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Now or Never: Why the government must step up to help the tech industry

It’s never been a better time to start a tech company. But a shortage of domestic cloud-computing services could spoil the party

Mar 17, 2014

by Max Fawcett

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Companies like Facebook and Twitter “are acquiring innovation instead of building it internally,” says Robert Hart, founder and CEO of the Canadian Cloud Council
Photograph Ryan Girard

What’s a company that’s run by a 23-year-old college dropout and has no revenue, almost no assets and a looming lawsuit over the rightful ownership of its intellectual property worth? According to both Facebook and Google, at least $3 billion. That’s what Facebook offered – in cash, no less – for Evan Spiegel’s Snapchat this past November. More staggering is the fact that Spiegel actually turned it down. And as if to demonstrate that he wasn’t suffering from a case of temporary insanity when he made that decision, Spiegel also rejected Google’s $4 billion cash and stock offer that followed shortly thereafter.

That Snapchat was seriously hacked more than once just weeks after those two offers were rejected seems like the universe’s way of punishing Spiegel for looking a stable of gift horses in the mouth. But the fact remains that two smart companies thought it was, if not a good move, at least a decent one to pay that much for Snapchat. And Snapchat isn’t some weird outlier, either. Robert Hart, the founder and CEO of the Canadian Cloud Council, thinks the super-premium valuations being put on companies like it and Instagram – another company with no revenue and little history – mean it’s a great time to be in the industry. “It’s a perfect example of why you’d want to start a tech company in 2014,” he says. “[Instagram] sold to Facebook a year and a half after inception for $1 billion, and they did it with seven employees and zero capital expenditures.”

The spending spree that companies like Facebook and Twitter are on isn’t about to end any time soon, Hart says. “I think a lot of these organizations are acquiring innovation instead of building it internally, which speaks to the opportunities that organizations with a cool idea have.” And here’s the kicker – the growing availability (and applicability) of cloud-based data, infrastructure and services has made it far easier, and cheaper, to get those ideas out there. “We’re entering a new stage in terms of the ability to leverage data in ways we’ve never been able to before,” Hart says. “That’s because it’s stored in the cloud – we can use location data from one mobile application, combine it with data from social media and come up with new loyalty applications that have never been conceived of before.”

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Kevin Dahl, vice-president of operations at Calgary-based eThor, which was named “most innovative startup on the planet” in 2012

The rise of cloud-based infrastructure (like Amazon Web Services, which Instagram used to build out its functionality) means companies can create, test and release a new idea with just a fraction of the capital that would be required to do the same thing a decade ago. “You can get to that point where you’re starting to get the traction and scale much quicker, and at a lower cost,” says Kevin Dahl, the vice-president of operations at Calgary-based e-commerce company eThor. “If it was 10 years ago and you wanted to build a solution and be able to scale it to 10,000 or 100,000 users, you had to spend a significant amount of money on resources and infrastructure. With the way the cloud has changed things today, you can get going quite efficiently and with very little capital expended.”

It also means you have a much better chance of getting acquired – or, at least, of finding out that you won’t. And while most acquisitions aren’t anywhere near as lucrative as Facebook’s deal with Instagram (and its attempted deal with Snapchat) – Dahl says the average acquisition is in the $15 million range – they don’t need to be. “If you can, with a couple of buddies, some programmers and a little bit of capital, put together a business model that starts moving out and getting some traction and you’re acquired for $15 million in a year or two? That’s not bad either,” Dahl says. “And then you take that $15 million and then build the next Snapchat and go for the billion.”

And therein lies the million – err, billion – dollar question for Alberta’s startup community: Can it produce a Snapchat or an Instagram of its own? There have certainly been some successes already, including eThor, which has raised millions of dollars in funding (including some from tech icon Mark Cuban) and was named the “most innovative startup on the planet” at the 2012 Global Technology Symposium. There’s also Edmonton’s Mover, a company that’s developed a solution allowing users to move large batches of files between different cloud platforms. “When they first started, they were focused on the actual application,” Hart says, “but I think now they’re more focused on the platform and integrating with their APIs [application programming interfaces] to create a much more interesting solution. They’ve done really well over the last year, and I’d say in Canada they’re one of the three or four more compelling cloud companies out there. I’d be surprised if they’re not acquired in the next couple of years.”

But if there are going to be more success stories like these, Hart says, governments need to help the industry build the infrastructure it needs to be competitive. “One of the issues we have in Canada right now, and certainly in the startup community, is that we don’t have access to a commercial cloud platform like Amazon Web Services [AWS]. Because of that, a lot of organizations in Canada right now are forced to build their businesses using U.S. cloud infrastructure – almost every Canadian cloud startup that I talk to is building their business on either Rackspace or AWS.” And according to eThor’s Dahl, that could be a problem – particularly for potential clients in Alberta’s biggest industry. “We’d much rather have our data and our clients’ data in Canada, as a Canadian company. And here in Alberta, oil and gas companies don’t want their data sitting on a U.S. server where Uncle Sam can come and ask for it and have a look at it any time it wants.”

