ACCELERATORS

In an empty office in the downtown Toronto building that will become home to Techstars LLC’s first foray into Canada, managing director Sunil Sharma is contemplating an important question.

Temporarily putting aside the hundreds of applications from startups from around the world that want to join the accelerator’s first Toronto cohort, he’s inclined to tear down all the glasswalled offices lining the floor so that the winning companies can work together in one large, open space. But first, an employee of the building’s management pops in with an even more pressing matter.

“Are you guys gonna have beer on the floor?” he asked. “You’re allowed to, but some people don’t want to.”

“Oh no, we want beer,” Sharma said. “And I want to bring cold brew in, too.”

Sharma is not the only one offering beer, trendy open-concept offices and other amenities in an effort to attract and then nurture successful startups. Plenty of governments and private investors are also pouring massive amounts of money into accelerators, incubators and innovation hubs in the hopes of launching the next Uber Technologies Inc. or Airbnb Inc.

In Canada, such success stories are rare. The biggest tech winners, such as Shopify Inc., have come from outside the incubator and accelerator system. Research suggests top-tier, internationally renowned accelerators such as Techstars give their startups a meaningful advantage, but it’s less clear whether other models are worth the time and money.

Sharma believes all these types of organizations can have benefits, especially the classic three-month accelerator style fuelled by privatesector funding. Everyone’s interests are aligned when investors take equity stakes in startups participating in accelerator programs, he says.

“We think it’s a two-way street. We have to earn our equity in these companies,” Sharma said. “It’s needed to have a Techstars model in Canada, as it is in many other countries. I think you’ll start to see more.”

The basic idea behind accelerators and incubators is to identify companies with the potential for massive growth, provide them with office space and connections, and hopefully help them grow faster than they would have otherwise.

The risk, however, is propping up mediocre companies that would fail in the free market, thereby siphoning revenue away from competitors and stunting their growth.

Over the past year, Canada has seen a flurry of both public and private investment in incubators, accelerators and tech research hubs.

For example, Montrealbased research hub and incubator Element AI in June raised $135 million from major tech companies including Microsoft Corp., Intel Corp. and Nvidia Corp.

Royal Bank of Canada, Magna International Inc. and Bank of Nova Scotia announced contributions to another $5-million fund for incubating artificial intelligence startups called NextAI in January.

And the federal government is taking applications for $950 million in seed money to create research and innovation “superclusters” across the country, in the hopes of nurturing Silicon Valley-like regional hubs of startup activity.

The Justin Trudeau Liberals have made innovation a key part of their policy agenda, with $1.18 billion earmarked for skills and innovation in the 2017 budget.

On Tuesday, Innovation Minister Navdeep Bains announced nine finalists for the federal government’s supercluster funding, focusing on such areas as manufacturing, artificial intelligence and ocean technologies.

The superclusters idea isn’t new: National Research Council Canada has been funding similar regional “technology cluster initiatives” since the early 2000s.

A 2010 NRC evaluation of the performance of its technology clusters determined “a number of challenges remain” when it comes to helping companies located there grow, cautioning “expectations regarding firms should remain realistic.”

The report cited scarce investment capital, insufficient incubation space and expensive technology as among those challenges.

John Stokes, a partner at Montreal-based venture-capital firm Real Ventures, which has invested in Techstars and Element AI and runs the accelerator FounderFuel, said he’s waiting to see how the supercluster strategy plays out before passing judgment.

But he sees a win-win situation when it comes to making private investments in accelerators.

Founders get capital early in their life cycle, support and the brand cachet of the accelerator, while investors streamline the scouting process to take bets on emerging technologies.

“It allows you to deploy both money and support in order to help companies on their path to hyper-growth success,” Stokes said. “From an investor point of view, it is powerful.”

In Canada, however, privately funded accelerators that take an equity stake in startups are relatively rare.

Incubators and innovation hubs — which provide office space, resources and mentorship, but don’t typically take equity or culminate in a graduation “demo day” for investors — are much more common, and most of them are supported by taxpayer dollars.

A prominent innovation hub is Toronto’s MaRS Discovery District, a government-funded charity that aims to help companies grow by providing them equipment and subsidized rent in a location right next to major hospitals and universities. The orjust ganization was the focus of controversy a few years ago after its new 20-storey tower needed to be bailed out by three government loans, but those loans have been repaid.

In addition to startups, MaRS houses major companies such as Facebook Inc. and the Canadian Imperial Bank of Commerce in the hopes they will forge partnerships with smaller companies under the same roof.

Salim Teja, president of venture services at MaRS, said the innovation hub’s track record speaks for itself, with MaRS-supported ventures raising $785 million in 2015 and generating $398 million in revenue.

“Government is really trying to catalyze partnerships between small companies and large companies to really focus on creating real value in the marketplace and solving big, important problems,” Teja said. “We hear often from VCs that companies that have gone through programs like ours are much better prepared for success.”

Of course, anecdotal evidence from venture capitalists is not the same thing as hard evidence. That MaRS discloses the revenue and funding generated by participating companies is unusual since most Canadian startup supporters prefer to keep such metrics to themselves.

MaRS published a report on Canadian accelerators in 2013 and came to the conclusion that “little is known how well accelerators actually perform.”

Accelerator directors interviewed by the report’s authors cited a lack of resources as the main reason for failing to track the performance of alumni startups, but there were other reasons, too.

The report quoted one accelerator director whose response when asked if he or she would consider publishing results in the future was, “When they’re good.” It quoted another director who was concerned data showing poor results would make it harder to receive government funding.

Sharma, who is also chair of the board of the Canadian Acceleration and Business Incubation Association, said the organization would gladly accept public funding to collect such data. He said it doesn’t make sense to pour funding into entities that are supposed to support startups without measuring how those startups fare.

“I just believe there should be a real rigour and analysis of this,” Sharma said. “By now, there should be so much data available, it should be analyzed in a very serious way about what are the outcomes and how does it trace back to the financial support.”

For founders, there’s no question that a prominent accelerator can provide a serious boost. Montrealbased bus rental startup Bus. com parlayed its graduation from FounderFuel into acceptance at San Francisco’s Y Combinator, widely considered the top accelerator in the world.

Bus.com chief executive Kyle Boulay said the relationships he built at Y Combinator and FounderFuel helped him raise a US$5-million Series A round in April. He said he regularly recommends accelerators to other entrepreneurs.

“For first-time founders such as myself and my cofounder, it’s always a really big asset to work closely under people who have done it before,” Boulay said. “The startup mountain is a very difficult one to climb.”

Stokes, the Real Ventures partner, said he welcomes government action to help make it less difficult to climb that mountain. He said it’s important for governments to show they support entrepreneurship, but, so far, publicly funded incubators and hubs haven’t posed much of a competitive threat.

“As a taxpayer, I would love to be concerned about the competition” Stokes said. “That would mean the government money is being used in a way I think is very impactful.”

THE STARTUP MOUNTAIN IS A VERY DIFFICULT ONE TO CLIMB.