop talking about RIM and we gotta start talking about what’s next.

CB: Why do we need Canadian-owned companies? Our video game industry, for example, is very strong despite the fact that it’s mostly foreign-owned.

BH: The branch-plant economy works well for us. If you take the Israeli example, there’s no bones about it. They don’t wrap themselves in the flag at all. They say, we develop the tech here, we’ve got the brilliant innovation here, we create the ideas, then we go straight to the United Stated and monetize it….

But we want the large companies to create the executive teams that spin out of a large company, like they do in the Bay area…. The large, growing companies attract the best and brightest. We get the best and brightest, they learn, they spin out and become the entrepreneurs. If we keep selling out and having a branch-plant economy, where are those people? Where are the people who know how exactly to grow a company? They’re not here if we keep selling out.

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