The first thing you learn when looking at the Canadian tech industry is that it is not Silicon Valley.That, however doesn’t mean Canada doesn’t create successful, globally-competitive multi-billion dollar tech companies. It just means the path to get there is usually slower and quieter. Despite the spectacular failure of Nortel and to a lesser extent Corel and the more recent travails of RIM/Blackberry, Canadian tech, according to some, is actually experiencing a slight boom, building on a long history of being at the cutting edge of high tech development.

“The Canadian tech industry has matured a lot since the last market boom of 1998-2000,” said Ron Shuttleworth a tech analyst at Toronto’s Stable View Asset Management, and who, previous to that, had over a decade’s experience as founder and CEO of several Canadian based software companies. “[With] more profitability, better management, the business model has matured. Plus start-up costs are a lot less expensive than 20 years ago, with open source software and cloud networking.”

Shuttleworth adds that with lower capital costs, more capital is available for incubators or accelerators (arguably the same thing). “We have an environment of fast failure, [for products that don’t find market share] basically these incubators become idea factories, designing solutions to take to market.

“So there’s a built-in efficiency that we didn’t have 20 years ago, but also, there’s now a lot of money chasing ideas, so there’s concern that some bad ideas are getting to second stage that might not otherwise get to that point.”

Steven Zicherman, a tech analyst with Vancouver-based Odlum Brown, who has also in the past worked at a technology venture capital fund, does not however agree that Canadian tech is in the midst of a boom.

“Not to my knowledge, no.” He notes it is hard for Canadian tech companies to attract the sort of capital that would lend itself to a 'boom.’ “We just don’t have the same culture as California and Silicon Valley, companies here need to be further along before they attract significant equity investment,” said Zicherman.

This contrasts with Shuttleworth’s assertion that private equity, venture capital money for start-ups has to a certain degree become saturated, with capital from resource/commodity-based companies rotating out and into tech investments.

“Canadian tech on many fronts is pretty positive right now,” says Shuttleworth. “The market was a little volatile in the first quarter of 2015, and we’ve had some pull back in the third quarter, but that’s to be expected in a bull market after a secular bear market.”

Stephan Jacoby, an App/software developer and Chief Technical Officer at Vancouver’s Square One Games Inc. (s1games.com) whose experience in the tech industry goes back to the late 1990s with IBM Europe, IBM Canada and EA Entertainment, is also less optimistic about the Canadian tech outlook.

“We’ve become kind of a satellite to the U.S, we’ve lost our innovative spirit,” he said. “U.S majors have pretty much bought anything small. But there was a time when we were leaders in Telecom, with companies like Nortel and RIM/Blackberry. Now Canadian tech has taken a backseat to U.S.-led companies. It’s still dynamic, but we’re nowhere near where northern California is. We just can’t compete in terms of angel funding. Silicon Valley-based funds have become somewhat of a monopoly in venture capital funding.”

Zicherman echoes that sentiment, saying, “You can’t compare the Canadian tech sector to Silicon Valley. It [Silicon Valley] just has a long history of innovation, with companies like Intel and Apple. It’s a risk taking culture. Plus, I suppose Canadians also tend to be a little more risk-adverse.”

Shuttleworth admits that while there is a lot of money chasing early stage, pre-IPO companies, they are ones that have a relative proven scale, Vancouver’s Hootesuite being a good example. He also agrees that the majority of emerging Canadian tech companies will be acquired by U.S companies. “Among the top 20 emerging tech companies I would say maybe 15 will be sold to U.S companies, then maybe five are homeruns, like a Shopify.”

Shopify, an Ottawa, Canada-based company founded in 2004 by three partners, began as a web site to sell snowboards online. They were unsuccessful at that, but their platform became the app (developed from open source software) for other users creating online commerce sites. Now with almost 150,000 online retailers, they IPO’ed earlier this year (May 2015) raising $131 million USD.

“Shopify? It’s one of those sectors where their success is almost dumb luck,” says Jacoby. Fifteen to twenty other companies are doing it, they just happened to be the site that caught on. But certainly it’s the big Canadian tech success story of 2015.”

