A new gold rush

Canadian startups head to Silicon Valley for riches, but promise to come back

IN A WAREHOUSE on the San Francisco coast, 1,000 venture capitalists sit shoulder to shoulder, eagerly watching as Torontonian Heather Payne walks on stage. “At Juno, we’re creating the technical university of the future,” she says, sporting a company-branded long-sleeve tee advertising her company, Juno College of Technology. The college offers students extensive coding education for just $1 in upfront tuition, with the rest paid though income share agreements. She’s one of 175 startup founders — 11 of them Canadians — who took the stage at Y Combinator’s recent summer-ending showcase.

Y Combinator (YC) is widely known as the world’s preeminent startup accelerator. Twice a year, thousands of companies apply for the competitive Silicon Valley program and the few that are admitted earn a US$150,000 investment from YC. Most move shop for three months to San Francisco, where they’re offered mentorship and gain significant entrepreneurial street cred.

At the end of each YC semester, every company gets just two minutes to pitch themselves to a sea of renowned investors in a tradition called Demo Day. What follows is a frenzy of investment. Watching the way investors circle the startup founders, it becomes clear why the television show Shark Tank is so aptly named. Evan Farrell, co-founder of Toronto-based ScholarMe, which helps students find financing for tuition, recalls an investor approaching him at Demo Day even before his pitch. “The investor said, ‘I’ve already heard of you guys. I’m just going to offer you $50,000 right now and we can go from there.’”

Farrell’s experience is an extreme one, but the average company coming out of YC raises between US$500,000 and US$3 million in days, at valuations between US$6 million and US$15 million, often in just their first or second year of operations. Notable YC startup alumni include Airbnb Inc., Dropbox and Reddit Inc. Three Canadian startups cracked YC’s 101 Most Valuable Companies list in 2018: smartglasses maker North Inc., online video host Vidyard and biotech company Atomwise Inc.

YC offers easier and faster money in a scaled startup ecosystem that could be likened to a candy shop. But even after a stint in the mecca of entrepreneurship, almost every Canadian startup in YC’s Summer 2019 batch plans to bring their operations back home. Most founders cite cost, talent and patriotic heritage. The average tech worker in Toronto costs nearly half as much as in San Francisco, at US$74,000 and US$145,000 respectively. Canadian rent is also orders-of-magnitude cheaper than in the Bay Area, even in the country’s priciest markets.

SannTek Labs Inc.’s Noah Debrincat says the University of Waterloo in Ontario is perhaps his most vital partner, even after YC. His company is developing a fast and reliable cannabis breathalyzer. “UW has given us access to multi-million-dollar equipment we could never have afforded this early,” he says. He also raves about the technical talent in Waterloo, and becomes excitedly speechless when reflecting on the mentorship he’s received in the region. “I only hope to someday give back as much as some of these founders have given us.”

This patriotism is nationwide. In St. John’s, Adam Keating leads CoLab Software Inc. in building a collaboration platform for mechanical engineers. “People in Newfoundland have gone out of their way to help us find funding, find people and even find space,” he says. In Victoria, Juan Orrego, whose company, Cuboh, helps restaurants consolidate orders from online delivery providers, says Canada’s support is “truly a competitive advantage.”

Many give credit to the federal government’s Scientific Research and Experimental Development Tax Incentive Program , which offers businesses up to 35% in tax credits for qualified research and development investments. The government’s 2019-2020 budget promised to increase such credits for fast-growing Canadian businesses. In recent months, it has also pledged $12 million for Quebec accelerators, and another $52.4 million towards a collaborative initiative between Invest Ottawa, MaRS and Communitech.

I’ve left many conversations with Canadian founders feeling energized

“I’m very bullish on what’s going on in Canada,” says Bryan Rosenblatt, a principal at Craft Ventures LLC in New York City. “I put Toronto, Montreal and Vancouver right up there with the largest U.S. cities as places where big tech companies can be built. I’ve left many conversations with Canadian founders feeling energized.”

Suneel and Sonia Gokhale, partners at Dubai-based VentureSouq, echo this sentiment, having expressed interest in five Canadian companies at YC’s latest Demo Day. “Canadian founders have a certain realness to them,” Suneel says. Sonia adds their humility is a strong quality, especially in today’s hot venture-capital markets.

As Heather Payne wraps up her presentation at YC, she tells investors Juno “has a clear path to $1 billion.” That may not sound particularly humble, but given the buzz around the Canadian companies at YC, it probably is.