Innovation: Make Toronto the startup capital of the world

Toronto is already the eighth-best city on the planet for startups. How does it become No. 1? How about free wi-fi, software engineering in high schools and encouraging some homegrown heroes to stay

In five years, Kunal Gupta has built Toronto-based Polar Mobile into one of the world’s leading digital-media software developers, creating mobile sites for clients like Condé Nast, The Wall Street Journal, CBS and every major Canadian media company. But there’s still something missing on his business card—an address. “We have customers in 12 countries, but my business card doesn’t have our city or country on it,” he says. “That’s on purpose, because it’s not clear yet if Toronto or Canada is an asset or a liability when you’re selling abroad.”

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Canada’s Centre of the Universe sits at a crossroads. Over the past decade, Toronto has become the undisputed capital of Canadian innovation, with more than 600 startups, the country’s largest cluster of universities and colleges pumping out research, and the deepest venture capital pockets in the land. A recent report by research firm Startup Genome ranked the city’s startup ecosystem eighth in the world, just behind Silicon Valley, Tel Aviv, Los Angeles, Seattle, New York City, Boston and London. Now Toronto needs to decide whether it’s content to be part of the pack—or if it wants to lead it.

The benefits of becoming a world startup leader are undeniable. San Francisco, which last November passed a bill to reduce payroll taxes, has seen 30% annual growth in tech employment. New York increased the number of digital jobs in the city by 80%, thanks to a push to boost its tech economy between 2007 to 2011. Toronto needs to take a page from these cities’ playbooks and recognize concrete steps are required to become a global innovation leader.

“Toronto has many of the critical elements to become a digital media capital,” says Don Tapscott, author of Macrowikinomics and professor of management at the Rotman School of Management, noting the city’s access to quality talent, good infrastructure and strong universities, as well as its large media presence.

Toronto-startups-graphicBut if it is serious about exploiting its innovation potential, Toronto needs a tangible strategy across government, the private sector, entrepreneurs and investors to make it happen. That includes a more active role for city hall in attracting and keeping business, improved investment incentives, and encouragement for big business to engage these new ventures as investors and clients.

Facebook Canada general manager Jordan Banks says the potential is there. “If you looked at Toronto five years ago, you may have scratched your head and said we’re sort of on a path but we’re not sure we’re on the right path,” he says. “Today, you would say we’re definitely on the right path. Can we go from being a Top 10 centre for excellence in the world to a Top 3? I think the answer is absolutely yes.”

Toronto already has a significant head start on its climb to reach the top of the heap, thanks to the many educational institutions feeding the city’s tech ecosystem. “You’ve got access to an amazing amount of talent from Waterloo, Schulich, Western, Queen’s, U of T, Ryerson, OCADU, and all the colleges,” says Gupta. “Some of the biggest companies in the world, like Google and Facebook, are coming here to recruit.”

By proximity alone, Toronto also has an indelible connection to Kitchener and Waterloo, home of BlackBerry and a thriving tech sector of its own. John Ruffolo, CEO of OMERS Ventures, compares the Toronto–Kitchener–Waterloo corridor to the natural link between San Francisco and Silicon Valley. “Over the last three years in particular, they’ve been linked very closely, and I think it’s made both of them much stronger,” says Ruffolo. “It’s got the right mix of ingredients that have spurred both ahead—KW with its phenomenal engineering talent, and Toronto with more of the financial muscle and general business expertise.”

But becoming a global leader requires more than simply sitting back and watching startup founders create the next world-beating technologies and digital products. The federal, provincial and municipal governments all must also play a role. Entrepreneurs give all levels of government high marks for their startup-friendly initiatives, but there is room for improvement. Tapscott says Toronto is missing two crucial ingredients. “Capital for entrepreneurs, and leadership at the local level,” says Tapscott. “Until we crack those two nuts, we’ll continue to be an also-ran.”

There has been significant progress when it comes to capital access for entrepreneurs in Canada, which directly benefits Toronto. Last September, the federal government set aside $400 million to create venture-capital funds led by the private sector, and also promised to give the Business Development Bank of Canada another $100 million to reinforce its venture-capital activities. Meanwhile, in May 2012 venture-capital fund Rho Canada announced the first closing of a $100-million fund for early-stage investments in mobile apps, new media, wireless infrastructure, semiconductors and software.

