Are Canada’s tax incentives causing startups more harm than good?

Still not sure if it’s a safety harness, a leach or a noose.
- Montreal-based entrepreneur

The person above, who didn’t want to be named, is referring to one of the government programs that fund R&D activity in Canada. Programs with alphabet soup names like SR&ED and IRAP can repay up to 85% of your developers’ salaries. (Yes, 85%)

Fred Lalonde, an experienced entrepreneur and founder of Hopper Travel, recently said these programs are the devil. And I think he was being nice. Here’s why:

  • These programs create bureaucracy. The government hires technical “experts” to audit companies and decide whether the work they’ve done is innovative enough. To navigate through their requirements and make sure you use the right buzzwords, startups hire consultants (some of them previously employed as the aforementioned government auditors) to prepare their claims. All of this costs money.
  • They’re a distraction. None of the people above add any value to your business. Every minute you spend dealing with them is a minute you could be spending learning about your customers/users, getting to product/market fit or gaining market traction.
  • They create incentives to misalign resources. This is dangerous because it’s insidious. When you’re getting back 85% of your engineering salaries, it’s easy to just throw more engineers at your problems. As a result, Canadian startups have world class engineering teams, but often fall short on the product and user experience side.

I’ve spoken to a several Canadian startup entrepreneurs in the past few weeks about these programs and there is clearly a lot of frustration regarding them. Yet at the same time, there is a reluctancy to discuss the issue publicly for fear of biting the hand that feeds them giving the already limited pool of capital available to early stage startups here.

I’ve come to the conclusion that these programs do more harm than good, and it’s time we have an honest conversation about getting rid of them.

But wait, you say, how will our tech industry continue to exist? You can argue it’s time to just drop the crutches and learn to walk. After all, these programs don’t exist in Silicon Valley, yet they seem to be doing just fine.

Or, the government can take that capital and redeploy it in other ways, such as:

  • Investing in venture capital. You don’t want the government investing directly in startups, but they can act as a catalyst by acting as a limited partner in funds managed by people with operational experience. This model has worked in Israel, and Quebec has taken some big steps in this direction recently with the creation of the Teralys Capital fund of funds as well as investing in Real Ventures.
  • Invest in infrastructure that creates conditions for innovation and risk-taking, from universities to places like Notman House in Montreal or MaRS in Toronto.
  • Creating startup friendly tax policies. We give tax holidays to foreign “specialists”; why not do the same for entrepreneurs, or early employees who decide to take the risk on a startup, or angels who invest in them?

What has your experience been with these R&D programs? Should we keep them or replace them, and if so, with what? Let’s get a discussion going in the comments below.

Customer acquisition, Entrepreneurship

Traffic hacks: Growing your user base at someone else’s expense

Most startup entrepreneurs are obsessed – rightly so – with figuring out the magic formula to get their product to go viral. But few are able to launch a product which goes viral completely on its own. Very often, successful products early on have gotten a boost by latching onto another company with more users, money or both. Here are some examples:

Hitching a ride

  • Despite still not being a monetization success, Youtube has been very successful at optimizing for retention and virality. But when Youtube first launched, their founders had to literally beg people to post videos. Is was not until Youtube enabled embedding and users started posting their Youtube videos on Myspace that the service really took off.
  • Location-based games Foursquare and Gowalla are seeing viral growth due in large part to very tight integration with their users’ Facebook and Twitter streams.
  • Without a doubt the most successful company built entirely on top of another social network is Zynga, through their brilliant (but often annoying) deep integration of Farmville and other games with Facebook in a way which enabled them to grow faster than if they had to build their own social graph from scratch.
  • Before Google was what it is today, they powered search on Yahoo!
  • BillShrink scored a marketing coup last year by convincing T-Mobile to plug the site’s cell plan picker because T-Mobile objectively came out on top most of the time. What are the chances the startup would have otherwise afforded a national ad campaign featuring Catherine Zeta-Jones? (See the video at the top of this post.)

There’s nothing wrong with being a plug-in to someone else who can increase your distribution early on. But pinning everything on one partner is a recipe for certain death, which is why all the companies above used their opportunities as a springboard – they embraced, extended and then evolved.

Case in point: When Facebook limited Zynga’s ability to talk to their users directly, and wanted them to migrate to Facebook Credits as a payment platform, they promptly decided to create their own game network. (And it didn’t take long for rumors to circulate about Google investing $100 million into Zynga and planning the launch of Google Games.)