The good news is that these sorts of security concerns could actually incent Alberta’s energy sector to support the development of some homegrown cloud infrastructure – precisely the kind that’s needed to incubate tech startups. “In Alberta, unless something provides direct value to the energy sector, the government is not remotely interested,” Hart says. “And what’s going to have to happen in Alberta is an ecosystem will have to be developed that provides commercial opportunities for the oil and gas sector.”

If that happens – and indeed, he says it already is, to a certain extent – the knock-on benefits could be considerable. There’s nothing stopping those same oil and gas companies, or whoever they partner with, from commercializing their cloud infrastructure the way Amazon and Facebook have. And if they did? “You could imagine the benefit of Salesforce.com, for instance, building its platform in Canadian data centres and operating it as a data safeguard to its U.S. data centre,” Hart says. Indeed, it could result in the almost mythical economic diversification that Alberta politicians have been talking about for decades now.

But, Hart says, it’s up to government to make the next move and support an industry that could be on the verge of something special. “I think if we can encourage the government to get more involved in this and really understand the amount of net new economic value that’s been developed in Amazon, for instance, or through IBM over the last couple of years is not even in the billions – it’s in the trillions. It’s a huge, huge economic opportunity.” Indeed, it would be nearly as self-defeating as turning down $3 billion in cash for your company.

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Money Talks

Alberta’s tech entrepreneurs face something of a Catch-22 when it comes to raising the capital they need to grow their businesses. It’s not that there’s an absence of capital – far from it, in fact. “If you look at the venture capital space right now, there’s a lot of interest in software companies,” Hart says. But, as eThor’s Dahl points out, that interest tends to depend on someone else already having expressed interest. “It always comes down to that very early seed-stage capital,” he says. “It’s those angel investors that will take a $25,000, $50,000 risk – that’s where I always found the real challenge. We’re starting to see a shift in Edmonton and Calgary, and hopefully we see that right across the province, but we need to see a lot more small investment being done. You never know where that next Snapchat may come from – and it usually isn’t the first iteration.”

So how can tech companies get that seed capital that can turn their idea into a workable concept? We asked Tara Kelly, the CEO of Splice Software and someone who knows a thing or two – OK, 10 – about how to raise money for a new business.

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Tara Kelly, CEO of Splice Software

Know your audience
“When you’re out there pitching, be aware of what that person’s knowledge base is. If you want feedback on the way you show your financial statements, it’s okay if they’re not in your vertical. But if you want them to get excited about your story and the problem you’re solving, make sure that person is experiencing the problem.”

Go beyond your comfort zone
“Ask who else you should talk to. Who else do you know that knows this space? People have really big networks, and a lot of people make the mistake early on of working to get traction with somebody that’s never going to get it.”

Go find the ‘yes’
“Look for the ‘no’ as fast as possible. The faster you can realize this person has absolutely no interest in you, the better the chance you’re going to meet the one that does. Instead of trying to turn all of those noes into yeses, go find your yes. If you really are solving a real problem, somebody out there knows about it. And if nobody out there knows about it? Go do something else.”

Find your kingpin
“When you start out a company, you either know who your perfect customers are or your perfect acquirer. Then, start thinking about your own circle and how far you are away from that. If you can find someone that sits on the advisory board for one of the companies that could potentially acquire you and he’s interested, he’s your kingpin.”

Crowdsource it
“We like to have support. We don’t like to be alone in our decisions – and financing is no different. Find out who is the kingpin in the deal. And you can actually ask: ‘If David got in, would you be interested?’ Don’t be shy about that. You just have to keep working it. They will talk to each other – and that’s OK.”

The Gods Must be Crazy
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Facebook founder Mark Zuckerberg
cpimages

Given the amount of money Facebook and Google offered for Snapchat, it’s fair to wonder how they assessed the company’s value. But eThor’s Dahl says there’s a method to their apparent madness. “They’re really looking at it and saying, ‘We need to keep our user base. Is it going to cost us more than $1 billion in the long run if we lose this much market share?’ The big players are recognizing that if they let a Snapchat slip through their fingers, once that opportunity is gone that billion dollars that they could offer them today may wind up costing them $100 billion over the next five years.”

And so, the fact that the company hasn’t actually generated any sales is beside the point. “It’s not based on revenue, because a lot of these large tech companies, even the ones that are doing the acquiring, may not have a real revenue model yet. Facebook’s still figuring that out. Snapchat is a good example – Facebook may not really have figured out how to monetize video on their platform, but they’ve got the eyeballs and the smartest people in the world to figure that out. So they know if they can capture a certain part of that market and own it, they’ll figure out how to make money on it.”

Click here for a list of recent acquisitions of cloud-based companies

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2 Responses to Now or Never: Why the government must step up to help the tech industry

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