The Big Read

How Google won over Kitchener-Waterloo

Illustration by John Hemminger

Steve Woods had been in Kitchener-Waterloo, Ont. less than two days when he found himself seated at a table apprehensively sipping wine with half a dozen of the town’s business leaders. He had been invited there the day before by Communitech’s CEO Iain Klugman, who insisted over the phone—with an urgency Woods thought was odd—that they meet as soon as possible.

Not five minutes into dinner, it became clear to Woods why he had been summoned. “‘What are you going to do for us here?’” Woods recounts Klugman asking immediately after toasting his arrival to town, along with other local luminaries—like then-University of Waterloo (UW) president David Johnston—who proceeded to brief Woods on how the community worked. “‘If you do it this way it’s going to be amazing,’” Woods recalls them conveying to him. “And they sort of left uncited what would happen if I didn’t.”

Woods’s arrival in town in August 2008 signalled, in many ways, Google’s official stake in the region’s tight-knit innovation ecosystem. Over the 10-plus years prior, Kitchener-Waterloo had honed an identity as Canada’s hub of digital talent and entrepreneurship. Now, Google—a Silicon Valley behemoth with few apparent ties to the community—risked upsetting that ecosystem. The leaders responsible for carefully fostering that community had reason to question how the company’s presence would alter what had become Canada’s most promising innovation hub.

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In the 10 years since Woods arrived to spearhead Google’s Canadian operations, the company’s footprint in the region has ballooned from about 20 to 600 employees; its Waterloo office (Google Canada’s engineering headquarters) now accounts for 60 per cent of its total workforce in the country. Its outsized presence amid the 500,000-plus population of Waterloo Region—which encompasses Waterloo, Kitchener and Cambridge—has not gone unnoticed. Google has become a reliable source of funding and mentorship for local startups. The company’s employees have logged hundreds of thousands of volunteer hours in the community. And, it’s been a vocal advocate on civic files like better transit and boosting STEM in the curriculum.

Kitchener’s newly re-elected mayor, Berry Vrbanovic, notes that some of Google’s impact is harder to measure—like bolstering the city’s reputation as an innovation hub. “Google has really served as part of the foundation from which everything here has grown over the last number of years,” he says. “As soon as you get a large company like that, it gives the broader ecosystem that signal of confidence that this is the place to be.”

“They draw talent to the region, which is good for me,” says Alroy Almeida, CEO and co-founder of Volterra, a fast-growing tech startup in Waterloo, who notes that people originally drawn to the region by Google may be more likely to join a local company, like his, once they’re in town.

Others, however, worry that by virtue of being a large, foreign technology company, Google’s growth in the area could stunt local companies—particularly those in the scaling phase, by outcompeting them for talent, driving up wages and cornering the digital tech market.

Indeed, Google walks a tightrope in the community—a delicate give-and-take with the ecosystem that’s underscored by persistent tension. It’s a balancing act that many foreign companies fumble, if they attempt it at all. “The Googles of the world, you can’t block them out,” says Carol Leaman, CEO of Waterloo-based Axonify, an online learning platform. “Because Google came in very slowly and carefully and logically, they’ve been embraced here,” she adds. “Right from the beginning was ‘How can we contribute back to the community?’”

Talking Point

Google’s foray into Kitchener-Waterloo at first raised concern within the tight-knit tech ecosystem. Now, more than 10 years later, the Silicon Valley behemoth has stymied fears of rampant talent poaching and innovation hoarding by integrating into the community on KW’s terms. The company’s outsized presence in the community isn’t without its critics, however, with some arguing that championing foreign multinationals represents a myopic approach to the economics of innovation.

In 2007, as Google neared its 10th anniversary, co-founders Sergey Brin and Larry Page decided they needed a new global expansion strategy. “If they were going to develop world-relevant products,” says Woods, “they needed to develop them from the world; not from California.” The company set out on a 22-month global tour to identify cities where it would put down roots. Each potential international headquarters needed a world-class technology university, a local culture of entrepreneurship, an appealing standard of living and a local leader who could represent the interests of both Google and the community.

