Without Top Investors, Canada Risks Its Startup Future
After two days of exciting back-to-back meetings with new startups in the Toronto, Waterloo and Hamilton areas, I am on an Air Canada flight back to San Francisco. Sitting in the packed flight, I am reflecting on the opportunities and challenges facing Canadian startups. I’ve always enjoyed visiting the area and talking with the entrepreneurs about their ideas. There’s opportunity in Canada because of the large pool of talented engineers and strong government support for startups. I have in the past used this rich pool of resources to support my own companies. That said, as a vibrant place for startups wanting to grow, expand, and eventually sell at the right price, there’s more work to be done.
Overall, the talent in Canada is unmatched. The university system adds over 30,000 new engineers to the existing talent pool each year. Canadian engineers have a high level of energy and are committed to their work – two things all startups need. Engineering salaries in Canada are relatively low, making it easier start companies there. In addition, the Canadian government has multiple programs for startups. As one example, the Scientific Research and Experimental Development Tax Incentive program (SR&ED) provides significant funding for early stage technology companies creating jobs.
In some cases, grants from these programs can cover over 50% of the research and development expenses. Other government organizations like the Business Development Bank of Canada (BDC) are devoted solely to financing entrepreneurs. Venture firms like GrowthWorks, Ltd., VenGrowth Private Equity Partners and Yaletown Venture Partners are actively investing in Canadian startups. Several University, government and independent incubators house and help hundreds of startups per year. For example, these rich resources have led to Toronto’s current startup scene of nearly 2,000 startups.
But, the country has its challenges. While the early stage startup scene is thriving – with plenty entrepreneurs, engineers, incubators and some angel investors, there isn’t the tier one venture capital and knowhow that is required to build startups into successful companies.
The funding landscape needs the most improvement. In 2014, Canadian venture capital firms invested roughly $1.9 billion into 379 startups. This isn’t much when compared to the $48.3 billion that U.S. venture capitalist firms invested in startups in the same year. Most importantly, Canada is lacking the tier one venture capitalist firms with Silicon Valley experience. Without this knowhow, it is very difficult to build successful companies with successful exits on the scales seen in the US.
Some major startups – like Shopify and Hootsuite – call Canada home, but these are few and far between. This is because, without the tier one venture capital investments and knowhow, it is nearly impossible to create meaningful exits. And this shows. The largest Canadian exit in 2014 was Kinaxis, which raised $100.6 million when it went public with a market capitalization of about $750 million. WhatsApp was acquired by Facebook for $19 billion in 2014. This is a significant difference. The smaller exit sizes deter entrepreneurs from staying in Canada and trying to grow and expand their startups to an exit.
There are possible solutions, and from my experience, I have some ideas. During my career as an entrepreneur, I have built three companies with presence and operations in Canada. I know that if the government and the private sector work together strategically, they can create the missing magic that Canadian startups need.
A first step would be to create a taskforce of experienced and successful Canadian entrepreneurs. This taskforce would work with startups to help them become fundable and bring in Silicon Valley tier one venture capital and knowhow. Additionally, this newly created task force could work with reputable investment banks like Goldman Sachs, Morgan Stanley and others to develop competitive exit plans for the Canadian startups. I personally know multiple Canadian entrepreneurs living in the US and Canada who would love to participate in such a taskforce.
Another great step would be for the Business Development Bank of Canada to create a new national fund that would only co-invest with tier one Silicon Valley venture capitalists. The BDC has been working with Silicon Valley venture capital firms for years and is the perfect bridge between them and Canadian startups. This new fund could be supported by leaders in the private sector and government – and would do wonders to help early stage startups.
Without significant strategic changes, business will continue as usual. Entrepreneurs will start companies there, use the engineers and the government programs, and then sell for a very low price or relocate elsewhere, usually in the US. Also, major tech companies like Google and Facebook will continue to have operations there only for the engineers, and nothing else. Yes, Canada has benefits for entrepreneurs, but it lacks the Silicon Valley knowhow, tier one venture capitalists and big wins required to make it a place where startups can grow, expand, and sell at the right price. If the government and private sector take action to bring the right knowhow and tier one venture capitalists to the area, the full value of Canada can be realized.