Canada’s Start-up Ecosystem: Are We Playing ‘Not to Lose’?
Canada’s tech start-up environment has produced worldchanging innovations, from BlackBerry to Shopify. But there remains a hollow middle in the start-up ecosystem, and it isn’t going to be filled if women continue to be consigned to the sidelines.
Since the 1970s, Canada has established a start-up Hall of Fame of sorts. It includes Nortel, Research in Motion, Slack and Shopify. These are the big ones, the ones that managed the ultimate breakthrough; to achieve valuations north of a billion dollars. We are incredibly proud of these achievements. At the same time, we fail to acknowledge the reality we are facing. The list of very large companies (>$1 billion) is relatively small. Worse, the list of large (>$100 million) and medium-sized companies (>$20 million) is almost blank. Drop down to
the bottom tier of companies, valued at less than $10 million, and we have a large pool that is only growing—not in size but in quantity. This is a problem. In the Ocean of start-ups, Canada has managed to produce plankton, minnows and 1 or 2 whales. Not exactly a thriving ecosystem.
To make things worse, the gap is a self-fulfilling prophecy of sorts. An entrepreneur will start a company and if they are lucky, they will be one of the very few that survive. From there, if they manage to gain momentum, they get purchased. The acquirers are often large, well-capitalized entities south of the border that then take their purchase and convert it to an exit for ITS shareholders at 10 times what Canadian shareholders received for their start-up. A simple case study is my own experience. I founded Tagga. We toiled for years and as soon as we gained traction we made the call to sell. For most, the exit would appear to be a success. Six months after we proudly closed our sale, our acquirers announced that they had leveraged our tiny company to redefine their entire offering. Our buyer was doing over $100M in revenues and now armed with a differentiated technology, they can race down their growth path, providing ten times the returns to their shareholders.
Barry had a similar experience. He became the CEO of software company Monexa, which was then sold to NetSuite. It was an excellent liquidity event for Monexa shareholders. Then, 18 months later, Netsuite, founded in California, was purchased by Oracle for $9.3 billion. California-based Monexa competitor Zuora raised close to US$250 million in venture financing and recently went public. Zuora now has a US$2 billion market cap though Monexa was first to market.
So what happens next? Our returns cycle back into the Canadian economy, going just a tenth of the distance of that of our US counterparts. Access to Capital has long been a problem for Canadian entrepreneurs. Still, the problem doesn’t end there. The fallout of producing smaller businesses means we produce a considerably different pool of start-up talent. To put it simply, we have excellent technologists but we are weak on management teams that can scale or commercialize. So again, the cycle repeats itself. An ecosystem with less capital and a talent pool of inventors rinses and repeats the same formula: start a company, prove the technology solves a problem and then sell it to a US buyer for small returns and little leverage. The more we do this, the smaller we get.
Since the nineties, the Government has made some concerted efforts at both provincial and federal levels to support the technology start-up community. Two amazing programs have emerged to support entrepreneurs and early-stage investors: Scientific Research and Experimental Development (SR&ED) tax credits and Eligible Business Corporation (EBC) tax credits. These programs have enabled start-ups to invest millions upon millions back into their companies whilst encouraging investors to support them because of the personal benefits that are reaped. In fact, SR&ED has become so popular, it’s now a stimulus for encouraging large technology companies to establish their R&D offices in Canada. Microsoft, Facebook and Google are prime examples. Without these government programs, the Canadian startup economy would dry up quickly. At the same time, we need more. We need support in commercializing our efforts. We need government programs that facilitate the recruitment of experienced foreign leadership, sales and marketing talent. We need programs that provide grants or tax credits for market research and customer validation programs.
Finally, much like our competitive counterparts, Canada fails to support its female entrepreneurs and investors. Our venture capitalists financed about 4 per cent of our female entrepreneurs last year. While many efforts have been made to increase the support for women in investing and entrepreneurship, Canada’s entire start-up ecosystem is currently only betting on half of the population.
So, how do we get out of this spin cycle? The path forward is easier said than done, but the solution still feels simple enough. We need to expand our thinking around what constitutes success in entrepreneurship. Canadian start-ups need to go beyond building interesting technologies, they need to distribute them. There is no reason why we can’t become stewards of our own innovations.
So again, the cycle repeats itself. An ecosystem with less capital and a talent pool of inventors rinses and repeats the same formula: start a company, prove the technology solves a problem and then sell it to a US buyer for small returns and little leverage. The more we do this, the smaller we get.
Our message to the investors, government and other ecosystem participants is to invest in collaboration and diversifying our thinking to support scaling companies. This means simplifying the sourcing of talent that can scale an organization, strengthening go-to-market programs, diversifying product lines to build new revenue streams, and building broad distribution partnerships. For government, this means investing in commercialization programs for companies that are both early and late in their journey to market. Both market research and showcasing Canadian companies should be a priority.
Over the last few years, the Canadian Accelerator and Incubator Program (CAIP) has dis-
tributed millions of dollars to incubator and accelerator programs across the country. In British Columbia alone, there are some 60 incubator and accelerator programs. Within each of these programs, we are attempting to build better companies. The challenge is, it’s the same programming, an over-emphasis on the things that keep us from being successful: building product and exiting. We have observed very few incubators and accelerators that focus on recruitment of executive leadership, sales training, go-to-market plans and the like. A way forward would be to concentrate this funding effort to reflect major centres across Canada. In this model, we could dive deep into both technology domain expertise as well as broaden programming and training to focus on marketing, executive leadership and sales. We can pool our resources and diversify our investment
Even if we manage to raise the bar and strengthen our national sales and marketing muscle, we would still be selling ourselves short if we look for our winners to come from just half of the population. While many programs have entered the market over the last several years to support women in entrepreneurship, they are not radical enough to drive massive transformation. From 1999 to 2009, female entrepreneurship grew by just 13 per cent. We need to provide greater incentives for women contemplating a career in entrepreneurship. These incentives should come in the form of both capital and mentorship.
Improving the quantity of mid-to-large and very large companies that Canada is able to produce will generate benefits across all aspects of Canadian life. More successful companies means more jobs, more tax dollars, increased wealth and a greater ability to innovate. All the same, if we continue to hollow out our entrepreneurship middle, then all our efforts and investments across public and private spheres will only result in diminishing returns down to zero.
Improving the quantity of mid-to-large and very large companies that Canada is able to produce will generate benefits across all aspects of Canadian life. More successful companies means more jobs, more tax dollars, increased wealth and a greater ability to innovate.
Amielle Lake is entrepreneur in residence at Entrepreneurship at UBC and Co-Founder of the Women’s Equity Lab. Barry Yates is Managing Director of Entrepreneurship at UBC. Laura Lam is Marketing Manager of Entrepreneurship at UBC.
UBC entrepreneur Valerie Song introduces her technology at the e@UBC venture showcase.