British Columbia Innovation Council

by Greg Aasen and Danny Robinson
February 3, 2011

Training our entrepreneurs and helping them through the very risky early stages of a startup is a logical extension of our support for higher education. In fact it seems quite illogical to spend so much on their formal education and then lose many of the most aggressive and talented students to places like Silicon Valley. Economic growth, innovation, and jobs are driven by entrepreneurs, but only very few end up starting a company right out of school. We plan to put a strong entrepreneurial infrastructure in place in order to convert some of this great talent into local startups. This flow of startups is the source of our next great anchor companies. Many will fail but the talent will continue to contribute to our high tech economy. We need programs to fill the funding gap between NSERC university programs and Angel funding. Funding this gap is unlikely to give a direct financial return to an investor. But, as we describe below, the community benefits no matter the outcome. That is why government is the only entity in a position to get a return on this investment.

The SR&ED program has been extremely useful for startups who have some funding. IRAP and WD fund some of the early stage startups. NSERC has increased its emphasis on commercial partnerships. The provincial government of BC has started some pilot programs to fund early stage entrepreneurs through BCIC. BC also started a very successful tax rebate program to incentivize Angels to invest more. A proposal for a similar federal program looks good. We are seeing positive changes that we need to accelerate if we want to become the best place in the world to start and grow a technology company.

"Every big company started out as a small company"

Think of the startup eco-system like an eCommerce shopping cart. You can get a lot of people to come to the web store, a few add items to the cart, even less make it all the way to the check out page, and a small percentage actually complete the purchase. Startups progress through a similar funnel. Simply put, we need to increase the conversion ratio of startups as they progress from one stage to the next in their lifecycle.

Ultimate Goal of the Eco-system: Anchor

Anchoring means that a company has hit a level of maturity where it starts to give back to the community in the form of creating jobs, educating the talent pool, adding credibility to the region, inspiring young entrepreneurs, and spinning out new entrepreneurs, and tax revenue. This is the ultimate goal, and the ideal outcome. However, it doesn't happen often, so the question becomes how do we make it happen more - or - how do we increase conversion?

More Startups

To do that we need to encourage more people to try. And to do that, we need to change the culture that 'failing is bad.' Chances are high that failed founders will not make the same mistakes they made the first time around, so they are less of a risk than they were before. Experienced investors prefer to invest in founders who have been through it before. Culturally we must celebrate 'trying' vs condemning 'failures'.  Doing so will entice more founders to put their livelihood on the line and try to start a company.

• Ralph Turfus started 8 companies over the last 30 years. Three were failures, four did ok and his last one, Class Software, was a big success. Ralph is now a very active angel, mentor and leader of the ACETECH Growth Strategy Program.
• Sydney Development Corp. was an early 80s software company. Many of the team went on to start new ventures like Distinctive Software, Sierra Wireless and PMC-Sierra.
• Zeugma just sold to Tellabs and the founders are looking at what to do next. Tellabs plan to double the engineering team.
• Vienna Systems developed cell phone technology and sold to Nokia. They ended up building a large team in Vancouver.

Produce More Exits

More exits attracts more venture capital into the region. Investors are attracted to great companies. To get more investment, we need more world-class companies. Sounds obvious, but the point is often missed. Exiting is also how angel investors are born, we need more of them and we need them quickly. Exits also create financially secure founders who will try again and this time, they will have the confidence to "go big".

• Layerboom sold to Joyent with 4 employees and 14 months after starting the company. It produced 2 soon-to-be angel investors.
• Bycast just sold to Netapp and the founders are looking for the next gig. Netapp plans to double the engineering team.
• Convedia sold to Radysis and kept the engineering team. The founders are working on new projects. Radysis now has over 100 staff working in Burnaby.
• Abatis sold to Redback and built up the team in Burnaby. The founders went on to start Octiga Bay which sold to Cray Computing. The founders tried another startup which didn't work and they are now looking for their next opportunity.
• Ballard sold off the Automotive division to AFCC which continues to develop hydrogen fuel cell batteries in Vancouver. Ballard continues to develop hydrogen fuel cells for niche markets.
• Hot Haus sold to Broadcom. They have grown their staff here and the founder is a very active angel.
• Crystal Decisions sold to Seagate, then spun out and sold to Business objects which was bought by SAP. There is a large presence in Vancouver and the founders and executive are active in the high tech community.
• Creo sold to Kodak. The founders are active angels and mentors. Many of the executive are involved in new startups like Redlen, Bycast, Kardium, Copperleaf and General Fusion.
• Pivotal sold to CDC Software, they are still hiring in Vancouver. The founder is an active angel in Vancouver.
• AbeBooks sold to Amazon. The executive are active angels. Boris Wertz is the most active Internet investor in BC, and perhaps Canada.
• NCompass was started in Vancouver by Gerri Sinclair and sold to Microsoft. Gerri was the Executive Director of the Centre for Digital Media Masters Program.
• PMC was bought by Sierra semiconductor and PMC exec eventually took over the company and changed the name to PMC-Sierra, Inc.
• Distinctive Software was sold to EA and they built a huge operation in Vancouver. The founders are active in our high tech community. Don reports to Steve Balmer of Microsoft and has moved back to Vancouver and is getting active. Paul started a major VC firm called VanEdge Capital.
• Club Penquin was sold to Disney. They continue to grow and operate out of Kelowna.
• MDI was sold to Motorola. Many of the executives ended up leaving Motorola and helped grow companies like Sierra Wireless, Digital Dispatch, Columbus Group, Ballard and MDSI.

Only a few exits involve moving the company. High tech companies are the people and most end up continuing business in BC and usually growing. But exiting to US companies is not a bad thing. It creates returns for local investors, bolsters our reputation for producing world-class companies worthy of attention from foreign VCs and acquirers, and plants some friends in influential positions at larger companies who have a patriotic desire to help startups back home.

• Flickr was sold to Yahoo. The team was quite small and was moved to Silicon Valley. While in Silicon Valley, Stewart provided support to local companies who wanted access to Yahoo. Now, Stewart has moved back to Vancouver to start his next company, Tiny Speck.
• DabbleDB, sold to Twitter. Avi, the founder, is a main point of contact for many Vancouver based companies who want to do business development deals with Twitter. Same thing with Beau who now works at Facebook.
• Dan Cordingley worked at Spectrum Signal Processing and went on to Level 1 in California before he returned and started Teradici which is doing quite well now.

About the brain drain

The bad thing is to not back fill those exits with a healthy steady flow of new founders. In this case, the best defence truly is a good offence. We need to open our borders to immigrant technology founders. See www.startupvisa.ca. Startup Visa was modeled after an American initiative attempting to open their borders for the same reason. Once their visa is approved, the Brain Drain problem will be greatly amplified. And BC's proximity to Silicon Valley makes us the ideal landing pad for attracting the best minds of developing nations to start here.

We also need to combat brain drain by creating the best possible environment for a startup to succeed in the world. Some of our most aggressive talent leave to find better opportunities. These are exactly the types that would start companies if we had the support programs and funding that encourages them to try something here. Exit, Anchor or Fail, we will end up with more of our local talent trained and contributing to our high tech community.

In every case, the positives far outweigh the negatives. It is very hard for government programs to pick winners but we don't need to in this case, we are betting on the whole league. The only way to get more anchor companies is to start more companies. Some fail, some exit and some anchor. There is no shortcut.

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