Kim Furlong
CEO - Canadian Venture Capital and Private Equity Association (CVCA)

An Economic Strategy for Canada’s Future: Embracing Risk

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Do we want to be safe and good, or do we want to take a chance and be great? That is the question that investors will have to answer as they navigate the uncertain times that we are experiencing.

The last decade was one of continued growth year-over-year and a period when the availability of capital went beyond the needs of industry. 

A readjustment in the valuation of companies trading in the public market last year was the first sign of temperate activity coming to private capital, especially in the tech sector. This adjustment in value was welcomed by many who saw the prices of transactions in the private space as too high. Between the war for talent, inflation, supply chain challenges, monetary tightening, and whispers of a recession, the January job numbers on both sides of the border surprised everyone. 

“The recent unexpected collapse of Silicon Valley Bank (SVB) which has had many asking about its long-term implications for our sector.”

Then came the recent unexpected collapse of Silicon Valley Bank (SVB) which has had many asking about its long-term implications for our sector. While the short-term risks in Canada were quickly mitigated, the episode has left everyone stunned. Within 72 hours, a financial institution that underpinned the growth of startups around the world disappeared. 

Investing in and growing companies will become even more challenging due to these uncertainties. However, this challenging period could also be an opportunity to think big, take risks, and realize that the successes of the last decade in building Canada’s ecosystem are only the beginning.

Remove Obstacles, Develop A Strategy

Multiethnic Business Team On Corporate Meeting Working Together Sitting At One Table In Modern Office. High-Angle Shot, Panorama

2023 is the year to start dismantling the roadblocks faced by Canadian startups. The two biggest challenges are access to financing and the difficulty attracting and retaining the right talent.

Macroeconomic conditions over the last few years have created new challenges for Canadian startups, including supply chain disruptions and reduced consumer demand. To take advantage of the opportunities presented by the current economic conditions, we must find innovative solutions to these challenges and be agile in adapting to new circumstances.

For example, as some larger companies have been rethinking their operations, others now have less competition for customers and talent. This environment provides an opportunity for smaller companies to gain market share and attract top talent. With limited resources, startups need to be strategic in their talent recruitment efforts, and the current conditions could be particularly beneficial for them.

Moreover, in the current environment, assets are likely to become undervalued, offering attractive opportunities to make strategic acquisitions. Portfolios can leverage acquisitions to quickly enter new markets, gain access to new customers, diversify revenue streams, and reduce dependence on a single market or customer.

It’s also important to note that going public may not be the only exit strategy for companies. Instead, companies have alternative options, such as staying private, taking on strategic partnerships, or seeking co-investments. Staying private means companies can focus on building their business for the long term.

In Partnership We Trust

The Canadian government must be strategic in its approach and apply successful programs, such as the Venture Capital Catalyst Initiative (VCCI), to new partnerships with the sectors that present growth opportunities for Canada. Life sciences, cleantech and agtech are three sectors with great potential for growth and innovation in Canada.

An Upward Trajectory for Life Sciences

The life sciences sector has a strong research base in Canada, with a thriving pharmaceutical industry and a significant presence in medical devices and diagnostics. With an aging population and growing demand for healthcare products and services, Canadian life sciences companies have a growing market to cater to. Additionally, Canada has a reputation for innovation in healthcare, which could allow Canadian companies to become global leaders in the sector.

Strengthening Our Cleantech Strategy

Canada’s commitment to sustainability and reducing greenhouse gas emissions, coupled with our abundant natural resources, makes cleantech another promising sector for growth. As the world transitions to a low-carbon economy, there is significant potential for Canada to develop and commercialize new technologies for renewable energy, energy storage, and carbon capture.

The most recent federal budget put a spotlight on the need for more dollars to flow to this asset class. From the new growth fund led by the Public Sector Pension Investment Board (PSP) to the introduction of new green tax credits, these are but initial investments needed to compete in a world where the quest to net zero requires new innovations and their adoption. 

Advancing the Agriculture Industry with Innovation

Canada is a major world producer of agricultural products, with a long history of innovation in agricultural technologies. With a growing global population and increasing demand for food, there is significant potential for Canadian agtech companies to develop and commercialize new technologies for sustainable agriculture. Precision farming, plant genetics, and biotechnology are just some of the areas where Canada could lead the way in agtech innovation.

