The Challenges of Scaling Up
- Canadian venture capitalists typically invest in order to sell a business, rather than grow or scale it up.
- Canadian companies are losing key talent to their American counterparts because they do not have competitive compensation.
- Canada lacks international sales talent, which directly impacts a company’s ability to scale.
The government needs to expand its presence by bringing the entrepreneurship ecosystem directly to the entrepreneur through a boots-on-the-ground model. Advisors and other ecosystem players must meet directly with companies, so that they understand the supports that are available to them.
How would you assess Canada’s strengths and weaknesses when it comes to supporting entrepreneurship, and especially scale up growth?
We are actually pretty lucky in Canada. We have quite a few strengths. The first one, and it is a big one for me, is that Canada has a really big talent pool of highly qualified personnel. We are actually second in the Organisation for Economic Co-operation and Development (OECD) if you look at the number of post-graduates per capita. We are a little bit lower for PhDs, but those numbers are actually going up right now, so we are in a pretty good position. Canada has a number of programs like ours at Mitacs that help support startups, as well as a good mix of incubators and accelerators. Some incubators are university-based, but others like MaRS and Communitech have broader mandates. We also have a pretty favorable business environment, including reasonable housing, good health care, and a good education system. These are things that companies look for, but more importantly, these are things that employees look for.
“Canada has a really big talent pool of highly qualified personnel.”
Canadians in general are creative people and that comes a little bit from the fact that we have very strong diversity. There are a lot of different people from different backgrounds and they bring new ideas to the table. We have good immigration policies that support that from our governments. When you put all of that together, Canada actually ranks number three in the world for entrepreneurship according the 2018 Global Entrepreneurship Index, so there is obviously something that we are doing right.
Of course, not everything is perfect so we do have some weaknesses. The first one is that Canadians are pretty good at taking small risks but not as good at taking big ones. We do not really have the venture capitalists (VCs) that we need for seriously scaling up our companies, and it is not just a question of the amount of money that they have available, it is more a question of the lack of patient capital. A lot of our venture capitalists have more of the build-to-flip model as opposed to a build-to-last model. They will build the company and start it up, and then they will try and sell it rather than stay with that company in the long run and grow it. A good example of that is the recent sale, a couple of weeks ago, of Element AI to ServiceNow in the US. We really need VCs that are not afraid to invest in the long-term.
“A lot of our venture capitalists have more of the build-to-flip model as opposed to a build-to-last model.”
We also do not have big enough markets internally. Many of our startups cannot get a good foothold before they need to scale up and go international. That is part of the issue for the companies that we work with at Mitacs, and if you are going to go international to find some VC funding or a market, you might be tempted to actually move your company outside of Canada. If you do not do that, you may have to move the intellectual property (IP) out of Canada to get the funding that you need. Either way, that is not really good for Canada.
What are the main barriers that Canadian entrepreneurs face and how can they be overcome?
From my own experience with my own startup, which I had before I joined Mitacs and from my current vantage point at Mitacs, there are basically three big barriers. The first one is talent. No matter what your technology, product, or service is, it always boils down to the talent that you can attract to execute your business plan. Canada is actually a great place to find highly qualified staff, but for a startup, this can be a very daunting experience. It is very hard to get noticed when you are an unknown startup.
There are also gaps on the talent side. Canada has very little sales talent available, especially for international sales. That, to me, is a really big one. We do not really have large VCs with deep pockets and experience to take a successful startup to the next level. Our venture capitalists tend to try and get the company to focus on short-term sales in order to generate revenue rather than really investing in them and backing them up to try and go for a bigger home run, so that is an issue. Further, the VCs often bring money to the table—which is great, and that is why you go to see a VC—but we really need VCs that invest into networks and contacts internationally that can help their startups get connected and grow.
“Our venture capitalists tend to try and get the company to focus on short-term sales in order to generate revenue rather than really investing in them.”
The third one is access to markets. Canadian companies often need to expand globally earlier than their US counterparts just because we do not have a large domestic market. That makes it more complicated and costly but also increases the risk for the company.
If you put all of that together, given that we do not have the right VCs here and that we do not have a big enough market, it is really critical that our entrepreneurs think globally right from the start. They need to have a business model that will attract foreign investors and they also need products and services that are designed from the start for international markets, because Canada is just too small.
What are some key indicators that a company is ready to scale up and what advice would you give to entrepreneurs who are at this stage?
