Jesse Brown: Why local tech wizards are taking their big brains and bright ideas elsewhere

Jesse Brown: Why local tech wizards are taking their big brains and bright ideas elsewhere

When a University of Waterloo grad used crowdfunding to raise $10 million for his smart watch company, the tech industry took notice. Is this the future of venture capitalism?

On the day I speak to Eric Migicovsky, he has been a millionaire for less than two months. The 26-year-old is the inventor of the Pebble, a clever watch that wirelessly syncs with your smart phone, pushing emails and texts to your wrist and controlling things like music so you needn’t pull out your phone while jogging or biking. When he couldn’t interest venture capitalists in Pebble, Migicovsky asked the Internet. He crowdfunded the project on Kickstarter, a site that lets creators gather seed money from the masses. “The night before we launched,” he remembers, “I was thinking how cool it would be to hit our $100,000 mark.” Pebble blew past that target in a few hours. When the campaign ended five weeks later, Migicovsky had made Kickstarter history, raising a record $10,266,845 from
68,929 backers.

His story has already become part of start-up lore. Got a great idea? No need to go hat in hand to banks or venture capitalists. Just do what Migicovsky did and pitch it online. More than any other project, Pebble has introduced the concept of crowd­funding to the public, and nowhere has the news been covered more enthusiastically than in Canada. That’s because Migicovsky is Canadian, raised in Vancouver and educated at the University of Waterloo. But he doesn’t live here anymore. He and his company have moved to Silicon Valley. They had to, or Pebble might never have happened.

Toronto is lagging behind the world in crowdfunding. Technically, Canadian companies don’t even qualify for Kickstarter; aspiring fund raisers need American bank accounts or credit cards. When Migicovsky was giving advice to Toronto entrepreneurs at a recent event at the Centre for Social Innovation, he told them that to repeat his success they’d need to close down their Canadian companies and incorporate in the U.S., transferring all assets. There are a handful of Kickstarter clones that work in Canada, sites like Indiegogo and RocketHub, but they are far less popular, which can defeat their purpose. And while we struggle to catch up, American crowdfunding is about to leap forward.

Crowdfunding is set to shift from Kickstarter’s donation-based model to a new approach where backers actually buy little pieces of the companies they fund. In the donation model, backers pick their favourite project and use their credit cards to kick in amounts as low as $5. Many give philanthropically—they believe in a project and want to see it realized. But most projects offer rewards. Pebble succeeded not because its backers felt benevolent, but because they wanted a Pebble; 97 per cent of the donors gave enough money to qualify for a watch. They essentially bought the gadget before it existed, proving crowdfunding’s effectiveness not only in seeding projects, but also in showing that they have a
viable market.

Barack Obama has a reason to like crowdfunding. His historic 2008 campaign raised over $100 million this way, much of it in small donations of less than $200. This past spring, he signed into law the Jumpstart Our Business Start-ups Act, or JOBS. Once it’s enacted, any American will be able to invest a small percentage of their income or net worth into private companies seeking a maximum of $1 million in funding. The stakes may seem low, but the potential is enormous. After all, Google was initially funded with an investment of $200,000. JOBS is expected to release billions of new dollars in capital for start-ups of all kinds, funding an explosion of new ventures and creating untold sums of new wealth. It could be the biggest boon to entrepreneurship since the business loan, and it will be a reality in the U.S. by the first day of 2013.

Migicovsky prefers the donation-based model, and why wouldn’t he? He succeeded wildly with it, surrendered no equity and now owns a company worth more than $10 million. Watches, like books, video games and movies, are perfect products to reward small donors with. But what if your company wants to make apps—a potentially lucrative enterprise that produces no physical object to offer donors? For Toronto start-ups, equity crowdfunding would be a godsend. But it’s not coming here any time soon.

There is no Canadian equivalent of the JOBS Act. The idea is floating around Ottawa, but the buck keeps getting passed to the provinces, each of which regulates the exchange of securities independently. Here in Ontario, only “accredited investors” can buy a piece of a private company, meaning you need to earn at least $200,000 a year or have a net worth of at least $1 million (excluding the value of your house) to qualify. The idea is that only the wealthy should be able to gamble on companies that aren’t subject to the same regulatory scrutiny as publicly traded concerns. Only about three per cent of Canadians qualify to invest this way. The rest of us can invest only in publicly traded stocks or in businesses started by friends or family. In other words, in Ontario, it’s okay to risk $100,000 on your cousin’s scheme for a vegan gastropub, but you’re not allowed to sink $100 into an incredible idea you found on the Internet. Or, to look at it from an entrepreneur’s point of view, it’s perfectly all right to gamble with large sums of your family’s money but forbidden to spread the risk among thousands of people who are investing because they love your idea, not because they feel obligated.

Migicovsky’s departure should raise some eyebrows. It’s not like he fell through the cracks of our tech industry or his talent went unrecognized here. He graduated from the best engineering program in the country, started his company through its VeloCity incubator program and got early funding from the Ontario Centres of Excellence and the Canadian Youth Business Foundation, organizations with a mission to identify and seed promising new initiatives. All of this local infrastructure exists to stimulate a regional tech industry. In retrospect, the system worked incredibly well; it picked a winner in Migicovsky, gave him the skills and mentorship he needed and a bit of money to get started. The only place it fell down was in getting anything in return. The missing ingredient was, and has been, venture capital. Migicovsky courted a few Canadian venture capital firms before giving up. “There aren’t many angel investors in Canada,” he told me. “I don’t know anyone who has raised money here.”

Meanwhile, our government’s efforts to turn the Toronto region into a start-up hub have instead turned us into a wonderful source of talent for the U.S. There are an estimated 350,000 Canadians working in the San Francisco Bay area, paying American taxes, starting American companies, creating American jobs. “Everyone has an iron ring here,” Migicovsky says, referring to the jewellery bestowed upon graduating engineers by Canadian universities.

I ask if any of this bothers him; if he wishes he could have launched Pebble back home. The issue is a non-starter. He’ll go wherever the seed money is. “My only goal is to make really cool things,” he explains. But does he feel he has a duty to give back to the Ontario tech scene that nurtured him? “I do,” he protests. “We just hired a bunch of guys from the University of Waterloo.”

“So you’re creating Canadian jobs?” I ask.

“No,” Migicovsky says. “They’re coming here, to California. I’m creating jobs for Canadians.”