Canada lacks policy and financing links to grow scaleups into global firms, say stakeholders

Scaleup companies need improved government policy and more financing from Canada’s big banks to grow large enough to compete globally, say entrepreneurs and innovation policy experts in conversation with RE$EARCH MONEY.

While venture capital investment is increasing in Canada, there is still a shortage of financing for tech scaleups in various growth stages, they say. As a result, many entrepreneurs are selling their companies too soon. Canada then loses intellectual property and other valuable, non-tangible assets to foreign firms, along with companies with disruptive technologies and potential to become “Canadian champions” on a global stage.

“I think what we ultimately need is a real shift in how the federal and provincial governments view innovation and scaling,” says Andrew Graham, co-founder and CEO of Borrowell, a Toronto-headquartered fintech firm that provides free credit scores and financial tools to consumers. Policymakers need to gear all of Canada’s innovation programs and industrial policies to growing “world-beating” Canadian companies, rather than creating tech jobs for U.S. subsidiaries that establish branch plants here, Graham says.

“The Canadian banks, for the most part, are missing in action when it comes to helping scaling companies,” says Toronto-based entrepreneur Marnie Walker, co-founder of Maple Leaf Angels. “And the government either directly or through other organizations funds the research or entrepreneurs as a startup, but then abandons them when they have success in the market and are ready to scale.”

VC funding in Canada hit a record high in 2018, with nearly US$3.47 billion invested through more than 471 deals, with a 26% increase in average deal size of expansion-stage deals, according to the Money Tree Canada report by PwC Canada and CB Insights.

Despite this investment, Canada’s companies are small or medium-sized when measured by employment, with just 0.3% classified as large, according to Innovation, Science and Economic Development Canada. In 2017, Canada had only 11 firms in the Global 500 directory, which ranks companies based on annual revenues.

Government innovation programs have focused more on supporting SMEs over large firms and have dropped firms as they gain size or profitability, policy experts Robert Asselin and Sean Speer said in a report released this month by the Public Policy Forum.

The situation is worrisome given that Canada's Innovation and Skills Plan aims to double the number of high-growth, high-impact firms in Canada, from 14,000 in 2014 to 28,000 in 2025.

Sean Mullin, executive director of the Brookfield Institute for Innovation + Entrepreneurship at Ryerson University, told R$ that over the last 10 years, government has made some smart moves – such as the Venture Capital Catalyst Initiative – to fix the startup stage of the financing ecosystem. “Now we have to turn our attention to the second stage.” This includes recognizing and supporting those unique entrepreneurs and opportunities to “go for the moon shot” and grow a company to global scale, Mullin says.

Challenges include fewer venture funds, “risk-adverse” banks

Graham says a major challenge is that about 100 times more VC investment goes into U.S. companies than in Canada. “There are certainly far fewer venture funds in Canada on a per capita basis, and fewer sector-specific venture funds in Canada.”

Walker says she received no help from Canada’s “Big Five” banks (RBC, TD, Scotiabank, BMO, CIBC), apart from some initial seed funding, in scaling her first company, Student Express, into a $15-million school bus firm. “The banks are risk adverse and poor at evaluating high potential growth companies,” she says. The federal regulator should compel Canada’s banks to allocate a certain percentage of their loans to scaleups, and redirect some innovation funding from startups to scaleups, she says.

Graham says Borrowell has benefitted from National Research Council Canada’s Industrial Research Assistance Program and the Scientific Research and Experimental Development Tax Incentive Program. But for scaling financing, the company – which has doubled its workforce to 65 from a year ago – turned to U.S.-based Silicon Valley Bank (SVB). “Ultimately what SVB offered was more commercially attractive to us, and looked to be a much faster process than what we were able to find with Canadian institutions,” Graham says. Borrowell also has VC funding from Portag3 Ventures and White Star Capital.

Mullin says that many scaleup firms in the “new economy” are knowledge-based and IP-driven, with IP and other intangible assets. “That’s a much higher risk profile for a bank.” Government could offer policy solutions such an insurance scheme that would help de-risk bank loans for scaleups for a period of years, until banks better understand the value of intangible assets, he says.           

Silicon Valley Bank’s arrival offers options

Canadian scaleups will have more in-market financing solutions now that Silicon Valley Bank (SVB) has a federal license to operate in Canada and opened its Canadian headquarters in Toronto. SVB has served the Canadian market via its U.S. operations since 2000, supporting clients such as Hootsuite, Shopify and HLS Therapeutics.

For 35 years, SVB has only banked the innovation economy of tech and life sciences companies and their investors, says Barbara Dirks, head of Canada at SVB. “We come to the financing or the founder conversation with an understanding of tech and scaling and funding rounds and the next milestone,” she says. “It really has evolved into the DNA of our company.”

SVB banks 50% of all venture capital companies in the U.S. and more than 60% of companies that completed an initial public offering in 2018, Dirks says. As of Q4 2018, the bank reached $3.4 billion in international loans, which includes Canada, the U.K., Israel and Asia. Two-thirds of the deals in Canada last year were for less than $1 million, compared with more than 60% of the capital raised in the U.S. through $25-million-plus growth rounds.

However, SVB saw a big shift last year in the higher number of larger rounds of financing in Canada, which indicates more companies are scaling to the next level, Dirks says. “We’re pretty bullish on the opportunity. We think the capital will flow and companies will scale in Canada.”

R$