Essential Scale-up Ingredients: Capital and Talent

How do you rate Canada’s start-up ecosystem and what are some of the current challenges within it?

Ten or 15 years ago, I would have said Canada had a start-up problem. Fast-forward to 2019 and we punch well above our weight in terms of start-ups per capita. StartupRanking.com ranks Canada fourth in the world for start-ups after the US, India and the UK.
You often hear that Canada now has a scale-up, not a  start-up problem. So, Canadians start a lot of businesses but the number of those that transition to becoming really big companies is where there is a gap. This is what I think is so interesting about the Canadian Business Growth Fund (CBGF). It is focused on providing patient, long-term fundingand it represents a golden opportunity to help address some of the challenges in transitioning a company from a start-up to scale-up. As a country, we should definitely be focused on the scale-up end of things.

“Access to capital and to a strong talent pool are the two most important factors in scaling a business.”

We should not forget that small and medium-sized businesses are the engine of Canada’s economy. A recent study published by the Business Development Bank of Canada (BDC) showed that 98.2% of all businesses in Canada have fewer than 100 employees. When you add in medium sized business, who have 100 to 499 employees, the percentage rises to 99.8%. A thriving small business economy is essential for keeping the unemployment rate low in Canada, but a few fast growth companies, like Hootsuite, League or Shopify, are vital as well.

What lessons can we learn from other countries to improve Canada’s ability and capacity to scale-up Canadian businesses?

Israel has a disproportionate number of technology start-ups that turn into big companies. Historically, these companies almost always move to the United States to commercialize, scale-up and keep their growth going. Waze is a classic example. While there’s greater access to capital and a larger market, the US also has more talent available in critical scale-up roles, such as sales and marketing, which are essential to growing companies. It is also interesting to look at countries like Singapore and South Korea. They too have many companies that have experienced rapid growth, albeit without having had to move to the US to do so.  It is, therefore, instructive to look at how access to scale-up talent has been a vital ingredient for success. Finally, let’s not forget China and the rapid entry into the Unicorn club by many of its companies.
The lesson for Canada is that scale helps enormously and without it it is even more critical that we find creative made-in-Canada solutions.
Canada should clearly take a closer look at the United States when it comes to the specifics of scale-up talent. In this latest tech boom, the US is a country of Unicorns, many of which are now contemplating or have executed IPOs. The Ubers, Lyfts and Pinterests of the world have figured out how to grow and grow quickly. There is much to be learned here. Not only did these firms have the all-important access to capital but they had the talent to deploy this capital properly in rapid talent acquisition, research and development (R&D), product development, global outreach and virtual organizations. The leaders running these firms have actually grown the businesses from the $10 million mark to the billion-dollar mark, and in some cases in excess of $10B. And they’ve done so very quickly. It used to take decades to hit the $10B mark, now it’s done in a matter of years. This kind of rapid scale-up  is a very different proposition than taking over an existing enterprise or starting a business. Put simply, access to capital is necessary but not sufficient. Access to a strong talent pool with the requisite know-how is equally important in scaling a business. Canada definitely has a management gap in the scale-up process – there is a role for government to close that talent gap.

“The challenge is in scaling it up – there is a whole different set of risk-taking moves and capabilities associated with going from $10 million to a billion.”

We often hear that Canadians are more risk-averse than our cousins to the south. I think that is borne out of dramatization by Hollywood and self-perpetuating mythologies. When you look at the statistics about the number of start-ups per capita, Canada is ranked 4^th in the world. Of course, there is a fair risk to go out on your own and start something, but there is also risk in taking a business forward in ‘leaps and bounds’. The challenge is in scaling it up —there is a whole different set of risk-taking moves and capabilities associated with going from $10 million to a billion. For example, when you’re moving from hiring 10 people a month to 100 a month or even 1,000 a month, you’re still taking risk but the bets are bigger. One of the reasons Nortel imploded was that they lost control of the hiring and management of talent. Scale-up is not an easy task, given the inherent chaos that surrounds rapid, large-scale change.

“The scale-up problem in Canada is really just a problem of scale.”