What are some of your favorite traffic hacks? Share them in the comments below.

Special thanks to Peter Pham for previewing and providing feedback on this post.

blogworld, Conferences, Entrepreneurship

Blogworld Expo 2008 Best of the Tradeshow Floor

I’m writing this from Blogworld and New Media Expo in Las Vegas, where I was on a Reblogworld panel yesterday talking about SmartHippo.

As i write this, the tradeshow floor here at Blogworld has been open for a little over an hour. I’ve made the rounds of the various booths and come up with my best picks:

Most innovative: Zemanta

zemanta_logo.gif Zemanta is a very cool tool for blog authors. As you’re writing a blog post, it analyzes the context to automatically suggest relevant images (creative commons-licensed), tags, external links and even related blog posts, all of which can be included in your post at the click of a mouse.


Zumata has the potential to help bloggers save time, write better and more interesting posts, and gain traffic. They are not monetizing it at the moment, but I can easily see them selling sponsored content recommendations tailored to the content of a blog post.

Most promising: Crowd Science

cs-logo.gifCrowd Science is a hosted audience measurement service. If you have a web site you want to sell ads on, you’ll want to provide your advertisers with demographic and psychographic information on your visitors. Most audience measurement services rely on observing the behaviors of a panel of web surfers, but many sites do not have enough traffic volume for such a panel to be effective.


Crowd Science’s approach is to host inline surveys embedded within the web site being measured. The surveys all contain a base set of common demographic questions, which site owners can enhance with questions specific to their vertical. The surveys are only delivered to a sample of overall traffic, and once enough data has come in, site owners can use it to create a media kit with data validated by a third party.


Most interactive: Toss up between b5media and Southwest Airlines

b5media-logo.pngThere’s a poker game going on at the b5media booth. You get get free chips by wearing b5media schwag, yelling out “I love b5media,” or the like. When in Rome do as the Romans do. And when in Vegas, well… here’s a crappy cell-phone photo of that poker game:



It’s great to see a big company that gets social media, and it doesn’t surprise me one bit that Southwest Airlines falls into this category. Southwest is holding a “blogospondent” where participants film and post videos about Southwest. They flew the top three contestants to Vegas for Blogworld, and they now have until tomorrow to produce a video. Oh, and they handed out roasted peanuts in the a

Are you at Blogworld and do you agree or disagree with this list? What are your favorite picks from Blogworld? Leave a comment below.

Entrepreneurship, Travel

Video interview with Stuart MacDonald of Tripharbour.com – Founders and Funders part 2 of 3

This is the second installment in a series of video recaps of the second Founders and Funders event in Toronto. In part one, we talked with one of the organizers. In this second installment, we talk to one of the entrepreneurs who was at the event.

Tripharbor.com logoStuart MacDonald is the founder of Tripharbor.com (Tripharbour.ca for Canadians), a recently launched vertical search engine for cruise ship vacations. Besides just letting you compare details and prices, Tripharbour also features some cool community features that let you read trip and destination reviews and make friends with others who have similar interests.

Stuart knows the online travel industry well, having previously served as SVP Packages and Chief Marketing Officer for travel behemoth Expedia. Cruise vacations is a $24 billion industry in North America, and he’s aiming for a piece of the action.


Founders and Funders Toronto video recap (Part 1 of 3)

Founders and Funders logoThe second Toronto edition of Founders and Funders event took place last week, on June 4th. The event is organized by David Crow and Jevon McDonald.

Rather than write up a big long report, I decided to continue my experiments with video by bringing a camera along to give people who did not have the chance to attend a bit of a feel what what the event if like.

In today’s interview, David Crow introduces the idea behind Founders and Funders.

Stay tuned: This Friday I’ll be posting part two of the series, where we get to hear from one of the entrepreneurs who was at the event.

Blogroll, Entrepreneurship, Microsoft

Microsoft Acquires Technology and Team from Montreal-based Credentica

Credentica logoMicrosoft this morning announced that it has acquired the technology and patents of Credentica, a Montreal-based provider of identity management solutions. The team, led by Stefan Brands, will join Microsoft’s Identity and Access Group.

