Shiftdisturbers Episode #3: Toronto as the Next Silicon Valley

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Transcript of the podcast:

Ian Gormely: Hello, and welcome to Shiftdisturbers, the MPI podcast where we highlight the people, research, and ideas that change the way we think about the world. I’m Ian Gormely, writer and content producer here at the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management.

Sarah Soderoff: And I’m Sarah Soderoff the Institute’s community manager. On today’s episode we’re taking a closer look at Toronto’s tech scene, specifically its ability to become a leading global hub for new technologies, one that’s on par with Silicon Valley

IG: A recent TechCrunch article proclaimed that “Toronto is poised to become the next great producer of tech start-ups. The story which chronicled one investor’s experience with the city essentially says that Toronto is poised to become the next Silicon Valley.” Now, that was just one story from one person’s personal experience. But it got us wondering whether or not such a thing could actually happen.

SS: Of course we’ve heard this before, from San Diego to Dallas to Mexico to Tallinn, Estonia, investors, entrepreneurs, and gadflies are always on the lookout for the next tech hub. And while many of these cities are regional centers for technology it seems unlikely that any are going to overtake the Santa Clara Valley as the world’s leading new technology hub. But the question remains, can Toronto become a technology hub that, if not overtaking Silicon Valley, can at least compete with the region for talent and money?

Dan Debow: I was talking to a professor who is really involved in the entrepreneurship role and I encouraged him. I was like, “you need to spend some time in Silicon Valley.”

IG: That’s Dan Debow; a Toronto based angel investor who has spent plenty of time in the valley. He started his tech career at Workbrain and then founded the start-up Ripple, both based in Toronto.

[00:01:39]

DD: And I just saw him last night after spending a year there. And he, you know other than the fact that he wasn’t wearing a suit anymore and he was wearing a T-shirt which was a good change, he articulated to me, he’s like I just never got a sense of how big the tech industry is and how massive it is, and how ingrained it is, and how it’s not just a bunch of kids in like you know, flip flops and hoodies. This is big business. Your likelihood of success is greater when you’re surrounded by great minds, lots of talent, where the competitive pressure on you is very high, right. You get a very quick sense of what winning and losing is when you’re in Silicon Valley. There’s no faking it. You know.

IG: So, as Dan explains Silicon Valley is more than just the new Detroit or Pittsburgh, the old centers of American industry. It’s a vast area filled with people who both want to change the world and make lots of money while doing it.

Speaking with Michael Katchen, I didn’t get the impression that world domination is in his future plans. But he is someone interested in boosting Toronto’s place in the global tech ecosystem. Michael is founder and CEO of Wealthsimple; a Toronto-based Fintech Company that helps clients invest small amounts of money with low fees. He worked in the valley for a few years before he moved back to Toronto, his home town, to start the company. He thinks that if Toronto is ever going to have a shot, it’s now.

Michael Katchen: I think we are at an inflection point. Historically, Canada has had some wonderful tech success stories, right. Nortel, Blackberry. And these were some of the largest companies in the world. Nortel was the largest company in the world in its heyday The difference now is unlike one champion right, instead of having one Blackberry that is just so much bigger than every other company around, I feel as though we have this cohort of companies that are actually doing really well at achieving scale at the same time.

So, you now you look at the Canadian tech scene. You’ve got Hootsuite, Desire2Learn, Shopify, this whole kind of great cohort. We could list off a dozen companies that are achieving really significant scale in Canada. And that’s a really interesting and different thing. Because all of those people that have that experience of building a business to scale, are now probably going to, as those businesses exit or go public, will start to go off and fund new businesses, or they’ll go off and start their own companies. And that kind of critical mass of people that have been through that is something I don’t think we’ve ever had before in this country.

[00:03:54]

And so, it gets me even more excited about what comes next when you have this great depth of experienced people that have been there before, go out and do the next thing because it should be even more successful the next time around.

SS: That critical mass that Michael mentions is really the product of Blackberry and the talent base that built up around it in the Kitchener-Waterloo area. That spilled over into Toronto, further fueling the flames of the city’s start-up scene.

MK: To a large extent Waterloo has come of age. If you think about the roots of Waterloo and the engineering department there which has become world class, the talent coming out of Waterloo is pound for pound as good as anywhere in the world. You know that was in large part a function of Blackberry and the money that came out of Blackberry. It was reinvested in the region and the school and building this kind of world class capability there, attracting talent from all over the world because of how exciting the company was in its heyday. It takes time for all of that to really start bearing major fruit. And I think that’s what we’ve seen over the last five or ten years here is really amazing talent coming out of that program; software talent, which is a huge input into building the new kinds of technology companies that are building huge value around the world.