This can vary a lot from company to company. It depends on their business strategy but usually, it starts once they have their products or services in the market and they start to see stable and continued growth of demand. This is often the point where they continue to build organically. Another competitor might come around with a more aggressive approach and steal a lot of the market, so if you see your demand growing quickly, you should do what it takes to meet that demand and aim to become the dominant player. My advice would be very simple: just go for it. Do not hesitate, do not overthink things too much. Follow your instincts and aim to be a leader in your sector. You should also make sure that you have a strong IP strategy that you can build on, which is often something that I see lacking in some of the companies that we work with. Companies tend to focus on the short-term rather than the long-term, and that includes not really thinking through a strong IP strategy that they can build on.
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What kind of partnerships are needed to help Canadian businesses scale up?
A big stakeholder is obviously the government, but to me, the government is really there to put in place the right environment and the conditions for the startups to be successful and grow. I do not think that they should go much beyond that; it is not the role that they should be playing. For example, I do not think they should be picking winners and losers—the market should be able to do that.
This might be biased given my role at Mitacs but the more important partnership is between academia and industry, since talent plays such a critical role, especially in the knowledge economy. That is what we do at Mitacs. We have a team of business development officers that are on the ground to meet with the companies, especially the small ones, and they are there to understand what their dreams or challenges are. Then, they go back into our colleges, polytechnics, or universities, and there they will find the researchers, technologies, equipment, and the students that can help the company overcome their challenges and pursue their dreams. Until now, we were limiting ourselves to research and development needs of the companies, but we have recently expanded to cover marketing, business, and law. We are expanding the kind of talent that we can bring to these companies. We even have a program now that is designed specifically to help startups go abroad and commercialize outside of the country.
What talent is needed to help companies through their growth stage?
On the management side, it is important to realize that the talent that you need for scaling up is actually different than the talent that you need for starting up. It is important to realize this and to add the right people to your management team at the right time. I often see companies that wait too long before making that shift.
“It is important to realize that the talent that you need for scaling up is actually different than the talent that you need for starting up.”
The other one, which I mentioned before, is sales talent. As far as I am concerned, this is a big one especially for international sales. You do not often hear Canadian parents encourage their kids to become great salespeople, and I am guilty of that. I have two kids, I am involved in sales, and yet, that is not really what I am telling my kids that they should be aiming for. That is a problem we need to fix. I am also not aware of many university courses that are dedicated to training salespeople, and yet, having said all that, they are often some of the people that have the highest salaries in companies, and there is a reason for that. It is a valuable skill set and it is what generates revenue.
“Canadian companies cannot get the talent that they need because the best talent goes to the US.”
As for attracting and retaining top talent, I have a solution for that one but it is probably not a very popular one in this country. We work with a lot of companies—that is what we do at Mitacs—and I keep hearing from a lot of them, though thankfully not all of them, that Canadian companies cannot get the talent that they need because the best talent goes to the US. Well, if top talent goes to the US, there is a reason for that. It is because they offer better salaries and better conditions, and that is why people go there. My solution, which again probably is not going to be a very popular one, is to simply offer competitive compensation. If you offer good salaries, good benefits, and good working conditions, plus if you have cool projects to work on, you are going to find the talent that you need. A lot of our companies just need to grow up and be more competitive, which again is probably not a very popular thing to say, but that is how the world works.
If you had to pitch to someone to improve Canada’s ability to scale its companies, what would you say?
Like I mentioned earlier, I had my own tech company before joining Mitacs, and I knew that there were a lot programs out there that could help my company and that I should be tapping into them, but in the end, I only used one. The one that I used was the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP). The reason I used IRAP is because someone showed up at my company, got a coffee with me, asked me questions about the company, and then found resources for me to use to continue developing my company and grow it.
“The ecosystem needs to go to the companies and not the other way around.”
If I had this 30 second sales pitch, it would be to the federal government and it would be to expand the boots-on-the-ground model of IRAP and of Mitacs so that we have more experts that proactively go out to meet with companies, understand their needs and then propose turnkey solutions. We need to keep the entrepreneur focused on growing their business and make it easy for them to tap into the resources that are already available out there in the ecosystem. The ecosystem needs to go to the companies and not the other way around, which is what we tend to do. We have plenty of programs and services, but we expect the entrepreneur to learn them all and to do all of the legwork, and that is just not efficient.