Rise of the Maple Syrup Mafia; Can a successful exit by one Canadian tech firm jump-start innovation north of the border, a la Silicon Valley’s PayPal Mafia?

Rise of the Maple Syrup Mafia

April 24, 2013: 7:18 AM ET

Can a successful exit by one Canadian tech firm jump-start innovation north of the border, a la Silicon Valley’s PayPal Mafia?

By Ryan Holmes

FORTUNE — In 2002, PayPal, the online payments giant, was sold to eBay for a cool $1.5 billion. Overnight, many of PayPal’s core employees got very rich. Rather than calling it a day, however, theso-called PayPal mafia went on to found and invest in a wave of new startups. You may have heard of some: Facebook, LinkedIn, YouTube, Yelp, Zynga, and Kiva … to name just a few. From one buyout, an entire ecosystem of wildly successful tech companies was spawned. In fact, over the last decade, the PayPal mafia’s track record has been nothing short of extraordinary, with one promising startup after another propelled to billion-dollar status and well beyond.

So what’s their secret? Was there something in the water? Did PayPal (EBAY) co-founders Peter Thiel and Max Levchin teach employees some Jedi entrepreneurial magic? Maybe. (Thiel doesbelieve humans can live forever.) But the likeliest explanation is a bit more mundane: The PayPal buyout gave some very young, very ambitious people the confidence to try for another big win and an experienced network to fund them. If that’s all there is to it, then I’ve got a question. Why does Silicon Valley get to have a monopoly on innovation? Why aren’t new tech mafias springing up elsewhere? The Internet radically decentralized information and ideas. So why is startup success still confined mainly to one corner of California?The question isn’t just academic. I’m CEO of a growing social media company headquartered not in the Bay Area but 1,000 miles north in Vancouver, Canada. The city has a solid cluster of new and legacy tech companies, from Electronic Arts (EA) to mobile game developers. We’ve got tech entrepreneurs. We’ve got tech incubators. We’ve got world-class universities.

So what’s standing in the way of a brand new tech mob — a Maple Syrup Mafia — taking hold right in my backyard and turning Vancouver into the next global tech hub? Well, to be honest, there are a few hurdles.

The temptation to sell out

Money comes to mind first. Right now, cities all over the world are home to startups with billion-dollar potential. But it’s the nature of the tech industry today that promising companies are spotted fast and bought cheap by the Googles (GOOG) and Microsofts (MSFT) of the world. Having been a struggling entrepreneur for most of my life, I understand the allure of selling out. You’ve got a good idea but limited revenue and often significant debt and — suddenly — someone shows up with a few million dollars. 

But maybe it’s time we took Sean Parker’s lines from The Social Network to heart. A million dollars isn’t cool anymore. A billion dollars is cool. It’s critical that tech entrepreneurs grow their companies, develop steady revenue streams, and only then think about an exit. It seems worthy to note here that a young, Vancouver-based Flickr — one of the Internet’s first real photo-sharing sites — was sold to Yahoo (YHOO) for a paltry $35 million in 2005. That $35 million figure may not sound paltry. But a similarly promising photo-sharing site called Instagram sold to Facebook (FB) for $1 billion last year. And it’s only when we start talking about 10-digit exits that the prospect of creating a true PayPal-style mafia becomes a reality.

Which is why I plan to hold out. Four years ago, I developed a tool that lets you access different social media accounts–Twitter, Facebook, LinkedIn (LNKD), etc. — from one interface. Simple concept. But it took off. Today, HootSuite has over 300 employees and 6 million users, and it’s used by three-quarters of Fortune 100 companies. We’ve had tempting offers, not to mention requests to move to San Francisco, and we’ve turned them all down.

We’re committed to growing an amazing, billion-dollar-plus company in Vancouver. In fact, the dollar value isn’t as important as the legacy of the company and the culture of homegrown innovation it inspires. When (and if) a liquidation event happens, the HootSuite team will be left with financial resources, network, and a lot of expertise — key ingredients for a Maple Syrup Mafia.

The education crisis

But it’s not quite that easy. The PayPal mafia thrived not only because it was well funded but because it had ready access to tech talent. This is where lots of global cities — Vancouver included — come up short. The reality is that we’re contending with a major shortage of developers, engineers, and programmers. Universities are simply not turning out enough grads with the requisite tech skills. (If this seems absurd in a climate of global recession and mass unemployment, it should.)

And the magnetic allure of Silicon Valley means that people with qualifications are migrating en masse to the Bay Area. An estimated 350,000 Canadians alone currently live and work in the Valley — an entire lost generation. It’s no exaggeration to say that much of the world is in the midst of a global brain-drain of engineering talent.

Case in point: Next month, Facebook is scheduled to open a temporary satellite office in Vancouver, whose express purpose is to attract and groom software engineers for an ultimate move to company headquarters in California. The lifespan of the project is one year: roughly the amount of time needed for Canadians to get a permit for full-time work in the U.S.

For a Maple Syrup Mafia to flourish, universities here need to counter this loss of talent by exponentially increasing the number of tech grads — and fast. Consider this an open challenge to the ivory tower. In a few years’ time, Vancouver will be flush with tech capital, and some smart people will be gunning to build the next Facebooks and Instagrams. Will entrepreneurs have to import talent from elsewhere or — worse still — be forced to pack up for San Francisco because they can’t fill jobs? The answer depends on how effectively the educational system is able to funnel students into engineering programs now and send the message that the jobs of tomorrow are in tech.

Rise of the Maple Syrup Mafia

But enough of the doom and gloom. It’s important to note that a Maple Syrup Mafia — and other tech families like it — would have a few key advantages over the vaunted PayPal mafia. It’s not exactly a secret anymore that Silicon Valley is the place to be if you want to ride tech’s next gravy train. As a result, promising startups are swamped with offers from venture capitalists and angel investors, which drives up the price of investing dramatically. Bargains aren’t likely to be found, and busts are as common as booms. Meanwhile, competition for engineering talent is fierce. Add to that an extremely high cost of living, and you’ve got a climate that’s not entirely conducive to business investment and growth.

That’s where the rest of the world has an edge. While Silicon Valley may enjoy a formidable concentration of capital and talent, it hardly has a monopoly on ambitious ideas and capable entrepreneurs. Investors willing to bet on opportunities outside the Valley will discover it’s far easier to get in on the ground floor. Margins are considerably higher. There’s far less hype and spin to wade through, making it easier to identify real gems. Plus, local governments can be very helpful with tax breaks and other subsidies for companies committed to high-tech jobs.

And let’s not forget about lifestyle. With all respect to Palo Alto, life in a semi-arid industrial park isn’t for everyone (even if you can get some really good tacos). I have a feeling that my hometown — which just so happens to be one of the world’s most liveable cities, chock full of mountains, ocean, progressive politics, and some exceptional street food of its own — might make an attractive alternative.

There’s room for more than one family in the tech mob. PayPal’s kingpins may rule Silicon Valley. But the Maple Syrup Mafia — and others like it — are gathering steam elsewhere. Will the years ahead bring a sweeter brand of Canada-based innovation to the tech world? I hope so. Our team is banking on it.

Ryan Holmes is the CEO of HootSuite, a social media management system with five million users, including 79 of the Fortune 100 companies. In the trenches everyday with Facebook, Twitter, and the world’s largest social networks, Holmes has a unique view on the intersection of social media and big business.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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