Special Report: Entrepreneurs Emerge From Winter Thaw –

After a harsh and lengthy winter for Canadian venture capital, there are signs of spring coming.

February saw a pair of important acquisitions, as broadband company Ciena Corp. announced it was acquiring Catena Networks Inc. for $487 million and high-performance computing company OctigaBay Systems Corp. was purchased by Cray Inc. for $115 million. A month later, Aspreva Pharmaceuticals Corp. raised a whopping $57 million, and in the last six months, life sciences firms in British Columbia alone have raised almost a billion dollars in venture and follow-on-stock offerings.

“You are getting a sense of things being more dynamic,” said Mary Macdonald, head of Toronto-based Macdonald & Associates Ltd., which tracks venture capital investing in Canada. Macdonald said the Aspreva deal, in particular, has created hope that things are finally turning around.

But even as deal activity returns, market players say the entrepreneurial culture in Canada needs further development to sustain the country’s VC effort. Perhaps the biggest problem with the country’s current crop of entrepreneurs is something that ultimately can only be solved with time: a lack of experience.

“We have a huge amount of expertise and not close to enough experience,” said Mark Skapinker, managing partner at BrightSpark, a Toronto-based early stage venture fund he co-founded with long-time business partner Tony Davis. George Adams, a venture investor who’s also president and CEO of The University of Toronto’s Innovation Foundation, jokes that “there are Canadian entrepreneurs they’re called expatriates.”

The result is a sort of outsourcing of sales and marketing to the U.S. The founders stay in Canada and shuttle between the technology operations there and sales in the U.S., and at a certain point they sell to a U.S. firm. Skapinker says this is the rule for Canadian startups; he and Davis did it with their first startup, Delrina Corp., and their follow-on companies. The companies they fund have that model, too, including Think Dynamics, which IBM bought for $78 million in May 2003. Companies like Corel Corp. and Research in Motion, which are staunchly Canadian, are rare exceptions.

One potential cause of this dynamic is the absence of government incentives for sales and marketing. While the federal SREDS program offers tax credits for development and research, market pros joke that there’s no comparable program for sales and marketing, even though it’s universally acknowledged as the main weakness in Canada’s entrepreneurial environment.

Despite the longstanding pattern of growing to a certain stage and selling out, things are changing, says one-time expatriate Ian Locke, managing director of venture capital firm Jefferson Capital. Locke spent much of the 1990s in the U.S., working at seminal Internet firm Netscape. He came back in 2000 and says “it felt different. The whole notion of being an entrepreneur was better understood, and the number of entrepreneurs had really grown.”

He is one of several who believe the recent downturn will help create a more seasoned class of entrepreneurs, even though their companies may not have survived, and this will encourage investors to back Canadian companies that are built more on the model of a Corel or RIM.

That said, for now access to capital is not easy. Large fundings like Aspreva’s $57 million Series A last March are few and far between. Both the government and Canada’s universities are trying to address the funds issue, in part through seed pools like the ones George Adams has encouraged, and through the government’s Labour Sponsored Fund program, which gives double tax credits to individual investors who participate. However, Quebec’s recent decision to sell off the state’s VC arm, Innovatech, has market pros wondering whether the market in Canada will continue to get the national and regional support many believe it still needs.

Much To Offer

The good news is, Canada already has world-class technical talent, especially in enterprise software, communications technology and biotech, where much of Canada’s entrepreneurial energy is focused. For instance, Waterloo University has long been either at, or near, the top of the list in graduates hired by Microsoft Corp.

Technology transfer efforts have been especially aggressive. Canadian universities like the University of Toronto, McGill University and the University of British Columbia have all given entrepreneurial spark to their licensing and technology transfer offices. Toronto has gone so far as to change its licensing office to a commercialization office, and is focused on creating businesses. To do that it’s worked with 10 Canadian venture firms to create informal seed funds, with about 44 million Canadian dollars (half of which has been invested, into 24 companies).

There are emerging success stories. Adams points to Biox Corp., which is commercializing a technique to turn waste grease (think burger joints) into biodiesel fuel, and has raised enough capital to build a processing plant.

Also, Canada doesn’t have a version of the Bayh-Dole Act, which means universities can be more flexible in how they deal with intellectual property, says Angus Livingstone, managing director of the University of British Columbia’s Technology Transfer Operation. For instance, a Canadian entrepreneur can license a technology and then contract back with the university researchers to have them do the development work.

Dan Gatti, president of his own consulting firm and an advisor to venture capitalists, says the tech transfer process in Canada helps ensure the best ideas are developed. “Universities in Canada bubble up projects to the VP of research and they pick the best ones,” he says. “In the U.S….every researcher is his own entrepreneur. They do projects and don’t tell anyone.”

In any event, Canadian market players are encouraged by tangible signs of a creeping entrepreneurialism. Quebec’s huge number of small biotech startups was sparked by the $4 billion (U.S.) sale of BioChem Pharma to Shire Pharmaceuticals in 2001. RIM founder Mike Lazaridis gave $100 million to Waterloo University for a theoretical physics center, a move reminiscent of U.S. entrepreneurs giving to their alma maters. And the idea of starting a business is becoming more of an option for scientists and academic researchers.

Still, while “the crocuses are sticking their heads out,” says Livingstone, he thinks it’s too early to say whether Canada’s entrepreneurs are ready to blossom.