Cascadian capital connections

Having one corporate foot on either side of the Canada-U.S. border is proving to be a successful business model for Vancouver-Seattle hybrids

 

Curt Cherewayko

The recession is not slowing the cross-border flow of capital between hard-hit Seattle and Vancouver, its Cascadian high-tech counterpart.

The unemployment rate in Washington jumped to 7.8% in January, which means there are more unemployed workers in that state than there were in the years following the dot-com collapse in 2001.

But while layoffs at major Seattle companies, including Microsoft Corp., Starbucks Corp. and Washington Mutual Inc., have grabbed headlines in that city during the last six months, venture capitalists are still spending money – some of which has flowed into B.C.

Victoria’s Genologics Life Sciences Software Inc., which develops software for life sciences research, closed a $5 million round last month that was led by Seattle’s OVP Venture Partners, with backing from two Vancouver-based venture capital firms: GrowthWorks Ltd. and Yaletown Venture Partners.

With a US$250 million venture fund that it closed two years ago, OVP is also helping to raise a round of seed financing for Vancouver biotech firm Indel Therapeutics Inc.

Chad Waite, a managing director at OVP and a Genologics board member, said the U.S.-Canada border isn’t a factor when OVP scouts investments in its Pacific Northwest target territory.

He also noted that Canada’s banking sector is in relatively good shape, while a pall has been cast over much of its U.S. counterpart.

“A number of our companies count on leveraging their equity with bank debt,” said Waite. “That money is getting very expensive.”

OVP has told its portfolio companies to reduce their burn rates so they have cash for 18 to 24 months and to cut 2009 sales forecast in half.

Waite said Canada’s scientific research and experimental development (SRED) tax credit program gives Canadian startups an advantage.

“We’re building [Genologics’] product at a substantial discount to what we can build products at equivalent companies in Seattle.”

GrowthWorks and Yaletown Venture have strong relationships with a number of venture capitalists in Seattle.

Last month, the two companies invested US$4 million in Seattle’s Mixpo with Seattle-based syndicate partner Madrona Venture Group.

Steve Hnatiuk, a partner at Yaletown Venture, said layoffs haven’t deterred the company from investing across the border.

“Layoffs free up really good talent that we might be able to bring into companies based here in B.C. or … add to a team based in Seattle.”

Mixpo was founded in Victoria, but moved its corporate headquarters to Seattle. It kept its core development team in Victoria.

The company moved to Seattle to develop sales and partnering channels across the U.S., where most of the company’s customers are.

Glenn Pingul, Mixpo’s vice-president of marketing, noted one advantage that Seattle has over Vancouver.

He pointed out that flights from Vancouver to Seattle are much more expensive than domestic flights within the U.S.

Ken Myer, president and CEO of the Washington Technology Industry Association, said some segments of Seattle’s technology cluster have been more affected by the recession than others.

Microsoft announced 5,000 layoffs last January and is cutting a similar number of contract employees.

At about the same time, Attachmate Corp. announced 150 layoffs and California’s TTM Technologies Inc. closed its Seattle facility, throwing about 425 employees out of work.

But Myer said Seattle companies in such segments as network infrastructure development and casual gaming remain strong.

Big Fish Games and PopCap Games Inc., two growing Seattle-based casual gaming firms, have presences in Vancouver.

PopCap’s retail game revenue rose by 85% last year, buoyed in part by sales of one of its most popular games, Mystery P.I., which was developed by the company’s Vancouver-based subsidiary SpinTop Games.

Last month, Big Fish released the first title developed by its Yaletown studio, which was opened last September and continues to hire.

Myer said Seattle’s technology cluster is taking a wait-and-see approach in 2009 with regards to the recession.

“There’s no broad conclusions you can draw yet. People are clearly concerned but we’re all busy. You have to spend your energy smartly, and worrying isn’t a very effective use of energy.”

He added that Seattle learned from its experiences during the dot-com crash in the early part of the decade.

“The business models are more solid than they were perhaps the first time around,” said Myer. “And you have serial entrepreneurs that that are more experienced. They have seen it before.” •

cgc@biv.com