Along with cities like Sydney, Zürich and London, Google selected Waterloo, and named Woods—who did his bachelor’s degree and PhD at UW—as the honorary local to head up the endeavor.

Woods, originally from Saskatchewan, was reluctant to take the plum job. “I had some bad experiences with my companies being acquired by big companies in the Valley,” says Woods, who was building his startup NeoEdge Networks in Mountain View, Calif. when the Google offer came up. “I had promised myself I would never go work for a large company ever again.”

Getting Woods on board meant convincing him that Google—whose parent organization Alphabet is the fourth-largest enterprise in the world, with a market capitalization of roughly US$800 billion—wasn’t actually a large company. “It might be big on the balance sheet side or the stock value side, but it’s not a big company organizationally at all,” Woods insists. “It’s a cross between a startup and organized chaos. It’s constantly reinventing itself.”

Persuading Woods of Google’s value to Kitchener-Waterloo was one thing; getting the community on-board was another question altogether. “I think it was during that first two or three years that people were a little bit worried about the impact [Google] would have on Kitchener-Waterloo,” says Leaman. “There was excitement mixed with a little bit of fear of ‘How is this going to go?’”

Prime Minister Trudeau and Google's head of engineering, Steve Woods celebrate the opening of Google Canada's development headquarters in Kitchener. Jan. 14, 2016. Handout: Google

On any given weekday afternoon, grade-school kids can be found downstairs at Google tinkering with robots. The echoey, 4,000 square-foot space of concrete floors, large windows and scattered desks is open to student groups and local STEM-related non-profits. Google officially opened the community area this past spring, at the same time announcing $2.1 million for outreach programs that teach STEM skills to school kids, women and immigrants.

The space was born out of a culture of volunteerism at Google, where employees are required to spend 10 per cent of their time giving back to the community. “We found that they needed space for all the things they were doing,” says Woods. “We want to do more ‘teach the teachers’, we want to do more engagement with kids ourselves, but space is often a problem with schools. They have all this robotics equipment—where do they put it? And so, we decided to create this community space downstairs to do these things.”

That initiative is one way in which Google has integrated with the community. “They recognize that they have to contribute to the good of the whole,” says Klugman. “Google has grown in a fashion that says, ‘We’re playing the long game, and we’re here to be part of this ecosystem.’ If Google wanted to be 5,000 people in 10 years, they could have been,” he adds, “but they would have wiped out the startups, and Steve Woods chose not to do that.”

There were concerns in the beginning that Google could indeed pillage the community. When the company first entered Waterloo in 2005—before Woods was at Google—it did so by acquiring Reqwireless, a local mobile phone software development company. While Reqwireless employees enjoyed payouts and jobs with Google, the deal saw the startup wind-down before it had the chance to scale.

As Dan Ciuriak, economist and senior fellow at the Waterloo-based Centre for International Governance Innovation, noted in his July 2018 report on industrial policy for data-driven economies, “[An] acquisition can dampen the dynamism of the host economy” by blocking “the emergence of a future competitor.”

Certainly, there are ways beyond acquisition that foreign tech giants—not just Google—can stifle up-and-coming competition; a number of founders in Waterloo expressed concerns to The Logic around poaching talent and hoarding innovation, for instance.

I’m not against them being here, but when we use incentives to get foreign companies to Canada, that’s distorting the economy and it’s creating inflation,” says one executive from a scaling Waterloo-based technology company, referring to incentives like subsidized university tuition and Canada’s Scientific Research and Experimental Development (SR&ED) tax incentive, which Google confirmed it leverages to help pay for R&D. “It’s also, I would say, stunting growth of scaling companies because the cost of things like data scientists and developers goes up and could price them out of the market,” says the executive, who asked not to be named out of concern it would cause harm to their company.

