The Next Silicon Valley? Why Toronto Is a Contender

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Wharton's David Hsu and Avi Goldfarb from the University of Toronto discuss Toronto's positioning as a growing tech hub.

If there were a dark horse among technology hubs, Toronto is certainly the stallion among them. In the past five years, Canada’s most populous city has shown it has more to it than its commercial and cultural attractions, and the best view of Niagara Falls. It has quietly become the world’s fastest-growing destination for technology jobs, leveraging early investments in artificial intelligence (AI) and especially machine-learning technologies at its universities, government funding and other resources for innovation, and an immigration policy that is friendly to technology talent.

Toronto has of course been a beneficiary of the Canadian prime minister Justin Trudeau’s outreach to big companies, but subsidies haven’t been a significant tool, according to Avi Goldfarb, marketing professor and the chair in artificial intelligence and healthcare at the University of Toronto’s Rotman School of Management. “More than anything else, [the drivers are] an open immigration policy, friendliness to innovation, and the funding of the basic research decades ago that led to the breakthrough for using machine learning that everybody is talking about today,” he said. (Goldfarb made his comments during a segment on the Knowledge@Wharton show on SiriusXM. Listen to the podcast above.)

Welcome, Tech Workers

Canada’s immigration policy has been especially “generous to high-skilled workers,” said Goldfarb. “If a company wants to hire somebody who is skilled in tech, the immigration process is smooth and easy, or at least as easy as these processes get. If you make an offer, you can get somebody on the ground in your office potentially within a month, which is unbelievably fast.”

Media reports in the past year or so have feasted on how Toronto and other parts of Canada are attracting an impressive flow of technology jobs and investments: Accenture and Amazon plan to create 800 and 600 jobs, respectively, and Salesforce plans to invest $2 billion in the country over the next five years, to name a few.

Uber, Amazon, Accenture, Netflix, Google and Salesforce are among the tech companies setting up hubs or expanding operations in Toronto, earning for it the moniker of “Silicon Valley North.” Between 2012 and 2017, the city attracted 82,100 tech jobs, or a growth of nearly 52%, to reach a total of 241,400 jobs in that sector, according to a CBRE Group study of July 2018. Toronto was the fastest-growing market for technology jobs in 2017, when it added 28,900 jobs, outpacing San Francisco’s Bay Area, Seattle and Washington, D.C., the study noted. It also ranked fourth as a tech talent market after those three cities, scoring over New York City in 2017.

“If you make an offer, you can get somebody on the ground in your office potentially within a month, which is unbelievably fast.” –Avi Goldfarb

Canada is able to draw more tech workers also because of the Trump administration’s relatively tighter policies in that area. However, Canada’s tech talent-friendly immigration policies pre-date the Trump regime, Goldfarb clarified. Other factors that help Toronto’s growth as a tech hub include the availability of university talent, including at the engineering school at the University of Waterloo, which is also in the province of Ontario.

The Canadian government provides funding for both basic research and the education system, especially to offer to graduate degrees in machine learning, Goldfarb noted. U.S. based multinationals tap into that talent base by setting up local offices in Canada or, to a smaller extent, acquiring Canadian startups, he added.

Public Policy and Partnerships

Goldfarb said Toronto has also had “a fair bit of luck, or foresight” in that it happens to have been a hotbed for technologies that are currently in high demand. “A lot of the current tech excitement is around AI, focused on machine learning, and many of those technologies were developed in Canada generally and Toronto in particular,” he added. “That turned out to be a big deal.”

The Canadian government supports such technology development with numerous programs for R&D, innovation and commercialization of projects. One prominent program is its $1.26-billion Strategic Innovation Fund, which aims to support business investments in technology development, transfer and commercialization.

Partnerships between academia and business have blossomed as part of that ecosystem. One such notable venture is the so-called Creative Destruction Lab (CDL) at the University of Toronto, which helps science-based startups scale up. CDL has five academic partners, but welcomes startups from any university, including in the U.S. and in Europe. In the first five years after its launch in 2012, CDL supported 225 science-based startups, according to a press note. “It’s been something of a focal point for a lot of the science-based tech community to get angel investment, to get advice and scale,” Goldfarb said.

