Oh yeah, Canada

Jeff Skoll is not your average U.S. entrepreneur. Not because the company he co-founded, eBay Inc., has had as much impact on ‘net culture as ‘net business. Not because he’s still worth billions in the wake of the stock market correction. And not because of his humble nature or homespun graciousness.

Skoll isn’t a typical U.S. entrepreneur because he’s Canadian. Skoll, along with Red Hat Inc. founder Bob Young and Phone.com Inc. CEO Don Listwin, are among a crowd of Canadian expats who are at leading Internet companies south of the border. Along with other engineers, designers and executives, they’ve created a brain drain from Canada. It’s not hard to see why. Canada’s high taxes, aversion to risk and lack of support for entrepreneurial endeavours have caused hundreds of thousands of Canadians to head for the United States in the past few years. A quarter of a million or so work in the San Francisco Bay Area alone.

The Canadian government would probably do anything to get entrepreneurs like Skoll, Young and Listwin back. But it may not have to. Entrepreneurial activity is picking up in Canada, and the United States is driving much of it. Both U.S. venture capital and high-tech companies are going north to take advantage of cheaper labour and the abundant pool of engineering talent that remains largely untapped.

“It’s our best kept secret,” said Minhas Mohammed of MM Venture Partners, a US$150 million Toronto-based venture capital firm.

On the map

According to research firm Venture Economics, U.S. venture capital investment into Canada reached US$660 million in 1999, a 250 per cent increase from 1998. Blue-chip firms such as Bessemer Venture Partners, Greylock, Oak Investment Partners, Kleiner Perkins Caufield & Byers and Mohr Davidow Ventures have all invested in Canadian companies. And the VCs who haven’t are thinking about it.

The success of telecom giant Nortel Networks, which is giving companies like Cisco and Lucent a run for their money, has put Canada on the high-tech map, as well as spawned a community of talented workers with particular expertise in optical technology. “You’ve seen a lot [of people] spin out of mother Nortel and form interesting companies,” said Bill Nolan of U.S.-based venture firm Crosslink Capital.

Canada’s schools have a reputation for cultivating top engineers. But as yet, this strength in science and technology has failed to produce the kind of explosion in entrepreneurship seen in Silicon Valley. “We’ve always had good technology,” said Mary McDonald of McDonald and Associates, a venture research firm, “but we haven’t had good entrepreneurial management talent.”

It’s this imbalance that’s leading U.S. venture capitalists northward.

“The VC industry in Canada is absolutely in its infancy. They don’t have the capital or contacts or resources to take companies to the next level,” Nolan said. Rather, VCs in Canada have operated like angel investors in the U.S., seeding deals with small sums of capital.

The angel analogy is an apt one. New venture funding in Canada doubled to US$2.7 billion from 1998 to 1999, but it’s no match for the United States’ VC juggernaut. In 1999, U.S. venture capital under management outpaced Canadian venture capital 16 to one and new money raised by 28 to one, according to Ron Begg of the Canadian Venture Capital Association.

“There’s not enough money and lots of good opportunities,” said Brent Holliday of Vancouver-based Greenstone Venture Partners. “The U.S. VCs can cream the market if they come in now.”

That’s what VCs like Rob Chaplinsky at Mohr Davidow are thinking. The firm recently announced an investment in Ottawa-based Trillium Photonics, a maker of optical amplifiers. “In the next couple of years, there’s US$100 million in investment opportunity for Mohr Davidow in the Ottawa-Canadian market,” said Chaplinsky, an Ottawa native.

The interest of such brand-name VCs from Silicon Valley is obviously good news for Canadian entrepreneurs. Richard Prytula, a partner with Montreal-based venture firm TechnoCap, spends a lot of time trolling the halls of U.S. high-tech conferences, and he encourages Canadian entrepreneurs to do the same. “You need tier-A investors,” said Prytula, “and all the tier-A investors are U.S. VCs.”

Heading North

Canadian VCs, who grew out of the conservative banking industry, want to forge relationships with their U.S. counterparts, since they are seen as experts in building businesses and in achieving great valuations when going public on the Nasdaq. Those relationships are materializing this year as U.S. VCs are calling on Canadian venture firms.

“All of the U.S. VCs are coming up here,” said Prytula. “They turned on the tap at the beginning of the year, and 15 new U.S. VCs have co-invested with us.”

Canadians, to be sure, are also generating a lot of the entrepreneurial excitement in Canada. Toronto-raised Vernon Lobo, a former McKinsey & Co. consultant and graduate of Harvard Business School, is coming home with contacts and management experience gained while working in the States. Lobo’s Mosaic Venture Partners, a Toronto-based firm, invests in U.S. and Canadian companies alike.

eBay’s Skoll recently established the Skoll Program at the University of Toronto, a joint five-year bachelor’s program between the school of engineering and school of management. The program, currently in its first year, is designed to give students the engineering skills and the business context in which to use them. Skoll also helps Canadian entrepreneurs find appropriate sources of venture capital both in the U.S. and Canada. Red Hat’s Bob Young is the largest individual investor in venture firm XDL Intervest, which has US$200 million under management.

XDL Intervest was created by Dennis Bennie, one of the founders of Delrina, a Canadian high-tech firm best known for its WinFax software. Bennie and two other founders have been cultivating start-ups since selling Delrina in 1995 to Symantec for US$560 million. Mark Skapinker and Tony Davis have started high-tech incubator Brightspark. Likewise, Evan Chrapko, co-founder of DocSpace Company, sold it to Critical Path for a cool US$500 million, and now he’s an angel investor. “These cashed-out entrepreneurs are taking up the role of being advisers and mentors to Canadians at home,” said Karen Grant of the Toronto Venture Group.

If those mentors give really good advice, perhaps Canadian entrepreneurs and VCs won’t have to rely so much on Americans.

This article originally ran in the San Francisco-based Industry Standard, where Park works as a staff writer.