by Christine Wong

Forgive me for stealing from Charles Dickens but it is the holiday season after all: was 2011 the best of times or the worst of times for startups?

Christine Wong

There were some incredible highs and lows for tech entrepreneurs this year.  

On the positive side, there were numerous Canadian startups (34 according to an informal count by Techvibes.com) that made successful exits through being acquired: Rypple, Radian6 (both by Salesforce.com), Flock, Five Mobile (both by Zynga), PostRank (by Google) and Back Type (by Twitter).  

One of those deals even involved a resurrection of sorts (okay, now I’m leaving the Christmas motif and veering into Easter territory) as Sprouter, just weeks after declaring it was shutting down due to lack of capital, was snapped up by Postmedia Network Inc.

 

On the financing front, it was a banner year for Canada’s green and clean-tech startups, which managed to round up a bigger slice of the VC pie than many IT startups. And heading into 2012 iNovia Capital, based in Montreal and Calgary, just announced it has raised $110 million for its third VC fund, which will invest in Internet, digital media and communications firms. 

The lows were illustrated by…well, some low numbers in startup financing. The first half of 2011 saw Canadian VC disbursements down just two per cent from the first six months of 2010. The dip in money raised by Canadian VCs, however, was dramatic, off 57 per cent from the same period a year earlier.  

Tech IPOs had a rough ride in 2011. Groupon, Zynga and LinkedIn all went public but have since seen their shares lose ground from their opening prices. Tech stocks that went public this year have lost 15 per cent of their value overall, according to Renaissance Capital data. Though some of that is due to a softening of the markets in general, the S&P 500 Index, by comparison, is down just 8 per cent since June.  

Some of the lows in the startup community were downright tragic. Last month Iliya Zhitomirskiy, co-founder of U.S.-based Facebook rival Diaspora, took his own life. He was just 22. His death sparked debate about whether the pressures of raising money, competing with Silicon Valley giants and ultimately failing to take his startup where he dreamed it could go – all under the scrutiny of the public eye – contributed to his suicide. 

Many noted that Zhitomirskiy killed himself less than a week after the Wall Street Journal ran a has-been piece asking “Whatever Happened to Diaspora the Facebook Killer?” Heady pressures for a 22-year-old to cope with, indeed.  

Zhitomirskiy’s death was a heartbreaking way to end the year.  

Still, I believe 2011 was more positive than negative for startups overall.  

Yes, Groupon and other tech IPOs had some hiccups. But do we really want to go back to the nutty days of the late-90s dot com bubble when kids fresh out of college raised millions of dollars by doodling ideas on a napkin, then crashed and burned when everyone realized, ‘Uh oh, there’s no revenue there’? I’ll take all of those once-bitten, twice shy investors keeping close tabs on the Groupons of the world before I’ll return to a climate where inflated startup dreams and dollars outstrip revenue and reality.  

And yes, the numbers show that it was a rocky year for Canadian startups trying to raise cash – at least on this side of the border. Yet Canada’s IT entrepreneurs aren’t giving up. They’re simply taking their pitches to Silicon Valley, New York and Boston, a crossborder financing trend that isn’t necessarily reflected in all the Canadian VC data collected. 

If you do look at that data, though, it’s also picking up: Q3 VC investments in Canada jumped to 51 per cent from the same quarter of 2010. Canadian VC funds also raised $365 million in Q3, a seven fold increase from the year earlier period.  

It’s tougher to get financing now than it was a decade ago and even the startups doing IPOs are getting a rougher ride than in the past.  

The thread running through these trends is caution. VCs are more cautious. The public markets are more cautious about buying into tech IPOs. So startups are looking to new avenues for capital, getting more creative in seeking that funding, and exiting through acquisitions more often than in past years. Hard times seem to breed creativity, resilience and resourcefulness when it comes to Canadian startups.  

So 2011 was a tough year for Canadian startups but a positive one in many ways. There was a lot more to celebrate than bemoan for those who looked beyond just the numbers.

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