IG: Though he doesn’t necessarily see Toronto overtaking Silicon Valley anytime soon, Michael is clearly excited by what’s happening in Toronto’s tech scene right now. And while Waterloo’s status as an incubator for tech talent in Southern Ontario is pretty undisputed, larger forces within the global start-up culture suggest the winds further up the 401 are actually blowing in Toronto’s favour.

IG: Richard Florida is director of cities here at MPI. Over the last two years he and his team have released a series of reports examining the Geography Adventure capital. The start-up city series has used venture data as a proxy for innovation and to pinpoint, down to the neighborhood level, where high tech start-ups are based in Canada, the US and around the world. Across the board start-up companies are leaving sprawling suburban flatlands like Silicon Valley for urban centres like downtown San Francisco and New York. He agrees with Michael that Toronto has the ingredients, yet Richard remains uncertain about the city’s ability to jump into the top tier of technology hubs.

Richard Florida: Waterloo is the really high tech hot spot because the high tech companies locate around the University of Waterloo. And that’s true to a degree. There are start-ups and venture capital investment in Waterloo.

But in fact there is more in Toronto and in particular the big clusters of venture capital events in the greater Toronto area, or the golden horseshoe, were in and around the urban center of Toronto. They were very close to the University of Toronto, so areas spanning the Annex, and adjacent areas of downtown. They were in the fashion district, near the entertainment district, and other parts of the urban center of Toronto. 

[00:06:38]

So, I think that Toronto really much signals this kind of shift towards urban start-ups, urban venture capital. Toronto has the urbanity, it has the spectacular universities. When you look at the University of Toronto and Waterloo, that axis has incredible technology capacity. It’s an exciting city. It’s a city that has great energy, it has great neighborhoods, and it’s more affordable than New York City or San Francisco.

All of that said, I do believe Toronto is still woefully underperforming compared to New York or San Francisco or even greater Boston. That for some reason up until now urban Toronto, Waterloo, the whole region has not been the kind of propulsive start-up environment that we’ve seen in San Francisco and Silicon Valley which have a long history, but even compared to New York City or London England which have come up the ranks very recently. We are maybe at a turning point now, but I think to say that Toronto is the next great start-up hub, it certainly has all the attributes of a great start-up hub, but I still think it’s a little bit of a ways off. You know I’d put Toronto more in a class with good start-up hubs like Austin or Chicago or Berlin. But I wouldn’t put it in that first ring of San Francisco and the Silicon Valley, New York City or London. I hope it can get there but it’s not there yet.

SS: Richard also warns that while the idea of becoming a Silicon Valley or even a Route 128 sounds appealing, the kind of concentrated wealth that large clusters of start-ups bring to a region is a double edged sword

RF: Cities for the longest time wanted good jobs. Good jobs are the kind of jobs that come with high technology start-up firms. If you have great ones like Intel or Apple or Google or Facebook or Twitter, they create whole new industries, and thousands upon thousands of jobs. And then, according to research every good job in a high tech company creates five spillover jobs. They call it a multiplier effect.

[00:08:29]

But I think one of the things that our research is starting to get at, is that there are also challenges that come with having a lot of start-ups. In San Francisco, especially in downtown San Francisco, there are two billion dollar neighbourhoods for start-up activity. That’s more than any other country aside from the United States has in venture capital investment. Both of those neighbourhoods, very small concentrated neighbourhoods near downtown San Francisco; well because the high-tech workers want to live near the start-ups because that’s what’s in fact causing the start-ups to gravitate to urban areas because the techies and the creatives and the designers, the talented people, they don’t want to live in the suburbs. They’re younger, they’re not married, they’re single, and they want the excitement of an urban area. Because they’re living close to these start-ups…and those start-ups are taking over old warehouses and factory buildings that might have been used for housing, they are driving up real estate prices, and the gap between the affluent techies and the regular people is growing. And the regular people are getting kicked out.

So, one of the things we’ve been looking at is to what degree start-ups are good for a neighbourhood. They create a lot of economic value. But to what degree they are putting pressure on housing markets and causing inequality. There I think the data we have is mixed. One, I think we know pretty clearly that start-ups do cause housing prices to rise. There is no doubt about that. But when it comes to inequality we’re finding a mixed message. On the one hand the wage and equality, the gap between highly paid workers and lower paid workers is rising. But a bigger measure of income and equality isn’t really rising.

And I just talked about a new study. They took a close look at the association between high tech and poverty. And they found that high tech areas tend to drive up the wages of the least skilled works. So that’s good. But they do very little to either address or mitigate poverty. They don’t necessarily make poverty worse. But they don’t make poverty any better.

IG: Give all these caveats I guess we better start thinking about whether we even want to be the next Silicon Valley. In fact Dan Debow thinks the idea that we could or should is kind of ridiculous.

