Canada becoming new center for AI startups

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(Bloomberg) -- Not so long ago, Canadian tech entrepreneurs had a long list of grievances: a dearth of early and late-stage funding, long visa wait times for foreign hires, local corporations that wouldn’t buy their products, the best and brightest decamping for Silicon Valley.

Fast forward to today, and those problems have largely evaporated. Justin Trudeau’s Liberal government, eager to brand itself as innovative, has given tech leaders pretty much everything they asked for, including special fast-track visas for tech workers and hundreds of millions of dollars in venture capital money and support for artificial intelligence research.

Of course, Canada has squandered its tech prowess before (see: BlackBerry). The trick this time is taking advantage of lessons learned so it doesn't happen again.

First, the good news. Silicon Valley venture firms no longer think twice about jumping on a plane to Toronto, Waterloo, Montreal or Vancouver to invest in Canadian startups. Google, Microsoft Corp. and Uber Technologies Inc. are all building artificial intelligence research teams in Canada, reversing some of the brain drain in what could potentially become the most important field of tech ever.

Venture capital investment in 2016 ballooned 26 percent to C$2.9 billion ($2.2 billion) from the previous year. In 2010 it was just C$900 million. U.S. tech giants have also been hiring heavily in Canada, taking advantage of the presence of computer science grads and the relative ease of bringing in workers from eastern Europe and southern Asia. Amazon has nearly 1,000 employees in Vancouver alone and is hiring hundreds more across the country; Google opened a new office last year with room for 1,000 engineers in Waterloo, BlackBerry's hometown.

Major U.S. tech companies are making strategic investments in Canadian startups too. Intel Corp. participated in a $120 million funding round for Thalmic Labs Inc. in September and Microsoft invested in Element AI in December.

In one week alone this month, Toronto venture capitalist and former EBay executive Janet Bannister says she took three calls from U.S. investors who want a piece of Canada. “All three approached me and said ‘I want to talk to you about your companies and about Canada because there’s great stuff going on and we want to be involved,” says Bannister, a partner at Real Ventures. “The Canadian ecosystem is at an amazing point, it’s an inflection point. It’s ours for the taking.”

Yet Canadian tech vets can't help being haunted by the implosions of Nortel and BlackBerry, multi-billion-dollar, world-beating companies that fell victim to hubris and complacency.

Pessimists say there’s no guarantee the cycle won’t repeat itself. What was supposed to be a parade of hotshot companies going public in the last two years turned out to be more of a trickle. Hootsuite Media Inc., which builds software that manages corporate customers' social media, is growing more slowly than before and has put listing plans on hold. Earlier this year, Bloomberg reported that Hootsuite never deserved its unicorn status, although Chief Executive Officer Ryan Holmes said the company indeed had a valuation north of $1 billion. Messaging application Kik Interactive revealed last month that of the more than 300 million people who’ve ever downloaded the app, only 15 million still use it on a monthly basis.

The only notable exception is Shopify, which helps businesses sell online and has generated steady revenue growth, pushing up the share price more than 275 percent since its May 2015 initial public offering. “I wish we had more Shopifys,” says Boris Wertz, who runs Vancouver-based Version One Ventures and helps source deals for heavyweight venture firm Andreessen Horowitz. “Right now we have one and I’m not sure there’s a second one that’s even close to that scale.”

With the biggest obstacles out of the way, it’s up to entrepreneurs to push past the Canadian habits of avoiding risk and selling their companies early, says Paul Teshima, who runs Nudge Software Inc., a Toronto startup that uses AI to help automate the tedious parts of sales jobs. “We don’t tackle big enough problems,” Teshima says. “You need someone to go for the big, big swing.

The presence of more serial entrepreneurs will go a long way in making sure that happens, he says. Teshima was an founding executive at Eloqua, a marketing software firm that Oracle bought in 2012 for $810 million. He’s part of a growing class of second- or third-time tech entrepreneurs building in Canada.

“This time around we have a very different attitude towards what building global value is,” says Frederic Lalonde, Chief Executive Officer of Montreal-based flight booking startup Hopper. He sold his first company to Expedia in 2002 and the travel giant still has a presence in Montreal. The old Canadian way of thinking might have been that he’d done a good job, created value for the city and country and should be proud, Lalonde says. But once he saw how quickly Expedia used his technology to recoup the acquisition cost, he wasn’t so sure he’d made the best choice.

“A lot of second-time entrepreneurs in Canada have a very similar story,” Lalonde says. “They made a bunch of money but you’re like, 'what did we give up in selling to the Americans?”’

Canadian governments have a conspicuous habit of paying more attention to the tech sector when commodity prices are low and there’s no guarantee that pandering to startup chiefs will be politically popular forever. Data from research firm Pitchbook released last week shows Canadian venture capital had a slow start to 2017. Only C$490 million worth of investments have been made in Canada so far this year, a pace far below 2016.

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