Strategy

Business without Borders: The Valley's hoser mafia

How a group of expats in California is opening doors — and wallets — for Canadian tech startups.

Jad Yaghi stood in a darkened conference room in Toronto’s MaRS Discovery District one afternoon this April and began a presentation he’d made successfully dozens of times. He introduced himself, his partner, Matthew Sloly, and their fledgling company, Verold, a name they’d taken from a proto-Germanic word for “world.” “We’re here today to talk about how we’re going to change the way 3-D graphics are produced and consumed,” he said.

A small audience of other entrepreneurs listened as he talked his way through his PowerPoint slides, describing a three-dimensional capture and modelling technology that seemed magical in its apparent simplicity. An embedded movie demonstrated how any video taken with any camera could be imported into Verold’s software, and how an object in that video — a statue, furniture, a person — could be roughly painted over with the cursor. The software would then transform it into a fully rendered 3-D model in a matter of minutes or hours instead of days or weeks. “Over half of Avatar‘s budget went to producing special effects and 3-D,” Yaghi said. “For computer game companies, 64% of their costs are producing 3-D graphics, and less than 10% of games break even. To do 3-D graphics, you need an actual human being sketching and drawing everything. We’re bringing an unprecedented level of automation.”

At the end of his 10 minutes, his peers applauded. Yaghi then turned to the panel of four men who’d been sitting at the side of the room taking notes, three venture capitalists and the head of a Silicon Valley tech incubator. They started breaking down his presentation.

The panel, and the day of presentations surrounding it, were part of a series of boot camps for Canadian tech startups organized by the Canadian Trade Commissioner Service of the Department of Foreign Affairs and International Trade (DFAIT). Over seven days in April, travelling through Moncton, Montreal, Ottawa, Toronto and Waterloo, a group of barnstorming American and Canadian venture capitalists and tech executives, plus a handful of staffers from the Canadian consulates in San Francisco and Palo Alto, met with groups of carefully selected entrepreneurs representing the best of each region’s startups. In the mornings, the VCs and execs led how-to seminars on cracking the U.S. marketplace and securing American venture funding. In the afternoons, the entrepreneurs offered their best pitches and received instant feedback from investors representing billions in capital. It was the most recent instalment in a new program reflecting how the consulate in Silicon Valley, and a high-powered new Canadian expatriate organization called the C100, are connecting homegrown startups with the technology and venture capital centre of the world.

“For a hundred years, we basically helped companies sell their products,” Stewart Beck told the crowd of entrepreneurs on the morning of the Toronto boot camp. Canada’s consul general for San Francisco, Beck was along for the barnstorming tour. “The business model has changed, for companies and for ourselves. For the last three years, I’ve been encouraging our people to basically say, ‘What is it you need to grow your company?’ And that’s what we offer as a service now, if you’re looking for financial assistance, if you’re looking for technology, if you’re looking to meet the right partner.”

The old system of subsidies for Canadian companies entering international markets encouraged Canadian entrepreneurs to engage with DFAIT’s agents abroad, but with that system long since dismantled, and with the Internet offering growing companies a source of market research more accessible than a visit to a consulate, said Beck, “we need to reach out to you.”

The boot camps, which run in both Eastern and Western Canada, are one way Beck and his team now do that. In their caravan’s five stops this time out, they connected with more than 50 startups. But an equally big part of the consulate’s strategy in the Valley has involved mobilizing the 300,000-strong Canadian contingent that lives and works there, many of whom hold executive positions at the biggest names in high technology, including Google, Apple, Microsoft and Facebook.

The C100 is an independent, non-profit networking organization bringing together hundreds of Silicon Valley’s Canadian tech entrepreneurs, executives and venture capitalists. It formed last year, the brainchild of the San Francisco consulate’s Thierry Weissenburger and some members of the Valley’s expat community. “Canadians tend to be dispersed here,” says C100 organizing committee member Ron Piovesan, a Toronto-born manager of corporate development at Cisco Systems. “We don’t tend to bond together like other expat groups do, and that’s exacerbated in the U.S. because it’s such a similar culture. You tend to just move down here and get on with your life, and you don’t necessarily think about connecting with other Canadians.” As it became clear how few of the Valley’s Canadian movers and shakers actually knew one another, and how much potential there was in the community, venture capital mavens Anthony Lee of Altos Ventures and Chris Albinson of Panorama Capital stepped up as founding co-chairs, and an organizing committee coalesced around them. In less than a year, the C100 has begun to knit together a cohesive Canadian community in the Valley, one that now has its own social networking tool, Bridgescale Partners co-founder and C100 charter member Rob Chaplinsky’s Digital Puck.

