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R&D up there; HQ down here

After buying Canadian start-ups, venture firms run them locally

Email|Print| Text size + By Robert Weisman
Globe Staff / November 30, 2007

NEWTON - While the founders and engineers at xkoto Inc. were toiling in Toronto last week on the company's business software, the company's new chief executive was here haggling with realtors and scouting for a headquarters office near Route 128.

"They're basically up there as an engineering organization in a hot market space with no sales and marketing," said Dave Patrick, a serial entrepreneur tapped on Nov. 1 by xkoto's new venture capital backer, Newton's Grand Banks Capital, to run the company.

Patrick's first tasks will be to build a sales force for xkoto software, which makes database servers more productive, recruit a management team, and move business operations to the Boston area. Its engineering and research and development will remain in Toronto, where the start-up was founded in 2005.

It's a scenario becoming common as Greater Boston venture firms hunt for high-tech investments north of the border and, increasingly, replant the headquarters of their Canadian portfolio companies in Massachusetts. The trend is likely to accelerate with the weakening of the US dollar, which makes it cheaper for Canadian technology companies to expand in the United States.

"This is the reality of business here," conceded Jay Myers, president of Canadian Manufacturers & Exporters, the nation's largest industry association, noting the Canadian dollar has appreciated 65 percent against the greenback since 2002. "Right now it's less expensive to have facilities in the US. And Canada is a small market, so companies have to go where the customers are."

Much of the shift southward is being driven by venture investors who have extensive networks of executive contacts around Boston and prefer to be close to the management teams of companies they fund. GrandBanks Capital, based in a former Baptist church in Newton Centre, has invested in four Canadian companies over the past six years and moved the headquarters of two - xkoto and Colubris Networks Inc., a wireless networking start-up - to the Bay State.

"The general theme is United Airlines and American Airlines aren't worth flying anymore so we want to stay local," said Charles R. Lax, managing general partner of GrandBanks Capital.

Atlas Venture of Waltham and Venrock of Cambridge similarly moved the home office of Internet video company ExtendMedia Inc. to Newton from Toronto, leaving the technical staff in Canada. Waltham's Polaris Venture Partners plucked security start-up Q1 Labs Inc. from Fredericton, New Brunswick, and set up shop in Waltham. Boston's Fairhaven Capital Partners has moved business functions of several Canadian firms to the United States, including Methuen's SiGe Semiconductors.

Tim Wright, the GrandBanks partner who managed the xkoto investment, said Boston area venture capitalists are finding more value to be had north of the border. "You can fund good technology and great products at a discount price and bring them to Boston where you have a great pool of talent that can run these companies," he said.

Others agree that while Canada produces first-rate technologists, it trails the United States in sales and finance, the skills needed to market the technology and expand the companies.

"Montreal's a 50-minute plane flight, Toronto's 90 minutes," said Paul L. Ciriello, managing general partner at Fairhaven. "We do deals there because we find extraordinary technology. The question is where can you get the experience you need to grow the company."

The poaching by US venture firms is a sensitive subject in Canada, a country that prides itself in generating innovations like the BlackBerry e-mail device but has seen many of its technology companies acquired. In the highest-profile recent example, IBM Corp. signed an agreement on Nov. 12 to buy Cognos Inc., an Ottawa software company with US offices in Burlington, for nearly $5 billion.

Such deals have sparked a mix of resignation and recognition that an alliance with US partners is key for tapping into the world's largest market and competing globally. For many Canadians, the key is keeping the high-value activity - engineering, research, and development - in their country rather than the home office.

"There's always the question of whether we're selling out," said Albert Lee, one of xkoto's three founders who continue to work in Toronto. "Are we another Canadian farm team giving way to a larger US player? But this is a global economy, so it's an obvious move. It means a lot of flights on an airplane because we need a lot of face time to make sure our company doesn't divide into two different cultures."

Keith Kocho, who founded ExtendMedia in Toronto, chose to move his family to Needham when venture backers Atlas and Venrock moved his company's headquarters to Newton. He's proud that 50 engineers and products managers - who president James M. Geary calls "the heart and soul of the company" - remain in Toronto.

"I was just not able to do this in Canada," Kocho said. "You have a market down here that is roughly 10 times the size. And Americans tolerate risk. It's a more entrepreneurial culture."

Robert Weisman can be reached at weisman@globe.com.

Canada's high-tech transplants

Boston area venture capitalists have been investing in Canadian technology start-ups and moving their business operations to Massachusetts. Here are some of the companies that have had their headquarters shifted here over the past few years:

Company Founded Headquarters Venture backer
Colubris NetworksLaval, QuebecWalthamGrandBanks Capital, Newton
ExtendMediaTorontoNewtonAtlas Venture, Waltham; Venrock, Cambridge
Q1 LabsFredericton, New BrunswickWalthamPolaris Venture Partners, Waltham
SiGe SemiconductorOttawaMethuenFairhaven Capital Partners, Boston
xkotoTorontoNewton*GrandBanks Capital, Newton

SOURCES: Companies, Globe reporting * Temporary office

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