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Startup that helps U.S. tech firms tap Canadian talent, tax credits gets backing for expansion

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Tuesday, May 22, 2018 – Page B1

A San Francisco startup advised by former prime minister Stephen Harper that was established to help American tech firms access Canadian engineering talent and tax credits plans to expand further into the country with an investment from leading American venture-capital firms.

Terminal, which has hired about 125 engineers in Waterloo, Ont., Vancouver and Montreal to work remotely for 18 U.S. startups, will announce on Tuesday that it has raised US$10.25-million from Lightspeed Venture Partners, Thiel Capital, Kleiner Perkins Caufield and Byers, Atomic Management LLC, Craft Ventures and Yahoo! founder Jerry Yang. Terminal was co-founded by Joe Lonsdale, who leads venture-capital firm 8VC - for which Mr. Harper is an adviser - and co-founded one of Silicon Valley's top private tech firms, Palantir Technologies.

Terminal hopes to double its head count by year's end and plans to eventually employ thousands of developers in Canada. It will open a Toronto office next and is looking to expand to Latin America.

But its quick expansion here has exposed a growing fault line in Canada's technology sector. Canada's flourishing crop of startups have been supported by programs from a Liberal government with an agenda for the innovation economy.

But the same government has also encouraged U.S. tech giants to expand here, with Prime Minister Justin Trudeau attending job announcements by Inc., Google and Microsoft Corp.

Some domestic startups worry those companies will suck up much of the local talent, making it harder for them to expand.

Terminal's arrival last fall sparked a flurry of concerned emails between Waterloo chief executivess, The Globe and Mail has learned, particularly after community leaders welcomed the company and Mr. Trudeau met with Terminal's founders in San Francisco.

"I think we're completely selling ourselves out," said Carol Leaman, CEO of Axonify Inc., a Waterloo-based digital-learning firm. "It's a free world, people have the choice and can set up shop where it makes sense for them ... But where I draw the line is that [Terminal] has access to government funding and is essentially employing people [in Waterloo] to build and support innovation that will ultimately benefit California companies.

"My company, which is trying to build a business here and keep the value in Canada, is competing with these other companies ... to the point where I've got to look for talent outside Canada. It doesn't make sense for the Canadian government to be helping [American firms] grow" here.

Terminal was hatched last year out of Atomic, a San Francisco "startup studio" that creates and funds startups. The idea was to create a shared service for Atomic firms to tap markets for talent outside its intensely competitive area. With its abundance of engineers, lower cost (labour costs are 10 per cent to 20 per cent lower in Waterloo versus Silicon Valley, Terminal says) and availability of federal tax credits through the Scientific Research and Experimental Development (SR&ED) program, Waterloo proved to be an ideal destination.

Five Atomic companies, including communications software firm TalkIQ, scaled up quickly by hiring developers in the region.

New Terminal CEO Clay Kellogg, a former Atomic operating partner, acknowledged the availability of SR&ED credits "was one of the factors that led to entering Waterloo."

In addition to Mr. Lonsdale, Terminal's co-founders include Atomic managing partner Jack Abraham, former Eventbrite executive Dylan Serota and ex-Navy SEAL Luke Finney.

As the five Atomic startups raised follow-on funding, "the new investors were impressed with the calibre of teams we were able to create and started to push their other portfolio companies to come talk to us," Mr. Kellogg said. "Over time, we realized there was a business opportunity." He added that Mr. Harper advised Atomic that "there is absolutely a need for an enabler to bring high-paying, highly desirable jobs into the [Canadian] market." Mr. Harper was unavailable for an interview.

The Terminal pitch is that it can help U.S. startups located in tight labour markets to expand operations to Canada, where the talent is top notch but in relatively less demand, less costly and where immigration policies are friendlier.

Rather than going through the effort of opening satellite operations, Terminal acts as a middle man by helping its clients find and hire talent in Canadian tech centres, housing them in a common space and processing their pay (clients do the final interviews and negotiate compensation directly with the Terminal recruits). The recruits are employed by Terminal but managed by and work full-time for the clients, which pay Terminal a fee per employee in addition to covering their salary. About 80 Terminal employees are in Waterloo with the balance in Montreal and Vancouver (a team of five runs the company in San Francisco).

"We've taken away all the legwork and all the headaches that goes with opening up your own remote operation," Mr. Kellogg said.

He downplayed the pursuit of Canadian tax credits, saying it wasn't a core part of Terminal's appeal and that it had pursued them for fewer than 20 of its hires, saying the bureaucratic hassle involved meant it "hasn't really been worth a lot of the effort" and "is not really what's driving our customers' behaviour." He added the discount for Waterloo engineers was "no more than between 10 and 20 per cent" compared to the Bay Area and wasn't a prime motivator for clients.

"What is driving our customers' behaviour is the access to amazing talent and the ability to ramp up these teams quickly," Mr. Kellogg said.

Nakul Mandan, a partner with Lightspeed, also dismissed the notion that Terminal was operating as an offshoring operation for Silicon Valley, saying clients were more focused on finding "the best quality talent" than low-cost labour. "Honestly, if we were trying to maximize the unit economics, then we would probably be in completely different locations ... The best talent is spread globally and I do think that over time Terminal should be the way companies think about scaling [up] outside of their headquarters."

But Carl Rodrigues, CEO of Mississauga-based mobile communications firm SOTI Inc., which has more than 700 employees and has run into labour shortages, warned, "We are now seen by Americans as they saw India a few years ago," saying engineers here were "cheap by California standards ... it is a good deal for a Valley company, but has the effect of killing Canadian companies who do not get paid in American dollars and have higher corporate taxes than American companies."

With files from Shane Dingman and David Ebner

Associated Graphic

Prime Minister Justin Trudeau meets with Terminal co-founders Luke Finney, centre, and Dylan Serota.


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