Where Angels Fear To Tread

Richard Berman
CEO, VerbFactory

I just returned to the San Francisco Bay Area after spending two weeks in Toronto, and it’s always interesting to see how other cities approach entrepreneurship. Toronto is ahead of the curve in many ways, but also faces some challenges that may ultimately limit how successful the city’s start-up companies will be.

One of the major differences between Northern California (I won’t say “The Valley” because so much of the innovation scene here is outside of what tech cognoscenti would consider to be Silicon Valley, but that’s a discussion for another time) and Toronto (I won’t say “Ontario” because Kitchener-Waterloo is a different animal than Toronto despite only being an hour away) is that so much of Toronto’s innovation is supported by government initiatives and publicly supported entities.

Exhibit A is MaRS (www.marsdd.com), a massive public/private/academic non-profit entity designed to support hundreds of emerging companies and get them ready for growth.

Thanks to MaRS and other similar initiatives, such as the new Toronto Hatchery, getting seed funding and structural support in Toronto can be easier than getting initial backing in the Bay Area.

That’s the good news.

The problem is that once companies spend their initial capital, there isn’t a massive network of investors ready to jump in and fill the void between the early rounds and venture capital-led Series A and B rounds.

It may be easier to get out of the gate north of the border, but it’s a lot tougher to get $200,000 in Toronto than it is in Palo Alto. Call it an “Angel Gap.”

Over time, Toronto’s tech scene may well develop its own angel community, but that is going to require a lot of folks making successful exits and reinvesting in local start-ups.

To date there have only been a few gold-plated acquisitions – most notably Google’s purchase of a University of Toronto company called DNN Research – meaning that companies looking for the next $120k only have a few doors to knock on. (MaRS Innovation was created to fill in this space by providing $100-$500k rounds for its most promising companies and technologies. Xagenic http://marsinnovation.com/tag/xagenic is one of these success stories, but this kind of Toronto-based funding is the exception, not the rule.)

Toronto can certainly wait for the local angels to emerge, but that could take several years and ultimately won’t benefit the companies that are currently looking for their next infusion of cash. A faster route would be for Toronto companies to build bridges to the Bay Area and tap into what is probably the best technology angel community in the world. There are literally thousands of people in the Bay Area who have made money in the technology industry who are looking for great new companies to invest in below the standard VC firm threshold, but they have no idea what is going on in the fifth biggest city in North America.

Organizations like Founders Network (www.foundersnetwork.com) can help. They focus on problem-solving and peer mentorship for tech founders. So for Toronto founders, that not only means a community of 500 fellow founders willing to help, it also means a bridge to Silicon Valley’s angels, VC’s and other ecosystem players.

It’s not a rosy picture, but forward-thinking Toronto start-ups can succeed by building connections to the vibrant and established Bay Area technology investment community and marketing themselves in a way that will resonate with seasoned tech investors and allow them grow their companies to a point where VCs are willing to get involved.

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