Sizing Up Vancouver Venture Capital

B.C. struggles to develop a healthy venture capital ecosystem.

Nadeem Kassam, Basis Band
As much as Nadeem Kassam loves Vancouver, his startup needs capital, and he’s moving to California to find it.

B.C. struggles to develop a healthy venture capital ecosystem.

A proprietary wristwatch branded the Basis Band combines a new heart rate monitor that doesn’t require a chest strap with a skin-temperature sensor and a sweat sensor to constantly monitor its wearer’s physical state. Vancouver entrepreneur Nadeem Kassam, who developed the watch starting with a patent he bought in 2004, thinks the data the Basis delivers is just the beginning. He wants to build a software package that analyzes everything from the quality of your sleep to the intensity of your exercise, complete with gaming-inspired mechanics that provide feedback and incentives.

Though still in the prototype phase, the Basis might have done well with a traditional consumer-product business model, but Kassam’s plan infuses the product with a much trendier model based on gaming technology. He needed venture capital money to accelerate development, and with his buzzword-buoyed pitch, he got it. In March last year, his company, Pulsetracer Inc., landed a US$9-million round of financing co-led by Silicon Valley’s Norwest Venture Partners and DCM.

Soon he’ll be moving his family to California. “I chose Vancouver because of the lifestyle,” he says, “but for business reasons, I need to move to San Francisco.”

The story of Vancouver tech entrepreneurs moving to the Bay Area or Seattle as their companies grow is a familiar one, but in the past the migration has often followed a sale to a large U.S. company. Notable examples include Flickr, which Caterina Fake and Stewart Butterfield sold to Yahoo Inc. in 2005, and – way back in the first tech bubble – Microsoft Corp.’s 2001 acquisition of NCompass Labs Inc. from Gerri Sinclair. Now the trend is better exemplified by web video advertising outfit Mixpo Inc., which gradually moved its headquarters to Seattle one executive at a time over the course of two rounds of investment from Seattle VC firm Madrona Venture Group Inc.

The story in this latest tech bubble is one of talent and equity flowing southward over time, as if by force of gravity.

Of course, not all Canadian companies with the bright tech ideas that find American venture financing settle south of the border. HootSuite Media Inc., for instance, took a $1.9-million investment in 2009 led by San Francisco’s Blumberg Capital and New York’s Hearst Interactive Media, and remains headquartered in Vancouver. But even when the people don’t move, the equity does.

“There’s a significant capitalization gap” between Canadian and American venture capitalists, notes veteran venture capitalist and co-founder of Yaletown Venture Partners Steve Hnatiuk. According to the Canada’s Venture Capital & Private Equity Association (which goes by the abbreviation CVCA), Canadian companies only managed to secure less than 40 per cent of the investment that American venture-backed companies did in 2009. And, Hnatiuk says, “when U.S. VCs come to invest in Canadian companies – something that happens relatively frequently – they tend to invest twice as much as what a Canadian firm typically would in those deals.”

No one is doubting the ability of Vancouver’s entrepreneurs to generate ideas that can evolve into good investments – Hnatiuk points out that Canada leads the world in government-funded research and development – but we’re lacking the local venture capital market to turn clever ideas into businesses. “When it comes time to take the step toward commercialization, we as a nation have an Achilles heel,” he says.

Nadeem Kassam is a case in point. He spent a couple of years hunting for investors at home before he started pitching in Silicon Valley. There were, of course, reasons he got turned down: “We had an early-stage prototype, we were pre-revenue, there’s hardware – all things VCs like to shy away from.” But he says it wasn’t a lack of interest that prevented the venture capitalists from writing cheques; it was the scale and complexity of his plan. “In Vancouver it was more like, Wow this is amazing, you probably need a lot a money . . . please stay in touch.”

The size of the American market isn’t the only factor driving entrepreneurs such as Kassam to seek investors south of the border. Another is what VCs call “the ecosystem.” Large, successful technology companies beget more large, successful technology companies, both by providing expertise at the early stage and by providing fat cheques when it comes time for founders to make an exit. According to Hnatiuk, there’s one more important factor too: “What Silicon Valley does better than anywhere else in the technology venture capital world is evolve very quickly when there are trend changes. So gamification, something you hadn’t heard of but you’re hearing a lot about now, is something they’re moving quickly on.”

The latest next hot thing might give Vancouver a chance to get better at this high-stakes game of trend-spotting. Last year Paul Lee, the former head of worldwide studios at Electronic Arts Inc. who is now managing partner of Vanedge Capital Inc., announced that his firm had closed a $100-million fund focused on online, mobile and social gaming. Then again, by the time you read this, maybe there will already be a new next hot thing.