Several Waterloo-based founders who spoke to The Logic—few of whom felt comfortable speaking on the record—complained about foreign companies’ ability to leverage those taxpayer-funded incentive programs, only to have the return on that investment sent back to the company’s country of origin through intellectual property.

Google Inc. has 33 patent applications pending and 80 patents granted in the U.S. for inventions that were developed, at least in part, by employees in Kitchener-Waterloo (that doesn’t include inventors who reside outside KW but work out of the Canadian headquarters). Jim Hinton, a Waterloo-based patent lawyer, says those figures likely capture about 70 per cent of patent activity that Google employees in the region have a hand in generating, and which is ultimately assigned to Google in Mountain View.

“Of course foreign branch plants make a contribution to our economy, but I would suggest Canada is capable of far bigger economic gains than simply being a hub for cheap talent,” says Jim Balsillie, the former chairman and co-CEO of Research in Motion (RIM), who built and grew RIM out of Waterloo and turned it into one of the largest tech companies in the world.

Balsillie argues that championing Google’s presence in the region represents a myopic approach to the economics of innovation. “This is a matter of innovation economics, not shallow nationalism.”

According to Balsillie, the lack of large exits and IPOs in Waterloo recently indicates how challenging it is for local companies to scale. In the decade prior to Google’s arrival, 10 companies from the Waterloo region went public, or were acquired, for more than $50 million. Those included RIM (now BlackBerry), OpenText and Sandvine. Since 2008, only one company, Arise Technologies, has gone public; it has since shut down.

“The economic impact of those success stories is visible not just in KW but across Canada,” Balsillie says. “But then came the incubator industrial complex and a push for cheap talent branch plants, and we haven’t had an IPO in 12 years or even a decent exit. Why? Because global value chains in intangibles are inherently unstable, data asymmetry breaks markets and IP operates on a winner-take-all principle.”

One can’t attribute causation from the lack of IPOs alone. Those figures don’t factor in the dot-com bust or the 2008–09 financial crisis, or the fact that more companies now choose to stay private longer because they can raise funds without an IPO—but they’re hard to ignore.

Shopify CEO Tobi Lütke, who chairs the federal government’s economic strategy table for digital industries, weighed in on the issue of foreign companies in Canada at the Elevate conference in Toronto last month. “What we need is a couple of bigger [Canadian] tech companies, because [big companies] have a very outsized impact on the ecosystem,” he told the audience. That same day, the government released an interim report on Canada’s global competitiveness, which also flagged the problem. “We are exporting our most precious assets to the benefit of other countries,” the report reads. “That’s not necessarily a bad thing. We do, however, need to double down on our own inventiveness to capture more of that wealth here at home.”

Google signage sits aloft at the Waterloo development headquarters. Handout: Google

For the most part, Google has become a welcome presence in the Waterloo region. But that didn’t happen by chance. Recall that first steakhouse meeting where Woods was grilled by the community’s innovation leaders: “From that moment on, I basically reported to David Johnston, as far as I could tell,” says Woods. He and Johnston—who was UW president from 1999 to 2010 and later Canada’s Governor General—would convene regularly at the University Club to set goals for Woods and ensure he was achieving them. “He had this notebook full of things I said I would do,” Woods says—things like increasing the number of Google Research Awards at the university, for example, and mentoring startups in the community and advocating for fast rail transit to Toronto and Pearson Airport. “I would often postpone the meetings because I was terrified of going in there and not having them done,” he says.

Over time, those relationships became formalized. Woods eventually joined the board of Communitech and became an advisor to UW’s ad hoc Committee on Technological Innovation. Soon, Google in Silicon Valley took note of the bond Woods had built with the community in Waterloo. “They picked up the model and it became Google for Entrepreneurs [G4E] worldwide,” says Woods, with the company setting up its own Communitech-style innovation hubs in other cities. Initially, Google even had a G4E accelerator in Communitech, “but they decided it made more sense to support partner organizations like Communitech, rather than to run their own programming,” says Chris Plunkett, vice-president of external relations at Communitech. G4E now sponsors Communitech’s own accelerator programs, like Rev and Fierce Founders. A number of ventures that have gone through those programs, including Bridgit and Knowledgehook, have gone on to participate in the global G4E Demo Day in Mountain View.