Will Hootsuite, a social network aggregator, be the next Shopify?

“Hootsuite? It’s hard to say if they are going to be the guy for that,” says Shuttleworth. “Shopify is the guy for online commerce, so can Hootsuite [as a social network aggregator) get there before a major duplicates it? Most likely, I think, they will be acquired.”

Jacoby agrees with that assessment, predicting Hootsuite will be taken over before they reach the IPO stage.

“But there have been other private tech successes in the past five years,” he says. “Clay Entertainment has done well (on a modest scale). And Road House Interactive, they attracted $30 million in funding, that’s nothing in Silicon Valley but for a Canadian company it’s a success. Plenty of Fish’s $575 million takeover [by the Match Group] is, I guess another Canadian success story,” says Jacoby, adding, “Canadian tech needs to make their own market and do it fast. With limited resources you have to be fast to market and beat Silicon Valley to the punch, we don’t have the luxury of time or money.”

So while start-up costs may be lower, fierce competition in the software/app development has altered that equation, as Jacoby notes “The point of entry is getting harder every day. Not like the old days when you could launch a web site from your apartment – I don’t see us (Canadian tech companies) taking market share from anyone.”

Although he does feel that software development can remain a competitive tech industry in Canada. “It has the highest margins and less capital requirements, much less than manufacturing obviously. Software is 90 percent human cost, at least traditionally those are the numbers for us.”

Shuttleworth agrees that while there is capital available for Canadian tech companies, timing is everything.

“The risk/reward in tech is much higher, so it’s tougher to raise cash for the A round.” He notes that Canadian private equity tends to be raised much more through intuitional funds, and so at an earlier stage than their Silicon Valley counterparts Canadian companies have to show viability. “The next level is scaling, then extending the solution, and many companies fail to get to this stage,” says Shuttleworth. “So companies like Hootsuite need to scale fast.  But then if you have to scale fast it can be a little more challenging. labour funds and other institutional investors want earnings and cash flow faster than venture capital funds would expect it,” says Shuttleworth. “Although the interesting thing about the Canadian market is we, unlike the U.S, have a venture exchange (TSX Venture Exchange) acting as a substitute for VCs, and unlike VCs there’s continuous liquidity. So you can win in small increments. Still, at the TSX Exchange level, there are only about 20 institutions that will take those risks.”

Jacoby says that Canadian tech is almost entirely driven by government tax incentives. “We generally have the tools in place to survive and thrive, but not the resources like larger foreign companies to leverage tax credit advantages.  However those tax incentives are much more generous than anything you see in the U.S,” he said. “Europe is having a harder time keeping up than we are, but it’s not the proximity to the U.S that helps us, it’s almost entirely the tax credit regime that attracts U.S companies to set up here. Tech companies are very mobile, they just need office space, so they go where the incentives are best.”

Zicherman also agrees with that assessment on Canadian capital. Adding that he thinks there may be some policy changes in the works [at the federal government level] to entice investors to get involved at an earlier stage of development.

So then, we have to ask, what happened to Canadian tech? Many U.S companies of course crashed and burned in the tech crunch of 2000, but the U.S tech industry has, arguably, never been healthier. Whereas since the early days of 2000 Canada hasn’t seen the booming heights of Nortel or even Corel at their peak.

Ottawa-based Corel had success in the mid to late 1990s with their graphic design software CorelDRAW. At about that time they acquired word processing software Word Perfect from Novell, when Microsoft’s Word was already well on its way to becoming the dominant word processing program. In 2000 flamboyant founder and CEO of Corel, Micheal Cowpland was accused of insider trading and shown the door. In 2003 Corel was bought by a U.S based private equity firm for $1.05 a share and voluntarily delisted from the TSX and NASDAQ. Today they have a market capitalization of about $250 million USD and produce a variety of widely-used graphics software. But clearly they are a long way from being the Canadian challenger to Microsoft they once envisioned they could be.

“First of all the first generation of Canadian tech companies is not all about Corel,” said Shuttleworth. “There were [at that time] a whole bunch of tech companies in Toronto/ Kitchener-Waterloo area that went through venture capital/labour funds and ended up selling to U.S companies, very few from that era survived.