“Public-private partnerships are essential and benefit the entire Canadian economy.”

Through the availability of capital for these sectors, we can drive economic growth and support the development of innovative solutions to some of the world’s most pressing challenges. This is where private investors and government can partner. The success of the Federal government Fund of Fund programs such as the Venture Capital Action Plan (VCAP) and VCCI has shown that these public-private partnerships are essential and benefit the entire Canadian economy.

For instance, to launch VCAP, the government invested $340M and in turn, $1.356 billion was raised by the private sector. VCAP funded 33 VC firms, and that led to 360 investments in Canadian companies. These companies, in aggregate, received $2.8B in capital from all sources. The VCAP program is tracking at approximately 1.44 times in terms of returns. There are very few government initiatives when the government advances its policy imperatives and receives all its money back plus a return. It is a win-win for the Canadian economy! 

A Simpler, Smarter, Stronger Strategy

In today’s competitive global market, companies are always on the lookout for countries that offer a business-friendly environment. Canada faces intense competition from other countries, and we must work hard to attract investment and drive economic growth.

Learning from Example: Singapore and Estonia

Singapore and Estonia are two nations that have gained a reputation for being highly attractive to businesses of all sizes. Both nations have implemented policies that encourage entrepreneurship, innovation, and investment.

Singapore has consistently placed high (currently ranked second) on various business indexes, such as the World Bank’s Ease of Doing Business report. Singapore has a simple and transparent tax system, with a flat corporate tax rate, no capital gains tax, and low personal income tax rates. Additionally, Singapore has a highly skilled workforce and invests heavily in research and development, with generous tax incentives for companies that conduct R&D activities.

Another country that has been successful in creating a business-friendly environment is Estonia. Estonia placed 18th on the Ease of Doing Business ranking because it has a highly digitalized economy, with most government services available online, including registering a business. The country has a flat corporate income tax rate, no dividend tax, and no double taxation. 

“Canada must become highly competitive to draw interest for investment and for building businesses.”

Currently, at rank 23, Canada must become highly competitive to draw interest for investment and for building businesses. The first steps are simplifying the tax code, incentivizing technology and investment, and slashing regulation.

Guidelines for a Simpler, Smarter, Stronger Strategy

Canada’s R&D programs need to be overhauled and expanded to laser focus on commercialization while building our ability to develop deep tech that could transform society. Our R&D spending has fallen behind other major countries, with only 1.4% of GDP allocated to R&D in 2021. While the government has tried to increase funding in recent years, we still fall short compared to Germany, the US, and China. A revitalized Scientific Research and Experimental Development (SR&ED) incentives program could drive investment in R&D, commercialization of intellectual property and boost Canadian innovation.

“Two notorious issues that remain burdensome for Canada’s SMEs are lengthy regulatory approval processes and our overly complex tax code.”

There are several business regulations in Canada that are prohibitive and slow investment down. Two notorious issues that remain burdensome for Canada’s SMEs are lengthy regulatory approval processes and our overly complex tax code.

Canada can streamline the approval processes and by doing so, could reduce the time it takes for projects to get off the ground, which could increase investment and spur economic growth. We must also simplify the tax code for small businesses. This would make it easier for entrepreneurs to start and operate businesses, which could encourage more investment and job creation. 

Canada has always been a nation of innovators and entrepreneurs. Now, more than ever, we need to come together to support our SMEs and drive economic growth. The road ahead may not be easy, but as Canadians, I believe we can rise to the occasion. I say we take a chance and strive to be great.

Kim Furlong
CEO - Canadian Venture Capital and Private Equity Association (CVCA)

Bio: Kim Furlong is the CEO of the Canadian Venture Capital and Private Equity Association (CVCA). Prior to joining CVCA, she spent a decade working for Amgen, a Californian biotech multinational. She is a native of Quebec, having grown up on the Gaspe coast. She now lives in Toronto with her husband Howie and her twin boys. 

Organization: The Canadian Venture Capital and Private Equity Association (CVCA) is the voice of the venture capital and private equity industry in Canada. The CVCA connects over 3,000 individual members and over 320 member organizations, linking venture capital and private equity firms, debt and equity providers, international investors, institutional funds, government entities, angel investors and family offices.