It’s hard to argue that the guts and the know-how required to actually scale-up a business are more prevalent in the US than in Canada simply because they’ve had more experience growing companies from $10M to $1B. The scale-up problem in Canada is really just a problem of scale.

Is there a role for governments that is not emphasized enough to create successful entrepreneurs in Canada?

There is always a role for government to play. People tend to glorify the United States as an example of zero government intervention. The reality is that governments are always involved, even in the US. The questions are really how and when they should be involved.
Governments at all levels in Canada have done a good job of encouraging and supporting start-ups. There are lots of programs such as Scientific Research & Experimental Development (SR&ED) credits, Ontario Growth Capital Corporation, Angel groups and the like. Now we need government to focus on the next phase of growth: scale-up.
There is a strong belief that Canada does not have a coherent innovation strategy to assist on this front. That said, I’m not sure that a grand unifying strategy is even the answer. The world moves too quickly for grand plans that attempt to capture it all.

“The reality is that governments are always involved so we need to think about how and when they should be involved.”

What we do need to do is give some specific thought and action to creating, attracting or accessing more of the high growth management talent that we need. Without the talent to go from $10 million to a billion, the capital deployed to help grow those companies isn’t going to help much. The two go hand-in-hand.
Canada is a country of high quality publicly funded educational institutions. As such governments already have easy-to-access conduits to help address the talent deficit, by encouraging the creation and delivery of programs and courses designed specifically to address scale-up knowledge gaps such as rapid hiring and organization building.  Funding student internships in high growth companies, wherever they may be, would help translate that knowledge into experience. Adopting policies or incentives to attract scale-up talent from outside the country can only help home-grown talent get better through mentorship or sheer osmosis. Government has a critical role, and many levers at its disposal, to help close the talent gap.

What can universities do to bridge that talent gap and encourage entrepreneurship, and how can the curriculum reflect this?

There is a significant role that universities and colleges can play. It is an out-dated mindset that universities should focus only on theory. Many already provide experiential learning opportunities via co-op programs, internships, incubators, accelerators, company projects and the like. While these are great, many are focused on technical skills or in the start-up arena. Universities and colleges simply need to take these time-tested types of activities and rethink how they could be applied to addressing the scale-up talent gap.

“Academia should look at new forms of enterprise, new forms of organizations, and new ways of doing things.”

Secondly, the actual content taught with respect to management education needs to continue to evolve. When I went to business school, more than a few years ago, there were no courses on entrepreneurship or innovation. It was all about getting a job in a big, existing enterprise. We talked a lot about General Electric and how Jack Welch ran this incredibly diversified portfolio of businesses. Now, we discuss how these Fortune 100 stalwarts are trying to reinvent themselves, how blockchain and AI are disrupting everything, and how to create and launch new companies. Management education needs to now contemplate, or in some cases ramp up and re-emphasize, curricula focused on how to do scale-ups well. Scale-up means being a global enterprise, requiring courses such as : How to build a global sales force? How to hire 1,000 people a month across the globe? How to create a finance infrastructure that supports a global enterprise? Academia should look at new forms of enterprise, new forms of organizations, and new ways of doing things.

What advice would you give to a young aspiring Canadian entrepreneur today?

The best advice is to have no fear and capitalize on the fact that today’s entrepreneurs face very little friction. Starting a business and growing a business is not as difficult as most people think, and it’s certainly much more socially acceptable to be an entrepreneur. It’s crazy, but 25 years ago, you would become an entrepreneur if you could not get a job at a big company. Now, everyone wants to do their own thing, be in charge of their own destiny, and change the world. Today, you can easily become known thanks to social networks like Instagram. There is lots of access to start-up capital, such as crowdfunding sites like Kickstarter and GoFundMe. We also have access to a variety of critical enablers: incubators, accelerators, maker spaces, freelance job sites, backend tech infrastructure, access to SaaS ecommerce platforms and payment systems, and the list just goes on and on. These once costly barriers are gone today. I also think that this generation has a completely different view of risk and societal norms. For all the hard work you’re going to put into any job to climb the corporate ladder, why not take that same energy and focus it on something in the start-up community.

Part of the Entrepreneurship Series presented by: