Despite sometimes frigid relations between Ottawa and Washington, D.C. during the Trump presidency, California’s tech ecosystem is increasingly connected to Canada’s, according to a new report from a leading San Francisco economic institute released Wednesday morning.
The 68-page report prepared by the Bay Area Council Economic Institute (BACEI)—which counts among its advisers the mayors of Oakland and San Jose—argues that U.S venture capital is increasingly looking to Canada for investment opportunities. It also states that the brain drain has been replaced with a steady flow of companies and people. And, there has been a growing number of cross-border partnerships between academic and research institutions across the Bay Area and Canada.
The wide-ranging report includes everything from the increased number of flights between Canada and California to foreign direct investment and venture capital fund data. It also contains interviews with high-profile Canadians living at home and in the Valley.
A new report by a leading San Francisco economic institute highlights some of Canada’s strengthening ties to the Bay Area. The report points out that U.S. venture capital is increasingly looking north, that engineering talent is recirculating between the two regions and that research and academic partnerships are growing.
The report highlights that Bay Area venture capitalists are increasingly investing in Canadian companies. For example, Kleiner Perkins led a $50-million Series A funding round in Toronto’s Tulip Retail in August 2017. In May 2018, Salesforce Ventures launched a $100-million venture fund for Canadian startups that use its platform.
“With the increased quality of Canadian companies together with positive policy changes, every major investor on Sand Hill Road is making investments now—over a billion dollars a year, often without partners,” Anthony Lee says in the report. Lee is the managing director of Altos Ventures and a founding partner of the C100, a trade organization promoting Canadians in Silicon Valley.
“A lot of venture funds here now need to start looking further afield in order to get the kind of returns they need to get,” said Rana Sarkar, consul general of Canada in San Francisco, who was an adviser for the report; the Canadian government sponsored the publication. “For the first time, [they’re] really creating a kind of geographically diversified investment strategy which they haven’t previously had to do.”
The California Public Employees’ Retirement System (CalPERS) works closely with Canadian venture funds; in 2018, it joined institutional investors managing over $6 trillion in assets combined—including OMERS, the Caisse, the Ontario Teachers’ Pension Plan and the Alberta Investment Management Corporation—to support G7 initiatives on diversity, infrastructure and climate change. The report notes that CalPERS will need to have more flexibility in its private equity program, as Canadian funds have done, to meet this commitment. That includes writing smaller cheques and supporting first-time funds and projects, the report says, both of which are common for startup investments.
In recent months, Canadian pension funds have explored direct investments in tech companies. U.S. funds see the Canadian pension model as a leader, according to Sarkar. In December 2018, The Logic reported on the Canada Pension Plan Investment Board’s plans to invest up to $1 billion in venture capital funds.
“U.S. pensions have all recognized Canadian funds are on to something, and it’s not easy to build that capacity,” said Sarkar. “There’s some limitations from a U.S. pension perspective that’s more regulatory, but if you ask any of the big U.S. funds, most of them have Canada envy.”
For example, six years after OMERS launched a venture capital fund in 2011, CalPERS created CalPERS Direct, a separate direct investment entity, to invest US$20 billion over 10 years in two in-house private equity funds making direct investments in private companies.
Canadian pension funds are also active investors in the Bay Area. Ivanhoé Cambridge, a Canadian real-estate company, acquired the 31-building Park Kiely residential complex in San Jose for US$235 million in 2011. Ivanhoé is owned by the Caisse de dépôt et placement du Québec.
The report—which said Canada and U.S. tech corridors enjoy a healthy “ebb and flow” of talent—challenges long-held concerns of a brain drain of Canadian tech entrepreneurs and talent to the U.S.
The wider availability of capital has eased pressure on entrepreneurs to move to Silicon Valley, Laura Bühler, director of the C100, says in the report. Programs like the $400-million Venture Capital Catalyst Initiative have injected more late-stage capital in Canada.
