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BlackBerry’s fall sparks a boom in start-ups in Canada’s Silicon Valley

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Reuters

Major technology companies like Google and BlackBerry provide mentoring services to companies within Communitech in the historic Tannery District in Kitchener, Ontario. More than 450 start-ups opened in the twin cities of Waterloo and Kitchener last year. Photo: Reuters

The troubles at BlackBerry, which fired more than half its staff and lost more than 90 percent of its market value as consumers shunned its smartphones, might have spelled disaster for the company’s hometown of Waterloo, Ontario. Instead, there are sports cars in the streets and new companies filling the refurbished office buildings.

More than 450 start-ups opened for business in the twin cities of Waterloo and Kitchener last year, more than four times the number begun in 2009, according to Communitech, a local company that advises them. Often, the new companies are being founded by former BlackBerry employees chasing their entrepreneurial ambitions in a community that is Canada’s answer to technology hubs in California and elsewhere.

“For those who are trying to get a new tech business off the ground, get it funded, and not get lost in the shadow of Silicon Valley, Waterloo can be the best place to get your company on the map,” said Sean McCabe, the vice-president of engineering at drone manufacturer Aeryon Labs in Waterloo.

Take Adam Belsher, 39, who left BlackBerry in 2011 after 13 years at the company because he wanted to run his own business and felt the impact he was having at BlackBerry, formerly known as Research in Motion (RIM), was eroding as the company got bigger. Today, Belsher is the chief executive of Waterloo-based Magnet Forensics, a company that makes software used by police to recover deleted information from computers, including e-mails, financial records and photographs.

“I saw RIM go through so many stages of growth and I take lessons from every one of those experiences,” said Belsher, who managed BlackBerry’s business with the biggest US wireless carrier, Verizon. “There are few companies that disrupt a mature market like wireless and create an entirely new multibillion-dollar category, so I believe I have more than a few good nuggets that I can apply to Magnet.”

Belsher is one of many ex-BlackBerry employees who chose to stay in Kitchener-Waterloo, rather than move to the financial hub of Toronto, or Silicon Valley.

BlackBerry became Canada’s most valuable company in 2007, just before Apple released the first version of its iPhone. At its peak in 2008, the company was valued at more than $80 billion (R841bn), compared with about $4bn now.

“BlackBerry made many millionaires who still live locally, who started investing in tech companies,” said Michael Litt, the chief executive of video analytics start-up Vidyard, based in Kitchener.

This has attracted venture capitalists.

“I have seen… investors in town, private jets landing at Waterloo regional airport straight from Menlo Park and Silicon Valley,” said Litt, whose company has said it could float its shares within two years. “It has changed so fast.”

The region’s turnaround story is similar to that of Oulu in Finland, where Nokia more than halved its workforce of 5 000. The city is slowly finding its feet again. Oulu is now a leading candidate to host a data centre for Microsoft, which is taking over Nokia’s phone business. Former employees have become entrepreneurs, doing especially well in the mobile gaming market.

In the year to April last year, more than C$214 million (R2bn) was invested in startups in the Kitchener-Waterloo area. Three years earlier, the figure was just C$500 000, according to Communitech.

These investments include an $80m infusion into Desire2Learn, which is developing online learning systems, and $14.5m for Thalmic Labs, the maker of the Myo armband that allows people to control electronic devices through arm motions and gestures.

“When BlackBerry was letting off thousands of people, there was a big concern in Waterloo that it would create an exodus,” said John Ruffolo, the chief executive of Omers Ventures.

Omers Ventures, the venture capital arm of Canadian pension fund Ontario Municipal Employees Retirement System, along with US venture capital firm New Enterprise Associates, made the $80m investment in Desire2Learn in 2012.

Omers Ventures had invested in other businesses including HootSuite, Shopify, Vision Critical and BuildDirect, all of which were targets for initial public offerings in the next two years, Ruffolo said.

It became more confident about investing in Desire2Learn after the start-up hired Dennis Kavelman, a former chief operating officer of RIM, he added. “Many great talented people left to join a variety of other start-ups and brought a nice stimulus of experience to some of these fledgling start-ups that has caused them to mature at a much faster rate.”

Spark Capital, an early investor in Twitter, and Bridgescale Partners, which invested in Shutterfly, are also putting money into the region. Spark Capital bought into Thalmic Labs and mobile messaging company Kik, while Bridgescale has invested in Rypple, a company later acquired by Salesforce that makes software to allow workers and managers to register feedback about each other’s performances.

The Canadian government has backed a C$200m-plus fund to indirectly invest in and support early and mid-stage start-ups.

Relatively cheaper housing has helped persuade ex-BlackBerry employees to stay. In February, the average price of a house in the Kitchener-Waterloo region was C$335 000, compared with a median price of $669 000 for a home in San Jose, California.

High-rise condominiums had sprung up, along with new hangouts, bars and boutique stores, revitalising the downtown areas and adding excitement to the street scene, said Communitech chief Iain Klugman. “We are seeing more Lamborghinis, Ferraris and Porsches on the roads.”

Unemployment in the Waterloo region fell to 6.5 percent last year from 8.3 percent in 2010, and is also lower than the Canadian average of 7 percent.

Demand for commercial property, some of which has been sold off by BlackBerry, has also risen. The average rent in Waterloo rose 10 percent to $133.70 a square metre in 2012, according to real estate services company CBRE. As more commercial space has been built to meet growing demand, the rate of increase slowed to 4 percent last year and is expected to flatten out soon.

Vidyard’s Litt knows first-hand how tough the property market has become for start-ups. His company leased about 930m2 of the approximately 93 000m2 available for start-ups in downtown Kitchener at the beginning of last year. “We took that with the assumption that, when we need more space, it would be easy to find. When we spoke to our landlord later, there was nothing available anymore.”

Kitchener, historically the blue-collar twin to the university city of Waterloo, is home to chic offices such as the Communitech building, a converted brick structure in the historic Tannery District, adorned with modern art, which acts as an unofficial clubhouse for many small tech companies. “These downtown properties were able to provide an urban lifestyle that many of these technology companies’ employees are looking for,” said CBRE executive Peter Whatmore.

Start-ups can also draw on engineering talent from the University of Waterloo, which has the world’s largest internship programme of its type, requiring students to complete four to six internships as part of a four-year degree course.

The university has long been the feeder school for many technology companies, including Google, Cisco and Microsoft. It was once BlackBerry’s stomping ground come recruitment season, and has spawned companies such as OpenText that have tasted success in the US and overseas.

Larry Smith, an adjunct associate professor of economics at the university, said BlackBerry’s success had overshadowed other companies and its reversal was now making them stand out. While its decline had released a lot of talent into the local labour market, the region also had the infrastructure that made it easy for companies to set up shop, he said.

Its BlackBerry connection is a form of assurance when backing the area’s startups. Executives who were part of BlackBerry’s success have experience of “scaling up” a business – a valuable asset for a start-up aiming to break into the big league.

Its decline has also made it easier for start-ups to hire and retain talent.

“It used to be hard for start-ups to get good talent because RIM was hiring,” said David Yach, a former chief technology officer for BlackBerry’s software business.

Like Belsher, he spent 13 years with the firm. He left in March 2012 and co-founded Auvik Networks, an enterprise-networking start-up. “[BlackBerry] was effectively taking up all the oxygen in terms of talent,” he said. “A lot of new people are finding a home in the start-up community.” – Reuters


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