A recent study by the Ontario Chamber of Commerce called Emerging Stronger makes a number of recommendations to help provide even more financial fuel. One is leveraging public-sector procurement to spur innovation. Companies can use a public-sector buyer as a reference for other potential clients to help drive export sales and gain access to financing, particularly in life sciences, manufacturing and energy. A similar strategy for defence procurement of the U.S. government fast-tracked the development innovations such as commercial aircraft, computers and the Internet.

Another recommendation is continuing the push for a common securities regulator, which would increase access to capital by increasing global confidence through more efficient regulation and stronger enforcement, enhancing Toronto’s position as a major global financial centre. Perhaps most interesting, the report calls for Ontario to legalize crowd-funding for financial gain to provide startups and small to medium-sized enterprises with the same levels of access to seed and venture capital as their counterparts in the U.S and Europe.

When it comes to local leadership, the city should follow New York City. Over the years, Gotham has pushed through initiatives that ranged from lifestyle perks like free Wi-Fi in public parks and subway stations to make the city more attractive to a tech workforce, to establishing a network of business incubators to help provide affordable office space to more than 500 startups. It also recently opened a second Academy for Software Engineering high school. In 2011, Mayor Michael Bloomberg hired the city’s first-ever chief digital officer, Rachel Sterne, who was a 27-year-old entrepreneur and Columbia Business School prof, to help the city use technology to better serve citizens and save taxpayer money by making services more efficient and accessible online. Mayor Bloomberg has also been telling anyone and everyone that he is determined to make his city a world-class tech community. As a result of these moves, the city enjoyed the highest job growth in the $20-billion global mobile app industry, and it was the only region in the U.S. to have an increase in tech venture-capital funding. Between the forward-thinking tech initiatives and Bloomberg’s boosterism, New York offers an object lesson for Toronto. To truly be a global leader in digital technology, innovation needs to become a significant part of the city’s identity—how the world sees it and how it sees itself.

“We need to stop trying to sell people on the idea of Toronto as a world-class city and instead tell people Toronto is a world-class city. We need to realize it ourselves and believe it enough that it can spread worldwide,” says Ray Sharma, CEO of award-winning mobile gaming shop XMG Studio and a co-founder of Extreme Venture Partners.

Government incentive and educational infrastructure are significant support systems, but the backbone of any global leader in technology and innovation is the entrepreneurs themselves. And Toronto’s culture of entrepreneurship has evolved light-years ahead of where it was just a decade ago. Mark Zimmerman, a senior advisor at Toronto’s MaRS Discovery District, says there was once a dearth of money, capital and people who had experience to help coach or advise others. “In the past, many entrepreneurs would sell their business to then go just relax in Muskoka, or they went to Silicon Valley and never came back,” says Zimmerman. “Now we have founders coming back to Toronto for lifestyle reasons and finding that there is a pleasantly robust local ecosystem to which they can contribute. And we’re benefiting from that.”

One high-profile example is Chamath Palihapitiya. Last September, the former Facebook executive and University of Waterloo alum looked back across the border from Silicon Valley and bought a majority stake in Toronto-based mobile development firm Xtreme Labs for a reported $20 million.

Sharma also notes the 2010 Google acquisition of Toronto startup BumpTop could directly benefit the local community. “So [BumpTop founder] Anand Agarawala makes something like $10 million on that deal,” he says. “His time at Google will likely come to an end in a year or two, and guess what he’s probably going to do? Move back to Toronto and start up his own thing. But this time, instead of going to outsiders for capital, he would invest his own money.”

As entrepreneurs continue to sell their startups for big money and then deploy that capital within the local ecosystem, more entrepreneurs and talent will be attracted to the city. “It becomes this self-sustaining engine that continues to churn out more and more companies,” says Ruffalo.

A robust ecosystem requires excellent talent, both grown locally and attracted globally, sufficient capital, a larger corporate culture that’s willing to embrace startups—whether that’s licensing services, buying companies or joint ventures—and educational institutions willing to play a part in that mix. It’s not 100% there, but by all accounts Toronto is well on its way. The city might just force Gupta to order new business cards.