Building Growth-stage Tech Companies in Canada
- Access to growth capital – and the right kind of growth capital – is an ongoing challenge for Canadian growth-stage companies, the lack of which can prevent them from reaching their full potential.
- The role of the government is to create the right conditions for businesses to thrive, not to intervene directly in entrepreneurship or to pick winners.
- Canadian management teams and investors need to develop the mindset of thinking big and about how to win outside Canada – not just in Canada.
I would pitch to entrepreneurs and aspiring entrepreneurs to take more risks and think bigger sooner. Take your plans and double or triple them and figure out how you’re going to make it work. Whenever we have thought small we have regretted it and wasted valuable time.
What do you identify as the main challenges that Canadian growth-stage businesses face?
Growth-stage companies around the world face common challenges, such as scaling their organizations, refining their product at high speed, evolving with their customers, dealing with competition, attracting talent, and attracting funding.
“One challenge that is somewhat more difficult in Canada is the availability of growth capital.”
One challenge that is somewhat more difficult in Canada is the availability of growth capital relative to the US. Canadian investors also often don’t look at the growth stage the same way US investors do. When I go to New York and San Francisco, I can talk to a dozen growth equity funds that specialize in our business model. There is nothing like that in the Canadian economy. Canada’s investment ecosystem is obviously smaller and less specialized than the US. Fortunately, many of the best Canadian growth businesses are taking on US and international capital, but we would be well served to have more sophisticated venture capital and growth equity in Canada staying close to promising Canadian businesses. Having said that, I think Canada is moving in the right direction and we’re in a much better spot than five years ago. Toronto has come a long way, especially in fintech.
What role do you see the Canadian Business Growth Fund (CBGF) playing in supporting our entrepreneurs?
CBGF is specializing in minority growth equity and doing it in an entrepreneur-friendly way. They have figured out a model that leaves entrepreneurs and management teams with greater control of their businesses than might otherwise be the case. They have designed their investment product for a very common situation, which is when a founder-controlled business wants to continue growing and raise a meaningful amount of capital but does not want to give away the keys yet.
“For entrepreneurs, it is not just important to access growth equity, but also to find the right partners who are aligned with their vision and where they are trying to go.”
The CBGF team is really good at working with growth companies. They are great mentors and resources for any management team. For entrepreneurs, it is not just important to access growth equity, but also to find the right partners who are aligned with their vision and where they are trying to go.We found we had a great alignment of values with CBGF and that was very important to us in picking them as a partner. We chose CBGF to lead our last round over some US and international options that we had.
If CBGF can invest in 25 or 30 Canadian companies in their first fund and continue to build, they will make a real impact in this country.
What can the government do to improve Canada’s business ecosystem?
Generally speaking, the government’s most important role is to set the right general conditions for business. Then it is up to businesses to figure out the rest and to thrive. Direct government intervention and picking winners with taxpayer dollars is not ideal. I think CBGF is a perfect example of how to do it – it came together through the federal government using its convening power but zero taxpayer money.
From an innovation standpoint, I think regulation needs to be designed in a way that works for startup and growth businesses, as well as incumbents. If the regulatory burden in a particular sector is so high that no small company can hope to adhere to it, that’s a problem for that sector and for customers over the long term. That doesn’t mean that regulations aren’t important – it means we need to find a way to create the right conditions in each sector. If the regulatory burden in a particular sector is significant and is difficult for small companies to comply with initially, that’s not a good thing for innovation in that sector. One solution is creating a sandbox environment where small companies can start off and grow into the regulatory regime – this is something that the Ontario Securities Commission (OSC) has been testing in the securities area, for example, with their LaunchPad program.
“If the regulatory burden in a particular sector is significant and is difficult for small companies to comply with initially, that’s not a good thing for innovation in that sector. One solution is creating a sandbox environment.”
The government also has a key role in ensuring that the universities are strong and have funding for technical subjects that move the dial in business and tech. We’re generally doing well here but we need to keep moving forward. Likewise, we need to make it easier for talented migrants to find employment in Canada. Canada is doing a better job than the United States on that front at the moment.
I do think we have good programs like the Scientific Research and Experimental Development (SR&ED) tax credit and IRAP research grants to encourage innovation. But the amount of paperwork required to access those programs can be difficult for small companies. There are certain government programs that we have not applied for because we don’t have the time to spend weeks on the paperwork. In fintech, we spend all our time figuring out how to make a financial transaction fast, paperless and convenient. Government paperwork is at the opposite end of the spectrum – this is an opportunity for improvement to ensure that these programs are being used.
How do you think Canada’s tech businesses should approach scaling up internationally?
In general, tech businesses can be really nimble across international borders and in some businesses, borders are almost irrelevant. It is a little different in fintech because the border is more real from a regulatory and capital standpoint, depending on the particular sub-field of fintech that you operate in.
Winning in the Canadian market is great, but I think we all need to figure out how to build more international winners. At the end of the day, Canada is a very small piece of the global economy and we can’t build global champions by only sticking close to home.
“We would have more large international tech companies if more investors and management teams were willing to stay the course and try to fulfill their global potential.”
Sometimes, in Canada, businesses tend to become the best in their field domestically, and then end up being sold to an international acquirer. The motivations make sense, but from a national perspective it seems like we have way too few Shopifys and other tech companies that have tried to go the distance outside Canada. If Sweden or South Korea can have multiple large businesses that are globally successful, so can Canada. Canadian companies have at times sold too early. I believe we would have more large international tech companies if more investors and management teams were willing to stay the course and try to fulfill their global potential. If Shopify had been sold to someone else seven years ago, we would not have that international tech player with a Canadian headquarters providing high quality jobs in Canada today.
How competitive is Canada’s fintech sector globally?
Canada probably punches above its weight in fintech. It helps that the Canadian economy has a high penetration of financial services. We have a vibrant financial services industry and workforce, so that tends to spawn financial services ideas and technology. The 100-150 fintech companies of significance in Canada cover everything from lending and payments to wealth management and insurance. There is constant improvement and a sense of dynamism in Canada’s fintech community.
The Canadian tech network is becoming stronger with more meet-ups, tech conferences and opportunities for established entrepreneurs to speak to aspiring ones. The fintech community in Canada is also very collaborative and vibrant. On any given day, I probably talk to at least one other tech or fintech CEO in Canada.
As fintech companies emerged, there was a period of uncertainty where banks and established financial sector incumbents were figuring out how to engage with us and what it all meant. Now, I see a lot of willingness to engage, partner or even acquire from their side. We have great relationships with multiple Canadian financial institutions and they are lenders and investors in our business as well. Most of the significant Canadian fintechs have at least one partnership with a major financial institution in one way or another. It could be a distribution partnership, a technology service partnership or a funding partnership. I still think that banks are in the process of figuring out how to integrate the innovations of smaller fintech companies into their businesses – this is an ongoing process.
Part of the Entrepreneurship Series presented by: