The backdrop said as much as the beaming man standing alone on the stage.

The man was Prime Minister Justin Trudeau. He wore no jacket, just a white shirt with the sleeves rolled up and the top button undone. He was casual and friendly and apparently overjoyed to be opening the new Google Canada engineering headquarters in Kitchener.

The audience and cameras were all focused on the PM, but they also took in the backdrop, which is always so important in a political announcement. Standing on a landing behind the stage were a couple rows of programmers, many wearing Google T-shirts. And then there was a row of school children, who had just received a lesson in technology from the Prime Minister.

“What’s happening here really, really matters, not just to the region, but to the country and the world,” Trudeau said to hearty applause at the event in January. “And it’s an incredible pleasure to be here today.”

Indeed there was something really, really important happening, and it extended beyond the opening of the Google Building. There is a reason that the young Prime Minister, three months into his mandate, appeared in the Waterloo Region surrounded by young programmers. Again and again in his visit he referred to the potential of the innovation economy, and the Waterloo Region’s place at the centre of it. With the oil patch in serious trouble, innovation may be the best hope for the country’s economy.

See our Full Report on the Waterloo Region

It’s well known that the Kitchener-Waterloo tech ecosystem is a phenomenon unique in the Canadian economy. But what’s less appreciated is that there may be no place like this little city of half-a-million souls anywhere in the world. Simply put, it is an extremely cost-effective factory for some of the best technology talent found anywhere.

For example, 60 percent of the engineers working at the Google building that the Prime Minister opened are graduates of University of Waterloo.

Just as it pours out talent, the Waterloo Region produces startups at a dazzling rate. Only Silicon Valley has a higher density of startups. Its support systems – from Communitech to the Waterloo Accelerator Centre to Velocity – stack up well against their competitors anywhere in the world.

But something is missing – a few key ingredients that are preventing the Waterloo Region from becoming a bona fide hotbed in the global innovation landscape. The city is small. It is not the home of many major corporations. There are few venture capital firms operating there. And there is overall a limited amount of funding in the region. To really capitalize on the opportunity posed by the innovation economy, KW needs to strengthen its links with Toronto so they constitute one supercity in the minds of investors and corporations.

“Size matters,” said Iain Klugman, the President and CEO of Communitech. “Toronto with 5 million people has the size, but it’s missing that edgy thinking, that different culture, that Palo Alto brings to the Bay region.

“If you look at the performance of the other innovation corridors, then you see this big opportunity. If you don’t take this opportunity, then you will continue forever to be a farm team to the Valley. If you build it right, you can be a top five ecosystem in the world. Then you’re growing the economy at a level greater than the sum of the parts.”

He added that there is a strong need for capital to grow the region’s startups, and that most of the funding deals in the world take place in the top five or six ecosystems. Kitchener-Waterloo and Toronto have to strengthen their ties to be considered a unit, a supercity, and attract capital into the fastest-growing part of the economy.

Of course, if you look at a map, the Waterloo Region and Toronto could easily be considered a unit. The gap between the two is only 100 kilometres. But the nightmarish traffic congestion along Highway 401 leaves commuters and visitors wondering if the two municipalities are in the same galaxy. The poor transport links make meetings difficult, deter interaction with Toronto-based corporations and mean Kitchener-Waterloo is treated as a single entity when the global startup ecosystems are ranked. But if KW and Toronto were treated as a unit, then Canada would have the makings of an innovation powerhouse.

“Kitchener-Waterloo is an important linchpin in the most important technology cluster in the country,” said John Ruffolo, the CEO of OMERS Ventures. He explained that the lion’s share of venture capital deals in Canada take place in five cities: Toronto, Vancouver, Montreal, Ottawa and the Waterloo Region. Toronto is extremely active, he said, combining it with the Waterloo Region would produce an entity responsible for more than half the VC deals in the country.

Read our Report on Trudeau's KW Tour

“Because bigger is better in terms of startup ecosystem, an integration of Toronto-Waterloo would clearly benefit both ecosystems,” said the Silicon Valley think tank Compass in its recent report on the Waterloo Region. “With a combined metropolitan GDP of about $350 billion–the 10th largest in U.S. and Canada–the corridor has the assets to compete on the global stage.”

Compass has rated Toronto as the 17th best ecosystem in the world, and pegs the Waterloo Region at No. 25. The report excludes the Waterloo Region from the top 20 even though it gushes about the startup density and talent that the region has produced. Compass does not quantify talent – it’s probably impossible to do so – but it presents anecdotal evidence suggesting that the engineering talent in Kitchener-Waterloo is second to none. Anywhere.

“Something is going on in Waterloo, because the applications we get from Waterloo students are better than those we get from students of any other university,” it quotes Y Combinator co-founder Paul Graham as saying.

Ted Livingston thinks he knows what is going on. The Founder and CEO of Kik.com believes the key to the “ridiculous” (his word) talent in the region is the legendary co-op program at the University of Waterloo.

He said an engineer or programmer studying at Waterloo has six co-op terms, which gives each student an unparalleled breadth of experience in real companies by the time they graduate. It produces a rarefied individual with the technical know-how and the business acumen that are so essential in building companies.

The Compass report also refers several times to the spirit of collaboration that pervades the Waterloo Region’s institutions – from Communitech to the Accelerator Centre to the universities. And Communitech itself has become an essential meeting place for the various stakeholders in the community.

Talent alone won’t be enough. The Waterloo Region is now home to 1,100 startups, and they will need capital to grow. But Compass says that they now only average about US$45,000 each in seed funding, compared to US$490,000 for Silicon Valley. To access more capital, it may be necessary to be part of a bigger community.

Most investors – angels, VCs and some say even investors in public companies – like to invest in companies close to home, so that they can easily meet with management and observe the company. A closer union between Toronto and the Waterloo region would help Toronto investors feel the KW startups are part of their own back yard. It would also help to convince international investors that they were investing in part of a major centre when backing Waterloo-area companies.

The gaps between Toronto and KW are also compounding another challenge facing startups in the smaller centre – the lack of major corporations.

“One of the gaps that exists for companies in this community is the customer deficiency,” said Communitech’s Klugman. “We need customers coming out of the gate.” He said that the startup community in the Waterloo Region needs stronger ties to Toronto’s corporations.

What’s more, these blue chip companies are realizing the threat to their business from disruptive innovation, and are therefore also interested in stronger ties with innovative startups. Both private and public sectors are therefore calling for better transport links.

“I do think it’s going to be very important to connect the two hotbeds of activity,” said Sam Sebastian, Managing Director of Google Canada. “I would love to see more interactivity and infrastructure connecting the two cities.”

There is broad agreement among the cognoscenti that stronger links between Toronto and KW would benefit everyone. But these people also agree that improved transportation links – especially a high-speed rail service – are at least eight years away.

Kitchener Mayor Berry Vrbanovic on the day of Trudeau’s visit called for two-way, all-day GO Transit train service in southern Ontario to attract and retain knowledge workers. But he added in an interview: “If everything went according to plan, there could be a high-speed train in eight to 10 years, but even that’s being a bit optimistic.”

The transportation problem may prove difficult to overcome, but there are strong tailwinds propelling the region’s startup community forward.

Communitech and the University or Waterloo’s Velocity accelerator are both expanding. The region’s high-growth companies are beginning to generate larger funding rounds, with Kik.com landing a US$50 million strategic investment and Vidyards following with a US$35 million venture capital round. Google and other blue chip companies are expanding in the region. There’s a sense of optimism in the air.

“I just have the feeling that Waterloo is on the cusp of greatness,” said Livingston. “The biggest problem we have here is getting people to realize how amazing it is.”