BlackBerry's meltdown sparks start-up boom in Canada's Silicon Valley

The troubles at BlackBerry Ltd, which fired more than half its staff and lost more than 90 percent of its market value as consumers shunned its smart phones, might have spelled disaster for the company's hometown of Waterloo, Ontario. Instead, there are hot sports cars in the streets and new companies filling the refurbished office buildings.

More than 450 start-ups opened for business in the twin cities of Waterloo and Kitchener last year, more than four times the number begun in 2009, according to Communitech, a local company that advises them. Often, the new companies are being founded by former BlackBerry employees chasing their entrepreneurial ambitions in a community that's Canada's answer to technology hubs in California and elsewhere.

"For those who are trying to get a new tech business off the ground, get it funded, and not get lost in the shadow of Silicon Valley, Waterloo can be the best place to get your company on the map," said Sean McCabe, vice-president of engineering at drone manufacturer Aeryon Labs Inc in Waterloo.

Take Adam Belsher, 39, who left BlackBerry in 2011 after 13 years at the company because he wanted to run his own business and felt the impact he was having at BlackBerry, which was formerly known as Research in Motion (RIM), was eroding as the company got bigger.

Today, Belsher is chief executive of Waterloo-based Magnet Forensics, a company that makes software used by police to recover deleted information from computers such as e-mails, financial records and photographs.

"I saw RIM go through so many stages of growth and I take lessons from every one of those experiences," said Belsher, who managed BlackBerry's business with the biggest U.S. wireless carrier, Verizon. "There are very few companies that disrupt a mature market like wireless and create an entirely new multi-billion dollar category, so I believe I have more than a few good nuggets that I can apply to Magnet."

Belsher is one of many former BlackBerry employees who chose to stay in Kitchener-Waterloo, rather than move to the Canadian financial hub of Toronto, or to California's Silicon Valley.

BlackBerry became Canada's most valuable company in 2007, just before Apple Inc released the first version of its iPhone. At its peak in 2008, the company was valued at more than $80 billion, compared with about $4 billion now.

"BlackBerry actually made many, many millionaires who still live locally, who started investing in tech companies," said Michael Litt, CEO of video analytics start-up Vidyard, based in Kitchener.

This, in turn, has attracted venture capitalists.

"I have seen ... investors in town, private jets landing at Waterloo regional airport straight from Menlo Park and Silicon Valley," said Litt, whose company has said it could float its shares within two years. "It has changed so fast."

The region's turnaround story is similar to that of Oulu in Finland, where Nokia Oyj more than halved its workforce of 5,000. The city is slowly finding its feet again.

Oulu is now a leading candidate to host a data center for Microsoft, which is taking over Nokia's phone business. Former employees have also become entrepreneurs, doing especially well in the mobile gaming market.

RISING INVESTMENT

In the year ended April 30, 2013, more than C$214 million ($235 million) was invested in start-ups in the Kitchener-Waterloo area. Three years earlier, the figure was just $500,000, according to Communitech.

These investments include an $80 million infusion into Desire2Learn, which is developing online learning systems, and $14.5 million for Thalmic Labs, the maker of the Myo arm band that allows people to control electronic devices through arm motions and gestures.

"When BlackBerry was letting off thousands of people, there was a big concern in Waterloo that it would create an exodus of people," said John Ruffolo, chief executive of OMERS Ventures.

OMERS Ventures, the venture capital arm of Canadian pension fund Ontario Municipal Employees Retirement System, along with U.S. venture capital firm New Enterprise Associates, made the $80 million investment in Desire2Learn in 2012 (http://r.reuters.com/vaw96v).

OMERS Ventures has also invested in other businesses including HootSuite, Shopify, Visioncritical and BuildDirect, all of which are targets for IPOS in the next two years, Ruffolo said.

