Canada can create 10 technology companies worth over $1 billion in the next 10 years, but only if significant changes are made to nearly every aspect of innovation policy, according to a report commissioned by the government.
The document, obtained by The Logic through an access-to-information request, envisions the launch of a national scale-up strategy that would alter the way the government allocates innovation funding, how key institutions like the Business Development Bank of Canada (BDC) operate and how venture capitalists and banks fund tech companies.
If all goes as planned the result would be the creation of 25 companies with over $100 million in annual revenue and $7 billion deployed per year of venture capital in Canada within a decade, in addition to the targeted 10 companies worth over $1 billion.
To help more companies grow exponentially, the report recommends changing how innovation funding is allocated to ensure money flows to companies that are growing and stops going to those that are not.
“Companies can currently use government programs multiple times without demonstrating growth or sustainability,” according to the document.
The document discusses the possibility of introducing a “lifetime limit” on applying for federal innovation funding to address “companies who survive off government programs.”
“The lifetime limit could take the form of either money or time. This would force companies to plan accordingly as opposed to taking advantage of programs like SR&ED continuously,” reads the document.
The report, titled “The Scale-Up Gap: A Blueprint for ICT Firm Growth,” was commissioned by the information and communications technology policy branch of Innovation, Science and Economic Development Canada (ISED). It was put together by two consulting firms, which interviewed some of the most prominent individuals in Canada’s tech sector, such as Bill Tam, then-president of BC Tech; Michael Galbraith, CFO of North (then Thalmic Labs); and Steve Currie, CIO of Communitech.
The federal government commissioned a report laying out a plan to build 10 tech companies worth over $1 billion in 10 years. It suggests only funding companies that demonstrate growth or sustainability and cutting off companies that rely on government funding to stay afloat. It also calls for private banks as well as BDC and EDC to become less risk-averse in providing debt financing for growing tech companies.
The scale-up report is sharply critical of not only SR&ED, which The Logic reported earlier this month disproportionately funds large companies, but several other prominent government innovation initiatives. BDC and Export Development Canada (EDC) are characterized as being too risk-averse in providing debt financing for growing tech companies, compared to development banks in other countries.
The Industrial Research Assistance Program, commonly referred to as IRAP, is described as having too many impediments to allowing foreign acquisition and has “little to no relevance in supporting growth.” The Canada Accelerator and Incubator Program and CanExport were also criticized; only Sustainable Development Technology Canada was universally praised as an “excellent program with sector specific support focused on commercialization activities.”
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Changes to some of these programs are already under discussion. In February 2016, John Knubley, deputy minister of ISED, and Giles Gherson, then-deputy minister of Ontario’s economic development ministry, met in Ottawa with representatives from many of the criticized programs. The object of those discussions was to eventually introduce new programming that would help “support the scaling up of Canada’s most promising companies.”
The report calls for a consolidation of the number of business innovation programs and the careful tracking of whether that money is helping companies grow. Budget 2018 eliminated about two-thirds of innovation programs, with many being consolidated. The Logic reported last month on a different analysis that showed the government did not measure results for a third of its $1.7-billion annual innovation funding programs between 2012 and 2017.
While there are many small startups in Canada’s tech sector, the report argues that companies at the scaling stage—which it defines as those with 10 to 25 employees and $2 million to $10 million in revenue—typically struggle. Consequently, very few Canadian technology firms ever grow into large companies.
“Canada is internationally ranked as a top performer at creating high growth startups but near the bottom at having high growth medium sized companies,” reads the document.
The scale-up report states that Canadian banks “are risk averse when it comes to providing debt financing to growing ICT companies,” and that U.S. banks such as Silicon Valley Bank and Comerica are filling a gap created by risk-averse Canadian lenders.
Canadian banks only lend to Canadian tech companies when they are backstopped by government programs like the Small Business Loan Program and BDC and EDC’s small-business finance guarantees, according to the report.
“These programs can create dependencies by the banks to only provide business credit if guarantees are provided by governments. This does not create a healthy business credit system that requires financial institutions to evaluate risk based solely on the merits of the business,” reads the report.
“Government programs should modify their guarantee programs to transfer the risk to the financial institutions over a defined period of time. Any guarantees would reduce or expire on a predetermined schedule.”
The report is also concerned about the dearth of IPOs in recent years, which is an industry wide challenge due to an increase in the amount of private capital available and companies wanting to stay private longer as a result.
“The number of successful exits has stagnated, indicating that not enough companies are scaling to a successful IPO or large acquisition,” reads the document.
Between 2013 and 2016, only four Canadian technology companies—Halogen Software, Baylin Technologies, Kinaxis and Shopify—debuted on the TSX, according to the report. Things haven’t improved much since then. Mogo Finance Technology, Ceridian HCM Holding and Real Matters are the only tech companies that have been publicly listed since that analysis was completed. Only Ceridian has a market cap of over $1 billion. However, IPOs are not the only metric of success. Waterloo, Ont.-based Kik, for example, raised $100 million in an initial coin offering last year.
A key way to solve the lack of IPOs is to create a national securities regulator, according to the report. The regulator would provide stability for investors, regardless of which province they’re operating in, and create investor registries to provide trust-like services for the holding of stock certificates. The federal government’s attempt to do the former is currently awaiting a Supreme Court decision
The report was discussed at multiple meetings of the Digital Industries Economic Strategy Table, the group chaired by Shopify CEO Tobi Lütke which advises Innovation Minister Navdeep Bains on growing Canada’s tech sector. One of the reports’ authors, Jeffrey Dale, gave a presentation on it at the group’s January 2018 meeting.
A list of recommendations released in September by Lütke’s group, echoes many of the same goals as the March 2016 report (it calls for 13 new billion-dollar companies by 2025), but it does not include the detailed criticism of Canada’s innovation programs or private sector practices, both of which the 2016 report identifies as key barriers to change.
While the scale-up 2016 report hasn’t been made public, some of its key recommendations have already become policy—it called for changes to immigration laws to fast-track highly skilled tech workers, some of which were implemented last year. And its most aspirational tenet is now a talking point for senior government officials. Last week in Ottawa, Bains said to a room of Canada’s top tech leaders that he’d told the prime minister he regarded the creation of “10 Shopifys” as a measure of success for the government’s innovation agenda.
Nilani Logeswaran, a spokesperson for Bains, did not directly answer questions about which, if any, of the recommendations issued in the scale-up report or the one issued by Lütke’s group, the government intends to implement. Logeswaran said: “All in all, I would say these are both reports providing recommendations to government, and not a report by the government on policies and goals.”
Other recommendations from the scale-up report are echoed in Lütke’s report—most significantly the call to focus funding and resources on firms that are already growing rapidly with the goal of creating billion-dollar firms.
Lütke’s report, however, does not mention the scale-up reports’ concerns about private-sector lending nor does it mention the scale-up reports suggestion of a national angel tax credit.
That credit would allow investors to write-off investments between $50,000 and $250,000, similar to programs launched in British Columbia, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland.