Almost exactly one year ago, Prime Minister Justin Trudeau attended a Liberal Party breakfast fundraiser at the Delta Hotel in Waterloo, Ont., the heart of Canada’s innovation corridor.
Ramping up for his reelection campaign that fall, Trudeau spoke about how the country needed to think big, the way Waterloo had done. “The transformations you’ve gone through, from textiles and manufacturing to being a leading tech hub … has elements of it that we need to replicate around the world, and mostly, we need to continue to invest in here.”
Over its first four years, the Trudeau government backed those words with action. The Liberals put $2.51 billion into the Strategic Innovation Fund and have used it to support firms outside the traditional auto and aerospace sectors; they’ve expanded eligibility for scientific research and experimental development credits; and they launched the superclusters program, which is finally starting to pick up steam. In February 2019, Ottawa packaged those and other gifts to the ecosystem into a glossy report titled “Building a Nation of Innovators.”
While the programs aren’t without critics, few in the tech sector doubted the prime minister and his deputies’ intent to be their champions. “Ten Shopifys wouldn’t be so bad,” Innovation Minister Navdeep Bains told an audience of tech executives in an Ottawa hotel ballroom in October 2018.
Which is why this week has left so many in the tech community bewildered.
To recap, on Monday and Wednesday, the government unveiled details of its 75 per cent salary assistance program—and it turned out most of those building Canada’s innovation nation wouldn’t qualify. The Canada Emergency Wage Subsidy (CEWS) is available to all Canadian companies and charities that have experienced a 30 per cent drop in revenues year-over-year for the months of March, April and May. Startups and high-growth companies that focused on continued expansion over profitability—or that don’t measure their earnings in quite that way—don’t think they’ll qualify.
Such startups raise funding on the promise of future growth. They use the money to hire employees and pay for marketing efforts. Those resources drive revenue growth. For 11 of the past 12 months, those efforts had the desired effect for successful operators, leaving year-over-year revenues exponentially higher than before. Then COVID-19 happened. Those same firms now have to account for losses in their future revenues. That means they need to reduce expenses in employee headcount and marketing even if they’re still seeing sales growth from the investments they’ve already made. For this group, in other words, revenue is a lagging indicator.
The CEWS criteria don’t seem to take this into account. As my colleagues have reported all week, the startup community has been left frustrated and confused by the government’s apparent about-face on a sector it had championed for so long. If the goal was to save jobs, then why don’t the policies apply to startup staff?
I want to pause here and acknowledge a few things.
First, COVID-19 is a public health crisis. The government’s immediate focus is and should be addressing that challenge.
Second, over the past three weeks governments have been crafting and executing in a few days policy that would normally take months. Extended cabinet meetings, long hours and time away from family have been the norm. I am thankful, and I know I’m not alone.
Third, main streets across the country are in deep pain. With more than 1.3 million Canadians filing for employment insurance and businesses shut down indefinitely, the overriding economic goal should be preventing a depression. The wage subsidy, along with the $40,000 loan program and the extended EI benefits, will go a long way in helping small businesses (though even there, some argue it won’t be enough).
With everything else going on, it would be easy to minimize the tech community’s concerns as complaints from an over-leveraged group of privileged entrepreneurs now facing the consequences of taking on too much venture capital and debt. There’s a line of thinking that this is the right time for a spring cleaning. That startups with healthy income statements and balance sheets will weather the crisis unscathed. That there’s enough “dry powder” on the sidelines for promising firms to go through existing channels and accept dilution when needed—or at the Business Development Bank of Canada (BDC), which, as The Logic reported this week, will be setting up a matching program for investments.
In isolation, that would be a fair argument. The same could be said for the airline and energy sectors, for which the government is working on bailouts.
But in this crisis, nothing can be viewed in isolation.
Airlines and energy companies are massive drivers of the Canadian economy and employment. They are too big to fail.
Tech startups that have been nurtured and supported by a burgeoning ecosystem are just starting to show signs of being vital to the overall economy. Letting these promising Canadian companies die because they pursued growth and scale would be a tragic mistake that could set the country’s innovation efforts back by decades.
It’s something both the United States and Germany seem to have grasped.
The U.S. Paycheck Protection Program allows small businesses impacted by COVID-19 to take out unsecured 10-year loans of up to US$10 million. The credit is based on a 2.5 multiple of average eligible monthly payroll costs, excluding compensation above US$100,000 in wages. So any business with US$100,000 in monthly payroll is eligible for a US$250,000 loan payable over 10 years. The program makes no distinction based on revenue loss, so the same rules apply for a tech founder or barbershop owner—and neither has to put up their house as collateral. (Implementing the program has admittedly been challenging.)
Germany is giving its startup community a tailored €2.2-billion loan program to provide liquidity for firms struggling with a collapse in demand. “Classic credit instruments are often a poor fit for young, innovative companies,” said Economy Minister Peter Altmaier. “For this reason we are offering a tailor-made support package.” The package is about “ensuring that this innovative growth sector with its many thousands of jobs gets through the crisis in good shape,” said Finance Minister Olaf Scholz.
While the Canadian government has worked with banks to issue credit of up to $6.25 million, of which 80 per cent will be BDC funding, details remain scarce.
Every day that companies go without new information is a day that burn-rate uncertainty becomes untenable.
Over the coming weeks, there will be countless layoffs in some of Canada’s most promising startups. Many could be avoided with a wage-subsidy policy that included them, or a loan policy that wasn’t restrictive to growth-stage firms.
At that same breakfast in Waterloo last year, the prime minister said the country must choose whether to “go forward confidently, or to hunker down in fear.”
There’s no way he could have known his words would be a primer for the unprecedented crisis Canadians are now facing. But his government should follow his advice.
A crisis is an opportunity to do things you could not do before. Now is the time to prepare Canada’s new economy, while continuing to support the one we have.