(More blog coverage from Microsofties Kim Cameron and Adam Shostack, and on Stefan Brands‘ own blog)

Brands is the inventor of private credentials technology which allows a user to prove something about their identity without disclosing more information than is absolutely necessary. For example, a voter can prove unequivocally that they have the right to vote in the state of California, without having to disclose their name or other personal information. As more and more of our lives moves online, privacy is increasingly becoming an issue that cannot be ignored. Most solutions require that you trust a third party (such as your bank, government, or Google), while Brands’ approach uses advanced cryptographic techniques that do not re.

The technology has previously found temporary homes at now defunct DigiCash and then Zero-Knowledge Systems, neither of which were able to succeed in commercializing the patents. But our plan is to integrateMicrosoft says it plans to integrate Credentica’s U-Prove technology into both the Windows Communication Foundation (WCF) and CardSpace.

I’ve known Stefan personally for nearly a decade now, and wish him the best of luck in this new chapter of his professional life.

Update: I’ll be writing a follow up post with an interview from Stefan focusing more on the personal side of his journey as an entrepreneur. Watch my blog for more.

Banking, Blogroll, Entrepreneurship

Regulators force Canadian P2P lender IOU Central to suspend activity

Over the past five or so years, the Internet has radically changed the way most industries (from content, to music, to travel) function. Central to this wave of change is a shift of power from large institutions to consumers. The financial industry is one of the last bastions where old-school business models still reign supreme.

But that’s changing.

Sites like SmartHippo empower consumers with tools and the information on the best available rates that they previously did not have access to. Peer to peer (P2P) lending sites such as Prosper and Lending Club empower consumers to bypass banks and lend directly to each other, with the promise of better rates on both sides of the equation. Where technology now provides a scalable way for consumers to exchange information and capital between themselves, the middlemen of the past are no longer as relevant.

Needless to say I’m a but fan of P2P lenders so I was quick to sign up with IOU Central was the first Canadian company to launch in the space. (I tried signing up with Prosper, but the site is restricted to US residents with a Social Security Number.) Lo and behold I logged into IOU Central today to start using the site only to be greeted by the message that “IOU Central is now operating with limited functionality.” Translation: No new loans on IOU Central, at least for now. Startup North was the first to report on this here.

I just spoke with Phil Marleau, their President and CEO, and he told me the action was taken at the request of the Autorité des marchés financiers, Quebec’s securities regulator. The agency is infamous for its impotence in front of real issues that should be under its control, such as its abysmal failure to help the 1,600 investors who lost $130 million in the Mount Real scam back in 2005.

He told me the AMF paid a visit to IOU Central yesterday and asked them to halt operations. It turns out that individuals using the site to lend money are making an investment, so IOU could be construed as selling securities.

“The important thing is that we’re working with the regulators and want to comply,” Marleau said.

According to Marleau, IOU Central had received legal advice stating they did not have to be regulated. This was based on the fact that their model was closely based on the way Prosper and Lending Club operate in the U.S., as well as Zopa in the UK. Based on this legal advice, IOU Central did not bother to even brief regulators on what they were doing.

Canada’s other P2P lender, CommunityLend, hit the scene with a lot of noise when they announced in December they had raised $2.5 million in financing. However, they have yet to have launched, citing the needs to properly address regulatory compliance issues first.

When IOU Central launched earlier this month, it looked like they had come out of nowhere and one-upped CommunityLend. CommunityLend must be gloating now.

“Our approach has been to build a viable and sustainable company, that will appeal to Canadians, and their desire for security with anything financial,” Colin Henderson, CommunityLend’s CTO told me via email. “There are no shortcuts with peoples money, and we have been working hard with the regulators for over 8 months, on over 40 Licences to ensure we can satisfy the needs of Canadians, by the time we launch.”

Marleau, to his credit, at least put on positive spin on the events: “When we’re back up, it’s going to be a better model. Because we’ll be regulated and that adds credibility and confidence.”

Here’s hoping it happens quickly. Canada’s financial system, an oligopoly if I’ve ever seen one, badly needs some shaking up.

Blogroll, Conferences, Entrepreneurship, SmartHippo, Web 2.0

Montreal Tech Events for January

January’s a busy month for Montreal techno-geeks. Here are some of the events going on:

Speaking of web building, here’s a video about just that subject:

Blogroll, Entrepreneurship, SEM, Web 2.0

Starting up in 2008 — Do You Really Need External Funding?

There’s a debate brewing on the state of startup funding in Canada.

