Small firms dominate Silicon Valley North

Small businesses dominate Toronto’s information and communications technology (ICT) cluster, often referred to as Silicon Valley North, according to a new report.

Only less than half of one per cent of the 11,500 ICT companies operating in the Toronto area employ more than 500 workers, according to Toronto: Canada’s High-Tech Hub. While 82.6 per cent of firms had less than nine employees, and another 12.5 per cent had between 10 and 50 seats.

There are a total of 40,000 ICT companies operating across Canada.

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The report is a collaboration between municipal and provincial government bodies, research firms including IDC Canada Corp. and KPMG. It was released Nov. 30 at IT World Canada’s Technicity event in Toronto.

Despite the staggering proportion of small companies driving a cluster that reported $52 billion in revenues in 2009, Toronto still needs the big players too, says Michael Williams, one of the report authors and a general manager at the City of Toronto.

“Big companies are the lifeblood of small companies,” he says. “Very few small companies sell directly to end users, so it’s the willingness of the big companies to take some risk with the small guys.”

Start-ups are ballooning the number of services firms in Canada’s largest city, adding about 2,000 new firms between 2002 and 2009. The number of manufacturing firms dipped slightly to 605 in 2009.

Software developers churning out mobile apps has been one particularly bright spot for Toronto, Williams says.

“I get a sense we may be the top mobile app centre in the world,” he says. “We’ve shown we can compete with the best here.”

There are many successful mobile start-ups, agrees Krista Napier, senior analyst with IDC Canada. Examples include Polar mobile, which sells 350 apps across three platforms and has about 350 customers. Endloop Systems Inc. has seen more than 100,000 sales of its iMockups app, used to construct quick preliminary designs of Web sites and mobile apps.

“Canadians are going digital,” Napier says. “They are gaming, they are downloading music and movies, and they’re using mobile applications.”

One challenge the start-up companies of Toronto’s burgeoning ICT cluster face is getting early stage investment. Most funding collected by start-ups comes at the expansion stage of growth, according to the study. In 2009, about $90 million was distributed at this stage while a total of about $14 million was given out at early stages.

“The more we can do to encourage small business to take the risk to innovate, the better off we’ll be,” Williams says. “We’re doing well and we should have pride, because pride begets pride, begets strength.”

It’s not fair to compare Canada to the U.S. in terms of funding opportunities, the author adds. There are areas of the U.S. that have just as much of a challenge in attracting venture capital. A more apt comparison may be Toronto to San Francisco.

Toronto bucks the trend of decreased venture capital investment across other Canadian cities since 2007. Still, it increased only a modest 8.3 per cent last year to about $103 million and that is down from a high of nearly $250 million in 2007.

But U.S. investors based in Boston and Silicon Valley are becoming more interested in bringing money to Canada, says Brendan Maher, partner and national industry leader at KPMG.

“Companies that build great technologies and have great management teams are always going to be attractive acquisitions,” he says.

The C100, a group of Silicon Valley venture capitalists, contain some Canadian members that are now coming back north to share their ideas, Maher adds. Members of this group would prove to be good contacts for new start-ups, as they represent members of a new category known as “super angels” – wealthy investors willing to take risk with those early stage investments.

Toronto software firms have closed the most funding deals over the last five years, according to the report. A total of 62 deals have been made since 2005, with Internet-focused companies the second-best deal closers with 36.

Brian Jackson is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and check out the IT Business Facebook Page.

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