Global mindset key to Waterloo Region startup success: Compass report

Go global, young startup founder.

That’s one of the top takeaways from a new report on the Waterloo Region startup ecosystem, released today by Compass, which recently ranked the region 25^th among the world’s startup communities.

As strengths go, relatively tiny Waterloo Region has startup density and tech talent to rival the world’s biggest and best-performing ecosystems, the 69-page report says. But if it hopes to crack the top 10, it needs to adopt a more aggressively global sales mindset, close a serious gap in seed-stage funding and nurture stronger ties with Toronto.

Dubbing Waterloo “the David vs. Goliath of startup ecosystems,” the report’s authors note that its 1,100 startups amid a population of just 500,000 give it the second-highest startup density in the world, behind California’s Silicon Valley and far ahead of Dublin, Austin, Tel Aviv and Vancouver.

The report also cites the University of Waterloo and its famed co-op programs for producing what many consider “the very best talent” in the world for tech companies, with UW second only to University of California at Berkeley, and ahead of Stanford, UCLA and Cornell, in the number of graduates hired in Silicon Valley.

“How can this region be so productive and effective at developing innovative technologies and startups?” the report asks, before going on to answer that its “top technical talent, deep sense of community, and the unmatched co-operation and co-ordination between stakeholders are the pillars of Waterloo’s success.”

At the centre of that co-ordinated approach is the Communitech Hub, which Compass cites as “rare among ecosystems.”

“Because Communitech is widely recognized as the one place to go for startups, everyone in the community can be accessed through the network,” the report says. “This effective model sets an example for other ecosystems around the world.”

At the same time, the region’s 25^th-place global ranking despite these strengths points to some serious challenges to overcome, the authors point out.

Chief among them is what Compass calls a “global market reach gap” among Waterloo Region startups, or a failure to capitalize on opportunities to sell into the U.S., despite its proximity.

The authors suggest Waterloo entrepreneurs aiming to scale quickly should focus their early customer development efforts on the United States market and build fully operational sales teams there, rather than sending Canadians south on sales trips, or even running U.S.-based sales teams remotely from Canada, as are the more common practices today.

“Canadian startups can learn from startups from Tel Aviv and other higher performing ecosystems by building their sales and marketing teams directly in the U.S. around experienced U.S. executives and employees bringing business culture, process knowledge and valuable relationships with and/or to customers and partners,” the authors write in a Compass blog post about Waterloo posted today. “This is an actionable recommendation that can be executed by startups themselves.”

This would help surmount another challenge facing Waterloo Region’s tech community – namely, slower revenue growth and a lack of significantly sized exits – a Canada-wide problem that dragged down the performance of all the country’s top startup ecosystems in the recent Compass rankings.

The lack of large exits, in turn, can be addressed by closing a gap in seed-stage and Series A investment, which Compass cites as another problem for Waterloo Region companies. That gap can be addressed through better incentives for angel investors, including tax credits and government matching funds for their investments, the report says.

“The key objective is not ‘more exits,’ which is related to more startups getting sufficiently funded, but startups with faster-growing revenues so more of them reach a higher valuation by the time it is time to exit,” the report says.

In its research of the world’s top startup ecosystems, Compass has found that sizable exits serve as crucial magnets for talent and capital. As top entrepreneurs flock to where they perceive the action to be, more successful companies are built and funded, leading to a virtuous cycle of ecosystem growth.

The report also calls for greater integration between Waterloo Region and Toronto, to give Waterloo entrepreneurs better access to customers as well as sales, marketing and business talent with growth-stage experience, and Toronto companies better access to Waterloo’s engineering talent.

Better and faster train service between the two cities would “create a shared pool of talent, as much for Toronto startups and tech companies to draw from Waterloo’s premier technical talent as for Waterloo’s startups to draw from Toronto’s experienced sales and marketing talent.”

Compass, based in San Francisco, conducts research focused on small and medium-sized businesses. Its 2015 Global Startup Ecosystem Ranking was published in July.

The complete, deep-dive report on the Waterloo Region ecosystem, including detailed statistics and recommendations, is available on the Compass website, along with a blog post about the region.