This got me wondering how many startup entrepreneurs think their bottleneck is a lack of financing when in actuality it’s not (or doesn’t have to be). I was reminded of this Business 2.0 article from 2005 in which entrepreneur Joe Kraus compared the costs involved in launching Excite in 1995 with what it cost to launch Jotspot exactly a decade later.

It took $3 million to take Excite from concept to launch, versus $100k for Jotspot exactly one decade later. I thought it would be interesting to extract some of his comments and see what has changed just three years later:

1. Hardware has become insanely cheap. As Kraus recalls, Excite ran on Sun servers that cost as much as $60,000 a pop. “Today JotSpot runs on commodity hardware–Intel chips inside boxes with no corporate logo, made by companies no one’s heard of.” And instead of $60,000, those anonymous boxes cost $1,000 each.

2008 Update: Even cheaper today with Amazon S3.

2. Infrastructure software is even cheaper. Excite paid a vast amount of money to companies such as Oracle just to license the software needed to build its service. “We must have spent $250,000 before we’d written a line of code,” Kraus says. But now open-source–Apache, Linux, MySQL, Tomcat, and so on–has reduced that cost to zero.

2008 Update: Zero is still zero, although the tools you can get for that price have improved.

3. The labor market has gone global. In the 1990s, only monster companies like IBM had tapped into offshoring. Today JotSpot, using Elance and RentACoder, has programmers on the payroll in Germany, India, Romania, and Russia–at a fraction of what they’d cost in the Valley.

2008 Update: Still holds true as ever. If you’re still at the stage where your concept is not yet proven in the marketplace and you’re raising money to hire a bunch of local developers, you probably don’t get it.

4. Search has rewritten the rules of marketing. Before Google, advertising on the Web was all about big marketers paying big bucks to reach as many eyeballs as possible. “But now,” Kraus says, “pay-per-click advertising, placed in an automated fashion, with no money spent on creative, lets me reach small or medium-size markets incredibly efficiently.”

2008 Update: Search Engine Marketing is no longer the panacea. In fact, in can be downright dangerous to rely on it exclusively as competition for your keywords and even Adwords’ algorithm itself are out of your control and can have a significant effect on your campaigns. Today’s successful startups are ones that harness communities, and hence thrive on the fact that their very own customers refer others to the site.

$100k is still a chunk of money, but it’s arguably within the reach of entrepreneurs with a bit of creativity.

Venture Capital still does and always will have a role to play. But I’ve seen entrepreneurs spend a year trying unsuccessfully to raise capital for a new concept, time they may have been able to better spend getting much further along their product roadmap before seeking out external funding. (OK, I’ve been that entrepreneur.)

What do you think? Post your feedback in the comments below.

Entrepreneurship, Mortgages, SmartHippo

SmartHippo media review

I thought I would update my readers with details on what some bloggers and media are saying about SmartHippo, our community site where people help each other find the best mortgage rates. If you’re interested in what we’re doing, please subscribe to the SmartHippo blog.

  • “One hopeful developer is George Favvas, who wants to make an application to promote his start-up, SmartHippo.com, which lets homebuyers compare mortgage rates between banks. ‘What we’re doing is inherently social, using the power of community to share information,’ Favvas said. ‘We want to let users be advocates for an application that fills a need.’”
    Montreal Gazette

  • “What a huge step for consumers to be able to see the feedback on these companies, or just to have any information on these companies that are calling them.”

  • “I know the banks could use a good kick in the pants (I use a local credit union, myself) and maybe an angry herd of consumer hippos could be just the ticket.”

  • “Especially with the recent mortgage crisis in the US people are more cautious than ever about the rates that they are able to receive and maybe even a bit distrustful of the lending companies. This is the first website of its kind to offer a place to compare and contrast lenders.”
  • “There’s a strong imbalance in the information that each side has, and my friends at SmartHippo have just launched a site to help correct that imbalance. If you’re getting a mortgage, or just want to compare, check these folks out. I really like what they’re doing and where they’re going.”
    Emergent Chaos
  • “Encore en construction, (SmartHippo) ne s’adresse, pour le moment, qu’aux consommateurs américains. Plus précisément, à ceux qui désirent comparer différents taux hypothécaires obtenus par des gens dans la même situation qu’eux. Grâce à cela, ils seront mieux informés au moment de négocier leur propre hypothèque.”
    La Presse (article in French)