Canadian scaleups are attracting unprecedented levels of investment these days but it still isn't enough to transform them into global competitors, entrepreneurs told RE$EARCH MONEY’s 18th annual conference in Ottawa.
Rather, Canada’s innovation ecosystem needs major cultural and structural changes to adequately support mid-tier firms with the potential to be global champions, business heads said in two separate panel sessions focused on growing Canadian companies.
“The flow of (venture capital) dollars has increased, the flow of dollars per deal has increased, and in particular the flow of dollars to do very large deals has especially increased,” Neal Hill, VP, market development at BDC (Business Development Bank of Canada) Capital, said in moderating the first panel session, which discussed the right investment blend to finance scaleups.
Total VC investment in Canadian companies more than doubled over the last five years, averaging about $3.6 billion in each of the last two years, he said. Deals of more than $10 million have increased, with deals of more than $50 million representing about one-quarter of total VC investment last year.
BDC Capital has a co-investment group that’s investing $30 million to $50 million per year alongside VC fund managers, to support later-stage financing rounds, Hill said. “The math tells us that the dollars are moving toward those scaleup opportunities.”
Panelist Craig Betts, founder and executive chair of Ottawa-based Solace Systems, which has revenues of over $50 million, said he raised enough capital within Canada to start building his company’s product, which enables the smart movement of data. Even more important to success, Betts added, has been attracting “really impressive” Canadian business people to the company’s board. However, he acknowledged that there are fewer of these knowledgeable mentors to help scaleups here than in the U.S. and other countries.
Panelist Andrée-Lise Méthot, founder and managing partner of Montreal-based Cycle Capital, which has about $1.1 billion in equity, said U.S. clean tech companies typically receive two-to-three times more investment than a Canadian counterpart. Méthot said she sees too many up-and-coming Canadian firms being bought by foreign interests because they can’t find sufficient growth-stage funding in Canada, or they lack experienced Canadian senior managers at the board level.
“We’re really good at the R&D, but when it’s time to deploy there’s not enough money and not enough smart and sophisticated people around the table,” Méthot said. The federal and provincial governments also need to better align their policies and regulations with successful Canadian growth firms, she said. “Or they won’t be Canadian in a few years.”
Government sending “mixed messages”
In the second panel session, Neal Desai, VP of Waterloo ON-headquartered Magnet Forensics, which makes tools for investigating digitally based crimes such as fraud and child pornography, said the government could use its purchasing power strategically to better help scaleups. A purchase order is the most valuable and validating form of capital for a company, he said. He added that it's “perplexing” the federal and Ontario governments are willing to backstop risky venture capital, but not support a self-financed executive team pouring profit back into their company.
Desai said the architectures of Canada’s innovation ecosystem are designed to help startups. The federal Scientific Research and Experimental Development tax credit program is available only until a company is profitable, he said. “The minute you’re profitable, it’s not.” National Research Council Canada’s Industrial Research Assistance Program (IRAP) is capped for companies with more than 500 employees, yet Ottawa says it wants to use IRAP to help scaleups, he noted. “That’s a bit of a mixed message coming out to the community.”
Panelist Rupen Seoni, senior VP at Environics Analytics, a Toronto-based data and analytics business, said Canada lacks the ecosystem structures to facilitate partnerships between government and the private sector, especially for strategic procurement. “Right now, we have to get in front of the right person at the right level of seniority who will somehow make an exception to make it happen. That’s not the way to partner with business.”
Panelist Audrey Mascarenhas, president and CEO of Calgary-based Questor Technology, said her clean tech firm’s revenue grew from $8 million to $23 million over the last three years. But 98% of that revenue is generated in the U.S., largely because the energy regulator in Colorado implemented regulations to reduce oilfield emissions and invited Questor to bring its technology to the state, she said. “Other countries use the leverage of their government. We never do.”
Mascarenhas said the Googles and Apples of the world are rapidly growing their workforces by offering internships to the brightest students at Canadian universities. “We’re paying these companies to come and set up their shop, and for the minimal investment of sponsorship they steal all of our talent,” she said.
At the same time, Mascarenhas said Canadian governments are pouring money into business incubators that have very low success rates, while “abandoning” mid-tier scaleups with potential for $100-million revenues. “We’ve got this enormous brain drain of entrepreneurs. We have to change the culture and . . . start to say it’s okay to cheer for winners and support them. And it’s just not about capital.”