The C100’s goal is to connect with entrepreneurs back home in Canada, providing them with high-level mentoring and funnelling Silicon Valley contacts and chutzpah back across the 49th parallel. “Canada is a very dynamic country,” Piovesan says. “It’s got a young and very highly educated population, but it traditionally relies on commodities, as we all know. We want to provide guidance to help people build different types of companies, to start out on their own instead of just being the Canadian subsidiary of a foreign company.

“It’s cliched to talk about it, but the culture of innovation and entrepreneurship here does actually exist. And I think finding ways to export part of that culture, of promoting that sense of ambition and of risk-taking, is a good thing to send up to Canada.”

Another good thing to send north: the scads of venture capital dollars to be won in the Valley. The Canadian venture capital industry has been missing in action for years. The number of investments by Canadian VCs, and their size, has sagged dramatically in the past decade and a half. According to the Canadian Venture Capital & Private Equity Association’s annual statistical review, total deal activity in 2009 fell to its lowest level since the mid-1990s, down to $1 billion from $1.4 billion in 2008. And that billion was bolstered by a handful of major deals in the final months of the year. The tech sector accounted for nearly half of the action, but it too was down 25% from the year previous.

When the CVCA’s members met for their annual conference two weeks ago in Ottawa, they golfed, sampled Scotch, enjoyed a private performance by comedian Rick Mercer, and assessed the state of their diminished business. Association president Gary Smith, of Brookfield Financial, opened the conference by imploring federal and provincial governments to play more of a role, lauding those provinces like Ontario that have launched venture funds, and taking credit for the repeal of Section 116 of the Income Tax Act in the Harper government’s spring budget. The subject of a seven-year-long campaign by the association, its elimination removed administrative hurdles for foreign investment and raised hopes that venture capital from private and sovereign wealth funds would soon stream across the border to buoy Canadian startups. And with so little activity in the domestic industry, young Canadian companies are increasingly looking for investment from abroad. Even at its zenith, Canada’s venture capital market was a small one. Though we fund disproportionately more companies than does the United States, the sums are small. California alone saw nearly $10 billion in venture capital disbursements in 2009 — a down year. It’s that kind of foreign investment pool to which DFAIT and the C100 are trying to build a pipeline.

Three weeks ago, Jad Yaghi flew to San Francisco for more mentoring. Verold had won a number of competitions for startups, including the Toronto edition of the prestigious TIEQuest global business venture competition, and the $2 million Yaghi sought to close Verold’s first round of funding was falling into place. But after talking to some fellow entrepreneurs, Yaghi decided to accept a spot in the C100’s program “48 Hours in the Valley.”

Verold was one of 20 companies selected to participate from across Canada. The entrepreneurs paid their own way, and their hosts did their best to make sure their guests wouldn’t regret buying the plane tickets. The biannual 48 Hours sessions don’t focus on making the pitch, or on how startups are going to get funded; they concentrate instead on the mechanics of the business. “If you come, you can’t just give a canned pitch,” says Piovesan. Each participant submits in advance a “problem statement,” where they detail one or two things that are affecting their business. “It could be on the financial side, the marketing side, the HR side, the sales side. Anything, really.” The mentors with whom the companies are paired for an hour at a time — VCs, tech executives, and angel investors — review the statements in advance, and come prepared for an in-depth discussion of how specifically to move the business forward. “To me, this is the real differentiator for C100 mentoring versus other mentoring programs,” Piovesan says, “not just in Canada but in the Bay Area.”

Yaghi came to discuss Verold’s central conundrum. The partners had technology that they knew they could sell in the short term, within the entertainment industry. But they were inclined instead to raise money, develop a finished product and find a way to sell it both vertically, within the animation industry, and horizontally, to the consumer marketplace. He talked to investors, who told him to prove revenue any way possible, and to executives working in the industry, who told him to walk the longer path. At the end of the mentoring sessions, he had heard both sides.

After lunch, he made one more pitch. A bus collected the Canadian entrepreneurs and shuttled them through the Valley, dropping off a handful at Cisco, a handful at Microsoft, and a handful at the Redwood City campus of Electronic Arts, the world’s largest video game publisher. C. J. Prober, EA’s vice-president of corporate development and a C100 organizing committee member, ushered him into a presentation room, where he was greeted by members of EA’s business development team. They settled into seats, and Yaghi stood at the front of the room. “My name is Jad Yaghi, and I’m the CEO of Verold,” he said. “I’m here today to talk about how we’re going to change the way 3-D graphics are produced and consumed.” His audience listened attentively.

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