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Canada must learn to scale up to turn innovators into employers

October 4, 2016

You won’t find many Canadians cheering the global slowdown in commodities. But amid the economic discomfort, important questions are being asked: How are we positioning other key national economic drivers, beyond the resource sector, to ensure our continued prosperity?

We need to be a competitive innovation country. We have a great foundation of entrepreneurialism – Canadians actually create new firms at a higher per capita rate than Americans, according to an Industry Canada study. Last year’s billion-dollar Shopify IPO represents a great demonstration of how made-in-Canada innovation and entrepreneurial energy can succeed.

With the commodities sector downturn and the election of a new federal government as a backdrop, now is the time to change the conversation – to prioritize Canada’s innovation sector and help this key economic driver “scale up.”

What do I mean by scaling up? A Deloitte study citing Organisation for Economic Co-operation and Development (OECD) statistics found that our startups have a strong record of achieving high rates of growth in their first five years. The federal government and provincial governments of all partisan stripes have cultivated a strong start-up ecosystem over the past decade. A 2015 report by the Global Entrepreneurship Monitor stated that among Group of Seven countries, Canada was second only to the United States for entrepreneurship.

Unfortunately, far too many of our startups cannot maintain that high rate of growth beyond their fifth year. As Deloitte reported, only about 3 per cent of Canadian services firms that survive beyond that point still qualify as high-growth.

While some of those startups find buyers south of the border, those next-stage innovation firms that remain get little support in their efforts to become large global companies. While the solution to scaling must be driven by the private sector, a collaborative approach with government will most certainly help. In fact, we need some of our startups to scale up into globally competitive firms that generate large revenue, employ thousands of Canadians and contribute to the tax base we need to maintain public investments. A different mix of policies will help more of our startups scale up to the Shopify stage and then grow to billion-dollar companies.

The blend of policies we need requires us to make a course adjustment. Government and high-growth potential innovative companies must come together to identify specific road blocks that they can clear together. As Prof. Daniel Isenberg, founder of the Babson College Entrepreneurship Ecosystem Project, has aptly stated: “Extraordinary value creation cannot occur without growth, and entrepreneurial growth poststartup, has numerous challenges, which can be an order of magnitude more difficult than simply starting a venture.”

The two areas that government and the innovation sector can and should focus on are customer access and talent access. This should be our objective for the next five years.

In terms of access to customers, we can do a lot more to help innovation startups get a fair shot at government and large corporations procurement opportunities. We can learn from our competitors. In the European Union, Israel, South Korea or the United States, jurisdictions make it relatively simple for startups to seek government contracts. Why? One reason is that nothing scales up top-line growth for a startup like securing sales to a big customer.

On procurement, we must at least match our competitors by streamlining government purchasing processes. And while I personally favour more “buy Canadian” procurement policies, let me be clear: I am not talking about subsidies or handouts. Innovation companies that receive government contracts must earn them by providing competitive solutions.

When it comes to government policy, procurement is just one piece of the customer access puzzle. A focus on specific intellectual property and copyright protections, bilateral trade policy, corporate tax policy and standards and regulations strategies that affect high-growth-potential companies are critical to entrenching Canadian technologies in the global marketplace.

Next comes access to talent. Today, this goes beyond the usual issues such as immigration policy or training and education. These remain important given the global tug-of-war to secure innovation sector-related talent, in which Canada is one competitor among many. It also includes ensuring we do not hamper startups’ ability to attract and retain key employees – or worse, give those workers incentive to relocate to more attractive jurisdictions.

On that score, there’s been talk of increasing taxes on employee stock-option plans. This discussion overlooks how startups in the innovation sector rely on stock-option plans to compensate employees. Rather than take a normal salary, innovation workers receive stock options and defer their compensation, sometimes for 10 years. Even then, the options may not appreciate; not every startup becomes a public company.

Everyone understands that governments need revenue to achieve their goals, but an option tax that hits Canadian startups risks driving away highly mobile talent and endangers that same government revenue. Let’s be mindful of the unintended consequences of such a tax. An exemption for the innovation sector may be necessary.

There’s no quick fix guaranteeing that Canada’s innovation sector will scale up and mint new unicorns. But make no mistake; we need far more scale-ups competing on the global stage. A better developed, scaled-up ecosystem means that we can become the acquirers, rather than always playing the part of the acquiree. This would give our innovation ecosystem longer-term stability and provide government with sustainable revenue. Enacting these policies calls for a collaborative approach and bold action. Our innovation sector’s future, and Canada’s future prosperity, demand nothing less. It’s time to scale up.