“That whole community in Ottawa that did not get the capital that was all in Toronto, and historically there’s been a gap there, it’s declined dramatically since the 1990s, but there was a gap then between product and capital. Corel had no chance, they set themselves up for failure from the beginning. They didn’t have the balance sheet to concern Microsoft, and they competed with them directly when they didn’t have to. [Add to that] the commercialization of their products was mediocre at best,” explains Shuttleworth.

So how does that example compare to a more recent Canadian tech flameout, Blackberry/RIM?

“Blackberry on the other hand did nothing wrong until they became globally dominant in 2007, nothing wrong at all. It was their arrogant reaction to iPhone. Their model was a standard development to market, and the smartphone is a good example of that process. It actually started with Palm Pilot, that proved demand, then Blackberry learns from them and they come in and prove the size of the market [with their product]. Then third in Apple took the lessons of Palm and Blackberry and they [go on to] dominate the market,” says Shuttleworth. “Look at Facebook, same story for social networks, you start with Friendster, it shows demand of concept, then Myspace expands the market, then Facebook dominates. Same thing for search engines, with Alta Vista, Netscape then Google. The third guy in almost invariably wins so that’s not a Canadian tech story, that’s tech.”

Shuttleworth goes on to explain a classic tale of hubris that yes, is not a tale limited to the Canadian tech sector. “What happened with Blackberry when iPhone came out was Blackberry had 80 percent of the market for smartphones, they didn’t make a mistake till then, but they were arrogant. Blackberry’s product guy, Mike Lazaridis didn’t take [Apple’s challenge] seriously enough. And I think what happened was they underestimated the impact/value of iPhone. Then they panicked and rushed a product to market (Blackberry Storm) in nine months and it ruined their reputation. They didn’t see it coming, and when it did they panicked, the same thing happened to Hewlett Packard and Xerox.”

Shuttleworth says that Canadians are very good at logistics and enterprise type solutions when building tech companies and that’s what attracts capital in Canada. “Blackberry said they were going to build a secure email mobile phone that’s why they got funded. Then they tried to compete with Apple on their strengths as a consumer product developer. And the [irony is] Apple is bad at enterprise solutions. But in the Valley they will throw a ton of money at consumer business models, not in Canada, it’s not what we do well.

“Look at Shopify,” he says “That’s a good example. They started out trying to market snowboards and failed at that consumer solution, but as a business to business solution it [excelled]. We [Canadians] do a good job at funding business to business enterprise solutions in software and hardware - such as chips and servers. It’s in our DNA in our capital markets.”

Jacoby and Zicherman agree that Blackberry’s hubris led to their downfall (as the dominant player in the smart phone market) however, Zicherman at least, does not agree with Shuttleworth’s assessment on Canadian companies ability to market to consumers.

“Canadians can do consumer tech. The issue with Blackberry is they failed to recognize change, they didn’t think Apple would get the traction they did, and they failed to innovate, so Apple leapfrogged over them. But you could say the same for Samsung Electronics and they tend to be more of a follower than a leader. Canadian tech can compete in that space, the Apple/Blackberry competition would be the same for any competitor [regardless of nationality]. Look at Microsoft, who has had trouble competing with consumer hardware,” said Zicherman.

Whatever their differences, all three’s assessment of Blackberry is really only separated by a matter of degrees. But going back once again to the tech frenzy of the late 1990s, and the highest flyer of all Canadian tech companies, Nortel, and their subsequent fall and dissolution; do we gain any insights on the state of Canadian tech today? Nortel, originally Northern Telecom Ltd. developed a business to business multi-platform multi-service communications network. With billions of government subsidized fibre optic cable already in place Nortel was expected to have a jump on competitors in creating network solutions for the so-called 'Information Superhighway.’ At their peak in early 2000, Nortel had a market capitalization of $398 billion CAN and accounted for more than a third of the total valuation of companies listed on the TSX.

“Nortel was a 50 year-old company when it went under, and it was a global company not a Canadian company, what happened to them is not unlike what Volkswagen is going through now.” says Shuttleworth. “They took on way too much financing risk to the point [that] it became fraudulent, paying customers to adopt their products and using off balance sheet accounting to hide it. They were driving sales beyond belief, literally beyond belief.

