Canada’s startup ecosystem has grown immensely in just five years — within that time we’ve had major exits like Shopify, and attracted the attention of accelerators like 500 Startups, which has set up shop in Canada.
Paul Singh, one of the original three partners at 500 Startups, is one investor who wants to get to know Canada a bit more closely. He left two years ago to raise his own $50 million fund which required him to travel extensively. “I was seeing cities from the inside of Ubers and spending hours in the ground investing in companies and I’d get out,” Singh said. “I got frustrated with the fact that I didn’t really understand the places my companies were being built.”
Since then, Singh has been travelling across Canada and the U.S. in his Airstream — essentially, a decked-out trailer — with the goal of truly understanding the communities he may potentially invest in. Throughout 2016, Singh plans to visit 34 cities across Canada and the U.S.
During his stop in Toronto as a judge for Communitech Rev’s Demo Day, BetaKit had the chance to sit down with Singh for his thoughts on Canada’s burgeoning tech ecosystem, the one thing Canadians can learn from their American counterparts, and his issues with Canada’s SR&ED program.
How Canada’s ecosystem has changed in the past five years
“Six years ago it kind of went from nascent and early stage, and now a lot of the VCs [in Canada] I’m talking to are talking about raising their next fund. Which is really neat, that’s a good sign from the VC side if there’s an increasing appetite for deal flow.”
“The challenge I’ll point out — it’s the same for Canadian and American founders — it’s that over the last five years, we’ve made it easier than ever to start companies. Whether it’s the rise of accelerators, networking groups, incubators, or coworking spaces. It’s the next big opportunity for community builders in Canada and the U.S. How do we start to build resources for companies after they get that first dollar of revenue? These kind of pitch competitions are great because these revenue-driven companies can get advice, but what about in between?”
“Community building is about inclusiveness and broad appeal. You want them to go to a community and get the resources they need to start. To start, however, we need to curate and think about what is it that this company needs to get to this level. And it’s typically some combination of urgency, which could be external where people are pointing and pushing. Or it’s functional expertise.”
— Paul Singh (@paulsingh) May 27, 2016
The challenges he thinks Canadian entrepreneurs face
“I would say founders in Canada are technically as strong as their American counterpoints. I think from execution standpoint they’re just as strong as their American counterparts. If I could import anything into Canada, it would be the sense of urgency. If I had a magic wand, the way I would import that sense of urgency is that I would drag them to Silicon Valley with me, so they could see more companies. See what it means to build a company. If community building is about inclusiveness and reach, then company building is about curation. How do we pull these companies to be better. So Canadian founders, I think, are just as strong in every way, I just need to figure out how to pull them faster.”
“I think we’re trying to use dinner party etiquette to build our businesses. If you’re in a dinner party and you’re in some personal relationship, building that relationship is about quality and quantity of time. Business relationship building is not really about quantity of time, it’s more about results. If you think about four pitches we just heard, all of them buried the fact that they had revenue until the end, or at least halfway through. We live in an attention economy. I don’t think we can overstate how important it is that when you have revenue, you’ve got to flip the pitch. There’s no way you can run the risk of being categorized as an early stage founder.”
His thoughts on Canada’s funding environment
“It’s definitely getting better. I think local founders might disagree, but the fact of the matter is, here is what I would say: on the funding side, I think any founder in Canada that complains about investors in their hometown is being lazy. I say that because as a founder, you may or may not be right about your local investors, but never before have you also been accessible to other investors. For local founders, what I say to them is ‘Look, the question is not whether the local investors will fund you, the question is,are you good enough to be funded by investors anywhere on the planet?'”
How venture capital has changed
“In the old days of venture capital — and when I say old days, I mean maybe five years ago — people like me could probably sit back and relax knowing founders would find their way to wherever our ivory tower was and ask us for money. But the reality now is that, because they can build companies from anywhere and because there’s more investors than ever, investors have to chase the companies. We have to find them. That means we have to go to places like Toronto and Waterloo, and sit through things like pitch competitions.”
How SR&ED can sometimes harm more than help
“I can’t tell you how frustrating it is. Sometimes I’ll meet Canadian companies and in one breath they’ll complain about how hard it is to raise money from here, and then in the next breath I say ‘Listen, you know that 80 percent of the world’s capital comes from the U.S., maybe it’s time to flip the company to the U.S.,’ and then they’ll be like, ‘Oh no, I’ll lose my SR&ED credits.’ If you want to build a venture scale company, you have to do whatever it takes to grow the company, particularly from an outside capital standpoint. In your personal and professional life, you can’t save your way to greatness.”
“SR&ED credits are great for capital-intensive businesses. I see great companies here a lot and they’re hindered by the fact that they’re so dependent on these SR&ED credits that their business isn’t actually going to work on an economic basis if they got rid of them.”
“In other words, maybe the SR&Ed credits are hiding underlying issues with these companies. So what I would say to Canadian founders is, if you think for even one second that you want to build a venture scale business, which isn’t right for everyone, but if you want to, try to challenge yourself to stay off the SR&ED. Because the goal is not to be tax-efficient.”
“I’ll be the first to admit that the lens of venture investors is perverse. We need you to grow fast and not predictable. It sounds ridiculous, but that’s how the business works. In that kind of business, grants sound like they slow you down because you have to do a lot of paperwork, and SR&ED seems to slow you down a bit because you’ve got this issue where you accidentally start to optimize for tax reimbursements rather than building a company. So if you think for a moment you’ll raise venture scalable business, I would argue that you should skip grants, skip SR&ED, and ask yourself what it’s really gonna take to build this thing.”