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Jesse Brown: Why local tech wizards are taking their big brains and bright ideas elsewhere

There is no Canadian equivalent of the JOBS Act. The idea is floating around Ottawa, but the buck keeps getting passed to the provinces, each of which regulates the exchange of securities independently. Here in Ontario, only “accredited investors” can buy a piece of a private company, meaning you need to earn at least $200,000 a year or have a net worth of at least $1 million (excluding the value of your house) to qualify. The idea is that only the wealthy should be able to gamble on companies that aren’t subject to the same regulatory scrutiny as publicly traded concerns. Only about three per cent of Canadians qualify to invest this way. The rest of us can invest only in publicly traded stocks or in businesses started by friends or family. In other words, in Ontario, it’s okay to risk $100,000 on your cousin’s scheme for a vegan gastropub, but you’re not allowed to sink $100 into an incredible idea you found on the Internet. Or, to look at it from an entrepreneur’s point of view, it’s perfectly all right to gamble with large sums of your family’s money but forbidden to spread the risk among thousands of people who are investing because they love your idea, not because they feel obligated.

Migicovsky’s departure should raise some eyebrows. It’s not like he fell through the cracks of our tech industry or his talent went unrecognized here. He graduated from the best engineering program in the country, started his company through its VeloCity incubator program and got early funding from the Ontario Centres of Excellence and the Canadian Youth Business Foundation, organizations with a mission to identify and seed promising new initiatives. All of this local infrastructure exists to stimulate a regional tech industry. In retrospect, the system worked incredibly well; it picked a winner in Migicovsky, gave him the skills and mentorship he needed and a bit of money to get started. The only place it fell down was in getting anything in return. The missing ingredient was, and has been, venture capital. Migicovsky courted a few Canadian venture capital firms before giving up. “There aren’t many angel investors in Canada,” he told me. “I don’t know anyone who has raised money here.”

Meanwhile, our government’s efforts to turn the Toronto region into a start-up hub have instead turned us into a wonderful source of talent for the U.S. There are an estimated 350,000 Canadians working in the San Francisco Bay area, paying American taxes, starting American companies, creating American jobs. “Everyone has an iron ring here,” Migicovsky says, referring to the jewellery bestowed upon graduating engineers by Canadian universities.

I ask if any of this bothers him; if he wishes he could have launched Pebble back home. The issue is a non-starter. He’ll go wherever the seed money is. “My only goal is to make really cool things,” he explains. But does he feel he has a duty to give back to the Ontario tech scene that nurtured him? “I do,” he protests. “We just hired a bunch of guys from the University of Waterloo.”

“So you’re creating Canadian jobs?” I ask.

“No,” Migicovsky says. “They’re coming here, to California. I’m creating jobs for Canadians.”

  • David Harvey

    I’m really happy for Eric & Pebble, and I agree that Canada is lagging behind in crowdfunding initiatives because of outdated laws and a fragmented securities regulation regime.

    One quibble, though. While Pebble did raise over $10 million, it now has an obligation to produce and deliver tens of thousands of watches to its backers. It essentially pre-sold product, and it’s financial success will depend on whether it priced its product correctly. If it turns out that it costs them $12 million to develop, manufacture and deliver these pre-ordered watches, it won’t be a success. For their sake, I hope they priced it right. For this reason, I think it may be a little premature to say that Eric is a millionaire. The question is not what they raised, it’s what will be left after they deliver.

    This is the critical difference between most Kickstarter projects, and venture capital or other types of equity investing. Investors know they are buying into a risky venture. Most Kickstarter backers think they are buying a product. If a company fails to deliver, equity investors know that risk comes with the territory, but Kickstarter backers will feel ripped off, as though they paid for a product they didn’t get. So far, Kickstarter has been lucky. But the model is very fragile. Kickstarter has no way of policing projects. One or two high profile projects that raise a lot of money but fail to deliver could destroy Kickstarter’s reputation, turning it from an innovative source of seed capital to a place seen as a forum for fraud & rip-offs.

    Reputation on the Internet can change in an instant, and is very difficult to rebuild. I hope for Kickstarter’s sake, and for the sake of all the people and companies looking to it for a launch, that they can manage the failures and frauds, so as to preserve the positive role they can play in the startup economy.

 

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