Room for Growth

Toronto certainly displays compelling potential with its mix of talent, technology and universities, but it could do with more help on financing, according to Wharton management professor David Hsu, who joined Goldfarb on the radio segment. “If you compare venture capital investments in Toronto vs. any other major [technology hub] around the world, it has lagged,” he said.

“Now is the time for Toronto to cement … those factors of attracting human capital, being friendly to entrepreneurship and an innovation ecosystem.” –David Hsu

Canadian venture capital investment grew 11% in 2017 with $3.5 billion invested over 592 deals compared to the $3.2 billion invested over 534 deals in 2016, according to a report by the Canadian Venture Capital and Private Equity Association (CVCA). At last count, in the first three quarters of 2018, VC firms had invested $2.4 billion in 483 deals. Although VC investments in the third quarter of 2018 fell 12% over the same quarter in 2017, the CVCA said it expects the full-year 2018 tally of VC investments in Canada to be similar to that of 2017. By contrast, U.S. venture capital deals totaled nearly $131 billion in 8,948 deals in 2018, according to data compiled by Pitchbook, a Seattle-based research firm covering the private equity and venture capital markets.

Canada’s evolution over the years as fount of technology and its successful commercialization is mirrored by the growth of its most high profile e-commerce retail company, Shopify. The Ottawa-based company’s shares were priced at $17 each in its initial public offering in 2015; its stock price has since grown to about $273 at last week’s close. However, Canada hasn’t produced a large number of so-called unicorns, and the few notables among them are based in Toronto, Vancouver, Ottawa and Montreal, Goldfarb said.

Three factors are driving Toronto’s growth as a tech hub, according to Shawn Malhotra, vice president of Thomson Reuters Toronto Technology Centre. They are its intellectual concentration, with the talent produced at its universities; its famed diversity, which he said in a blog post “enables multiple inputs, and helps to eliminate biases while fostering creativity and problem-solving:” and the “snowball effect” that established technology companies like [Google’s parent] Alphabet and Shopify create, he added.

Time to Consolidate Strengths

Toronto could borrow a leaf from the experience of the biotechnology industry in its nascent years in the 1970s, said Hsu. Back then, the biotechnology industry successfully used the concept of “co-locations” that allowed for a clustering of the development of science, technologies and startups, he explained. After the first 10-15 years of growing to a critical mass through such co-locations, the biotech industry spread out, he added. He wondered if the same experiment could work for Toronto with participants such as CDL and the academic talent in AI and machine learning. “R&D co-location, rather than geographic dispersion, is what renders the exploitation of external knowledge more effective in enhancing firm performance,” according to one recent research paper.

“The key challenge and opportunity is to see if we can leverage the talent here and the interest from multinationals and from relatively smaller scale angel investors to build some global tech companies in Toronto.” –Avi Goldfarb

“Now is the time for Toronto to cement … those factors of attracting human capital, being friendly to entrepreneurship and an innovation ecosystem,” Hsu suggested. Businesses could tap into the AI and machine-learning tools developed in Toronto, even if they are located elsewhere in the U.S. or globally. “Policymakers and companies in these tech hubs with emerging technologies like Toronto should think carefully about how to lock it in, because there are these tipping points and superstar cities on the path towards becoming the next Silicon Valley.”

Goldfarb acknowledged that Toronto is a long way from being the next Silicon Valley. “That doesn’t mean that we can’t be an important tech hub,” he said. He noted that tech jobs in Toronto have come from both startups and established companies – mostly from the U.S. – that are setting up research offices in the city. Big technology companies use their Canadian operations to conduct primary research, and “a small fraction” of their employees end up starting companies of their own, he said. “That leads to a positive feedback loop for the community.”

Goldfarb agreed with Hsu that select public policy interventions could catalyze the next growth phase for Toronto as a compelling tech hub. “The key challenge and opportunity is to see if we can leverage the talent here and the interest from multinationals and from relatively smaller scale angel investors to build some global tech companies in Toronto,” he said.

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