As Canadians, we live in an incredible country but I want my children to live in a better one. And with six children, I’ve got a pretty big vested interest! How do we continue the recent trajectory of growth and innovation in this country?
The basic economic equation is: Competition improves innovation which drives productivity, generates higher GDP per capita and in turn improves the standard of living and prosperity of everyone in the country. Many of Canada’s economic challenges can be associated with the first step in the process – Competition.
The World Economic Forum just released their annual review of international competitiveness. Unfortunately Canada’s ranking fell to 15th (from as high as 9th five years ago). This is our lowest ranking since 2006. The study looks at 12 pillars of global competitiveness. The two that held us back most are Innovation and Business Sophistication (we did great in the basics such as health, education, institutions and infrastructure). More worrisome is that our private sector spending on research and development (R&D) is ranked 27th in the world while in government procurement of advanced technology we rank 48th!
Our businesses just don’t spend enough on R&D at 1.7% of GDP compared to 2.4% of GDP for other OECD countries. While already spending 30% less than our peers, this rate is going down in Canada while other nations are on the rise. From 2005 to 2010, Canada’s gross expenditure on R&D fell 15%! Part of the issue is that just 6% of R&D spending comes from Oil and Gas extraction versus the 32% which comes from the technology sector. This disproportionately low spending in other sectors makes Canadian technology R&D even more important.
We need to continue to grow Canadian technology companies and keep them in Canada in order to develop a more vibrant ecosystem in this country. Eventually, investment in innovation and education will become self-reinforcing. But until we get there, we need leaders of Canadian tech companies to build the foundation by resisting the urge to sell too early and continuing to grow their companies in Canada. The good news is that there is more capital available today to achieve these ends. In 2013, venture capital investments in Canada rose 31% to $2 Billion. This is the second highest level in a decade. The average deal size continues to increase and there is a consistent flow of capital from the U.S. as well.
However, as Canadians we remain risk-averse. Compared to U.S. and European investments, our deals are done at later stages, and in more profitable companies with lower failure rates. We need to shift our culture and recognize that it is OK to fail and that a certain amount of failure is a necessary part of building the innovation ecosystem.
Despite this more cautious approach, Canadian tech companies are largely capitalized well-enough to get to a sale – the median amount raised prior to a sale was the same in both Canada and the U.S. in 2013; BUT we sell earlier (too early) with the mean time to exit in 2013 at just over 3 years in Canada versus 5 years in U.S. (stats from Canada’s Venture Capital and Private Equity Association).
If we don’t sell too early, here is what happens: Canadian VC-backed companies have nearly three times the average sales growth as non-VC backed firms; 10 times the employment growth rate and three times the R&D spending growth. This all translates into a huge impact on our economy and addresses several of the issues cited by the World Economic Forum study regarding our innovation and business sophistication.
Together, we can continue to build a lasting Canadian innovation ecosystem which drives productivity in this country and improves the standard of living for my children and yours.
About the Author
David is passionate about innovation in Canada and speaks frequently on this topic. He is a trusted advisor to high-growth technology companies across North America and Europe and founded the technology investment banking practice at BMO Capital Markets in 2008.More Content by David M. Wismer