Canada’s Start-up Ecosys­tem: Are We Play­ing ‘Not to Lose’?

Policy - - In This Issue - Amielle Lake, Barry Yates and Laura Lam

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 photo

UBC en­tre­pre­neur Va­lerie Song in­tro­duces her tech­nol­ogy at the e@UBC ven­ture show­case.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.