“There was so much pressure on their sale’s teams to drive sales that when a client was reticent to take their product that quarter they would say, we’ll book you for next quarter but it went on that quarter’s books anyway. There’s no Canadian angle to Nortel, or for that matter Blackberry,” opines Shuttleworth.

“Take OpenText, from the same era as Blackberry and now bigger than Blackberry – but they have the competitive saturation. Also Constellation Software or CGI, both very successful, CGI has a market cap of $13 billion but no one is talking about them, OpenText’s market cap is $6 billion and Constellation $12 billion. Or (software company) Descartes as well, a slow and steady performer, they got caught up in the frenzy of 2000, but a new management team came in and built a successful company.

“So there are Canadian tech companies in great shape but not making any news, and traditionally Canadian tech companies have been great public companies, but despite this there’s been this singular focus on Blackberry. In this new round of Canadian tech, not just Shopify, we’re seeing very well-rounded companies. Blackberry’s failure is really out of the ordinary, it has nothing to do with being Canadian,” said Shuttleworth.

Zicherman agrees with that take on the Canadian tech sector. “Constellation Software is a great example of a Canadian tech company,” he confirms. “It is very well run, CEO Mark Leonard doesn’t want to compete with U.S majors, and they make smart acquisitions, buying companies that the big guys don’t buy into, and finding small software companies in niche industries. They buy when the price is right, and they treat their shareholders as partners, not subservient to management. It’s one of the most under-appreciated companies. There’s a lot that can be learned from them (Constellation).

He agrees that CGI, also run by skillful managers, have a similar successful strategy to Constellation, buying assets and incorporating them into their existing platform.

However Jacoby laments the passing of the high-flying days of Nortel, and even the brief market domination by Blackberry in the smart phone market. “Looking back at 99-2003 (when I was with IBM) to today there’s been a change in the industry. Canada is participating a lot less now. Back then there was a lot of talk about Silicon Valley North. Nortel attracted a lot of start-ups, it had that lightning rod effect. Now Waterloo (Ontario) has basically been taken over by Google, they’re taking over the Blackberry real estate.”

He adds, “Vancouver in particular has the feel of being a U.S hub, all the big Seattle tech companies are opening branches here, Microsoft, Amazon.”

One major change Jacoby notes in the new economics of Canadian tech, which is perhaps a positive, depending on where you sit, is that in 2000 Canada was actually considered a cheap software labour location for tech. “Now it’s mostly in India, China is starting to pickup. But when I worked at IBM Amsterdam a memo was circulated saying they were going to begin outsourcing labour to China, India, Russia and Canada to take advantage of cheap labour. Shows how much that’s changed in 15 years, they actually closed Amsterdam to consolidate operations in Canada.”

He also laments that some big Canadian tech success stories are often lost track of when absorbed into U.S companies. He cites Electronic Arts as one example, noting how it was a big successful Canadian tech company for ten years before their take over.

Shuttleworth explains that U.S takeovers of successful Canadian tech companies are almost inevitable, as Canadian companies rarely (especially since 2000) experience the price to earnings multiples on the TSX, that U.S companies achieve on NASDAQ or NYSE.

“[Take] Bridgewater Systems, it went through IPO about two- three years ago, but because it was on a Canadian exchange its price to earnings multiples were about 50 percent of what they were of U.S competitors. So a U.S competitor offered a 50 percent share increase and acquired the company, largely due to the depressed value of shares on a Canadian exchange,” said Shuttleworth. He adds that he doesn’t believe the skill sets are to be found in Canada to meet the challenges of commercialization in creating a global company.

“The consumer funding paradigm is to be good at bringing a product to market, and to do that you need a lot of money. And Silicon Valley is good at aggregating a lot of capital.”

So it would seem that Canadian tech today mirrors Canada as a whole. It’s not as big and brash as the U.S industry, and there’s less money being thrown around. It’s heavily influenced by American culture, but in the end the industry manages to do good (sometimes great) things in a quiet, steady manner.