“They’ve been big supporters of our talent programming,” says Plunkett. Most recently, Google started running themed one-day training sessions for other companies in the community, including one in June on analytics and search engine marketing.

Leaman, whose company PostRank was acquired by Google in Silicon Valley in 2011, says Woods has been an effective ambassador for the region. “Google in Kitchener-Waterloo has taken a very respectful approach to building their business here,” she says. “They’ve done that by, first and foremost, having a leader who has been very respectful of the community, who has gotten involved in the community and hasn’t been just sort of this transplant who’s come in with a mission to take from the community and not give back.”

Several Waterloo-based entrepreneurs who spoke to The Logic pointed to San Francisco-based Terminal as an example of how branch plants can upset the local ecosystem. Terminal’s business model is to help companies (usually from the U.S.) outsource development to Canada, where they can access tax credits, talent and affordable wages. Terminal has offices in Toronto, Montreal, Vancouver and Kitchener-Waterloo; it employs about 125 workers across Canada. “These Terminal companies have no interest in building a company in Canada or contributing to the local economy,” says Leaman. “It just feels very different from what Google is doing. It feels like a satellite operation with all decisions getting made elsewhere. And giving government funding to those organizations is what I object to. I think that money could be redirected to real Canadian businesses.”

In an email to The Logic, Terminal CEO Clay Kellogg said, “We invest in cities like Waterloo by building local offices, investing in established and emerging talent, and giving those engineers equity in scaling startups around the world,” adding that Terminal may help keep talent in Canada who would otherwise have moved to places like Silicon Valley for work.

“In the coming months and years, we know that major U.S. enterprises will be setting up shop in Canada or expanding—Uber, Google, Amazon, Microsoft,” said Kellogg. “While we certainly hire local talent, Terminal isn’t the threat. We simply compete with every other startup and enterprise tech company who’s hiring.”

It’s unclear to what degree, if at all, foreign companies in Canada ultimately benefit or leech off the local economies in which they operate. “This is a policy issue that’s not going away,” says the Waterloo-based executive, noting that policymakers need a way to assess the long-term economic impact of foreign companies compared to Canadian ones. “We don’t have the right data points for that, and that’s really, really concerning.”

For its part, Google in Waterloo has avoided the negative reputation assigned to big foreign companies in satellite cities, at least for now. It’s done that by leveraging its clout as a big company to benefit, rather than traipse over, local ones.

“I tend to feel obligated in a way,” says Woods. “Google is big—it’s maybe not a structural monolith like some companies—but it is big. We have a lot of resources. I spend a lot of my time trying to make sure we get more invested in the community.”

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When then-Ontario premier Kathleen Wynne revealed plans for a high-speed rail system between Toronto and the Waterloo Region, she made the announcement at Google’s Kitchener office, in the community space overlooking the rail line. “That’s how integral Google has become in all of those community issues,” says Mayor Vrbanovic, referring to the company’s transit advocacy.

Johnston, now a senior advisor at Deloitte, recalls sitting with Woods on bean bag chairs 10 years ago and discussing how to make that high-speed rail line happen (the new provincial government has since put those plans on hold). “All of this was in the context of making the Waterloo region even more liveable and transportation friendly for a growing population,” says Johnston, “and for high-quality living and business efficiency.”

Google doesn’t pretend that its push for high-speed rail is an altruistic play; it would be a boon to the company’s ability to attract more talent, particularly from Toronto. Of course, other companies would benefit, too. “If we can use Google’s clout to bring in talent, that’s great for us,” says Almeida. “It builds a bigger city and a stronger community.”