It became more confident about investing in Desire2Learn after the start-up hired Dennis Kavelman, a former chief operating officer of RIM, Ruffolo added. "Many great talented people left to join a variety of other start ups and brought a nice stimulus of experience to some of these fledgling start-ups that has caused them to mature at a much faster rate," he said.

Spark Capital, an early investor in Twitter Inc, and Bridgescale Partners, which invested in Shutterfly Inc, are also putting money into the region.

Spark Capital bought into Thalmic Labs and mobile messaging company KIK, while Bridgescale has invested in Rypple, a company later acquired by Salesforce.com that makes software to allow workers and managers to register feedback about each other's performances. (http://r.reuters.com/xaw96v)

The Canadian government has also backed a C$200 million ($183 million)-plus fund to indirectly invest in and support early and mid-stage start-ups.

Relatively cheaper housing has helped persuade ex-BlackBerry employees to stay. In February, the average price of a house in the Kitchener-Waterloo region was C$335,000 ($305,700), compared with a median price of $669,000 for a home in San Jose, California.

High-rise condominiums have sprung up, along with new hangouts, bars and boutique stores, revitalizing the downtown areas and adding excitement to the street scene, said Communitech CEO Iain Klugman.

"We are seeing more Lamborghinis, Ferraris and Porsches on the roads," he said.

Unemployment in the Waterloo region fell to 6.5 percent in 2013 from 8.3 percent in 2010, and is also lower than the Canadian average of 7.0 percent.

Demand for commercial real estate, some of which has been sold off by BlackBerry, has also risen.

The average rent in Waterloo rose 10 percent to $12.42 per square foot in 2012, according to real estate services company CBRE. As more commercial space has been built to meet growing demand, the rate of increase slowed to 4 percent in 2013 and is expected to flatten out soon.

Vidyard's Litt knows first-hand how tough the real-estate market has gotten for start-ups. His company leased about 10,000 square feet of the approximately 1 million square feet available for start-ups in downtown Kitchener at the beginning of 2013.

"We took that with the assumption that, when we need more space, it would be easy to find," he said. "When we spoke to our landlord later, there was nothing available anymore."

Kitchener, historically the blue-collar twin to the university city of Waterloo, is today home to chic offices such as the Communitech building - a converted brick structure in the historic Tannery District, adorned with modern art, which acts as an unofficial clubhouse for many small tech companies.

"These downtown properties were able to provide an urban lifestyle that many of these technology companies' employees are looking for," said CBRE executive Peter Whatmore.

ENGINEERING TALENT

Start-ups can also draw on engineering talent from the University of Waterloo, which has the world's largest internship program of its type, requiring students to complete four to six internships as part of a four-year degree course.

The university has long been the feeder school for many technology companies, including Google, Cisco and Microsoft. It was once BlackBerry's stomping ground come recruitment season, and has spawned companies such as OpenText that have tasted success in the U.S. and overseas.

Larry Smith, an adjunct associate professor of economics at the university, said BlackBerry's success had overshadowed other companies and its reversal is now making them stand out.

While BlackBerry's decline released a lot of talent into the local labor market, the region also has the infrastructure that makes it easy for companies to set up shop, he said.

The BlackBerry connection is also a form of assurance when backing the area's start-ups. Executives who were part of BlackBerry's success have experience of "scaling up" a business - a valuable asset for a start-up aiming to break into the big league.

BlackBerry's decline has also made it easier for start-ups to hire and retain talent.

"It used to be hard for start-ups to get good talent because RIM was hiring," said David Yach, former chief technology officer for BlackBerry's software business.

Like Belsher, Yach spent 13 years with the company. He left in March 2012 and co-founded Auvik Networks, an enterprise-networking start-up.

"(BlackBerry) was effectively taking up all the oxygen in terms of talent," he said. "Now a lot of new people are finding a home in the start-up community." ($1 = 1.0976 Canadian Dollars)

(Writing by Sayantani Ghosh; Editing by Robin Paxton and John Pickering)