BACEI highlighted government investment in Canada’s science sector, which it credited with producing high-quality talent in fields like artificial intelligence.
Sean Randolph, senior director of BACEI and one of the authors of the report, credits government investments in R&D, as well as strong universities like the University of Waterloo and hubs like the MaRS Discovery District for growing the Canadian tech ecosystem. “The investments that Canada has been making … appear to be paying off,” said Randolph.
The report cited Facebook’s selection of Montreal as the site of its AI lab and Uber setting up its engineering hub and autonomous-vehicle program in Toronto as examples of the talent attracting California investment.
Win Bear, head of business development in Canada for Silicon Valley Bank—which sponsored the report—says he sees most potential in AI, quantum computing, machine learning and fintech, especially in Toronto, Kitchener-Waterloo and Montreal.
“When you look at the venture fund statistics, the level of growth activity, government support, the incredible tech talent, and the educational system—all of these things—it’s hard to find a reason not to be there,” says Bear in the report.
Canada’s relative openness to immigration can also be a selling point to foreign talent that may be facing challenges getting the U.S. H-1B visa, according to Sarkar. “There’s a golden moment for Canada to scoop up a lot of talent, and we’re trying to spread that word and ensure we get our fair share of the talent that is looking in various directions.”
Despite gains in the Canadian tech ecosystem, the Bay Area is still attractive to high-growth startups. Half of Vancouver-based connected-car company Mojio’s 100 employees are based out of the Bay Area. The company’s key partners—such as Bosch, Amazon and Microsoft—also operate out of the region. “We just couldn’t find what we needed by being only in Vancouver,” Kenny Hawk, CEO of Mojio, says in the report. “And with current [U.S.] immigration rules being tightened, being in both places helps us attract the people we need both here and in Vancouver.”
The ties between the tech hubs is leading to an increase in air travel. Air Canada’s passenger count to and from the Bay Area increased by more than 10 per cent year-over-year, according to the report. The airline—which also sponsored the report—runs flights between San Francisco and Toronto, Montreal, Vancouver, Calgary and Edmonton.
At least seven Canadian universities maintain an active presence in the Bay Area through alumni networks and research collaborations, which can help expose students to the tech capital.
The University of Waterloo, the University of Toronto, McGill University, the University of Ottawa, Simon Fraser University, Western University’s Ivey Business School and Queen’s University all have Bay Area chapters. These groups regularly host events, like in January 2019, where members of the University of Ottawa’s Bay Area Alumni Council selected the city’s top five startups to receive a visit in Silicon Valley.
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Universities also play an important role in fostering research and development connections between Canada and California. Researchers from Waterloo’s Perimeter Institute for Theoretical Physics are studying neural and brain networks at UC Berkeley’s Redwood Center for Theoretical Neuroscience. Meanwhile, academics from UC Davis and the University of Alberta are researching how the Zika and hepatitis C viruses reproduce at the cellular level. The work gives insight into a family of viruses including West Nile and dengue; it can potentially lead to more effective treatments.
These research and development partnerships extend to the private sector, as well. Several California tech companies have opened R&D hubs across Canada, drawn by lower operating costs and fast-growing talent. In January 2019, Tigera, a San Francisco-based cloud-security company, spent US$90 million on a new software engineering office in Vancouver. In September 2018, Intel spent US$544 million to open a graphics chip engineering and design laboratory in Toronto, while Uber and Microsoft have pledged nearly $1 billion in total toward expanding their respective presences in Toronto.
Canada and California have a friendly trade relationship in contrast with the trade tension of the U.S. as a whole. Given the outsized role that the Bay Area plays in the global economy, Sarkar argues that it’s essential for Canadians to maintain strong connections to the region’s power brokers.
“The Bay Area is still the single most important node in a global node that probably has seven or eight nodes,” Sarkar said. “Canada’s connection to the Bay Area, as a result, is extraordinarily important. It never has been more important.”