DD: I think when you ask this question if you really need to appreciate how far the distance between Toronto being compared to a place like that is. It is so much bigger, so much larger, so much denser, and so much richer in so many ways, that to try and be like Silicon Valley north – a term that I can’t stand – because it’s so silly. Anyone who understood it would be, like that’s crazy. You would never be able to do that right. So the question is are we a hub, are we a location, can you build economy? Yeah, for sure.

IG: Instead, Dan sees a different way forward for Toronto.

DD: There used to be a thing called the tech industry and I guess it sort of is. But the truth is if you’ve been listening, every industry is the tech industry. Every industry will be eaten by software. Healthcare, automotive, manufacturing, you just see it happening, right. I mean the cab industry has been eaten by tech. So tell me what industry isn’t tech? What I think the future is, is when you think about this as a hub, is Toronto a place that has lots of industries, lots of business, where we get very good at using technology to become globally competitive. We have a chance to do that. And I think we can. And we can have classic technology companies that sell globally here, as well. 

 [00:11:35]

And I think we have a chance, as well because there are certain areas where we really have dense concentration of expertise. And if we play it right, focus on winners, concentrate our energies, remove barriers, put entrepreneurs first, I think we actually can become much bigger which we have to because if we don’t this thing about software eating the world, it’s going to come eat us. And many things that we take for granted in a very wealthy Canadian society that provides spinoff benefits, I think they’ll go away. And we need to figure out how to create new businesses. It’s a pretty big imperative.

SS: Whichever path we take, Michael thinks the government is going to need to step in and help create the ecosystem.

MK: How do we make sure that Canada becomes a global leader in technology, right? And a lot of really smart and capable people are trying to think about that problem. The challenge is I think we have to do things differently than we have. And I think the government actually has to play a really important role. The government has historically been really bad at placing bets. They like to spread the money across everything and every city and every province and every little opportunity here and there to be very equitable, which is a nice social policy but a terrible economic policy. I

I think the government can play a few important roles. I mean, one is research, talent. We’re not just talking about recruiting volumes of software developers, but how do you recruit the absolute top in their field. How do you create the incentives? How do you create the Visa structure that you can actually bring those people here and make sure they stay here, and are excited to be part of what we’re building in Canada? Have we created an environment that’s pro and promoting of innovation, or does it slow it down and/or hinder it? There’s a lot a government can do in terms of building a start-up city.

SS: However, Dan says that whatever role government plays it needs to take a ‘Do No Harm’ approach. To his mind that means putting companies and the entrepreneurs behind them first.          

[00:13:35]

DD: Policy makers want and can in a big way to help, but we are kidding ourselves if we think it’s like the academics in the universities will get together and learn various levels of government. It’s entirely about great companies being created by entrepreneurs; that is what turbocharges the environment. You want to create and catalyze lots of other start-ups, well, have a really big successful one, you’ll have those first 50, 100 people there know what it really is like to build a start-up. They’ll also; many of them will have capital in their pockets. They’ll have credibility when they need to go off and raise money from other venture capitalists. And it sort of starts this wonderful virtuous circle.

If you look at a company like Workbrain, and you look around the city of Toronto, the number of start-ups that were founded by alumni in that company, the number of employees and all sorts of other companies that got their first job experience or something like that at Workbrain, you’d see that it’s amazing how much economic activity came out of this one firm. The company is the vehicle to create more companies. And if you don’t understand that it’s going to be very difficult.

In Canada today we have lots of start-ups in fact maybe too many. What we don’t have is a lot of scale ups. We don’t have thousands we have a few hundred. Companies that could go from five to 50, from 50 to 100, to 100 to a billion because those are the things…I mean, look at Silicon Valley; those are the massive engines of wealth. There are thousands of other companies that follow in their wake but you still need Facebooks.

SS: That does it for this episode of Shiftdisturbers. Thanks to Dan, Michael and Richard for their time. If you want to make small investments with low fees check out Michael’s company, Wealthsimple at Wealthsimple.ca

And you can keep up with Richard Florida’s work at MPI on our website, martinprosperity.org. And keep an eye out for his new book, The New Urban Crisis; Winner takes All Urbanism, Divided Cities, and the Patchwork Metropolis when it’s released next spring.

IG: Thanks for listening to Shiftdisturbers. If you want to know more about what’s going on at the Martin Prosperity Institute follow us on twitter at MartinProsperiT. Note the lack of a ‘y’ at the end there. And to make sure you never miss an episode of Shiftdisturbers please click the subscribe button. I’m Ian Gormely…

SS: And I’m Sarah Soderoff. Thanks for listening.

[16.07 minutes]

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This podcast was produced by the Martin Prosperity Institute at the Rotman School in 2017.