"Canada must focus on adopting entrepreneurship with rigour – which means fixing the broken links on the long chain of startup activity. Whether academic, government, private or public sector, we need to get better at entrepreneurship as a country. The nation needs to be 'schooled'."
This article aims to debunk common perceptions around why Canada seems to be failing in its ability to create successful startups. A robust startup sector will only be made possible if Canada invests in and nurtures a culture of entrepreneurship.
Setting the Scene in Canada
“I need money.” A common assertion upon the mouths of entrepreneurs at startup phase, that money is the sure bet for their success, is one that must be de-mystified. Although capital is certainly quintessential, it is by no means the only factor. Furthermore, lack of investment capital is not the root cause of Canada’s deficiency in startup success.
In a report on understanding the disappearance of startups in Canada, the Impact Group points out that from a global perspective, Canada is well stocked in technological know-how and has solid skills and traditions in the research and development (R&D) sector. However, this fact might be marred by its inability to grow R&D-intensive firms. In 2001, only 200 of 9,000 R&D-intensive firms were considered to have had significant growth. Between 1994-2001, the high-growth group only saw an increase of approximately 14 new companies per annum.
Despite having healthy supports in place at both the Federal and Provincial programming levels, in the form of R&D tax credits, grants, loans and collaborative agreements, it’s our ability to grow Canada’s R&D-intensive sectors that proves weak.
Canada’s failure to commercialize its R&D may be a direct reflection of its traditional aversion to entrepreneurism. In more ways than one, the US has typically cultivated and appreciated entrepreneurship more than Canada, and has subsequently reaped the benefits.
The report also pointed out that, although all entrepreneurs face a certain level of failure, serial entrepreneurs are the most successful when compared to university or industrial entrepreneurs. A serial entrepreneur is defined as "somebody who makes a living by starting up companies and operating them until they are competitive, then selling them". This proves an interesting point when correlated to the fact that many American venture capitalists (VCs) are serial entrepreneurs, while their Canadian counterparts generally come from financial, not entrepreneurial backgrounds.
The lack of enterprise experience was also found among Canadian service providers such as lawyers and accountants. More importantly, however, may be the fact that among startups that failed, CEOs tended to be from scientific or technical backgrounds, with no business experience.
Impact Group found that among successful companies around the world, CEOs have remarked that Canada’s science and tech expertise is among the world’s best and have in fact competed over talent coming out of Canadian universities. However, due to the lack of commercial skills among Canadian graduates, CEOs were instead relying upon American and other foreign nationals for executive talent.
To further contextualize Canada’s serious issue with its productivity growth, a report put out by the Council of Canadian Academies states that since 1984, the relative labour productivity in the Canadian business sector dropped from more than 90% of the US level to 76% in 2007, putting the country 15th out of 18 comparative Organisation for Economic Co-operation and Development (OECD) countries.
With a Canadian unemployment rate that increased 46.6% from 5.8% in September 2007 to 8.5% in December 2009, it may be stating the obvious that creating new jobs is a priority for all levels of government, as well as for those affected by unemployment.
A report published by the Kauffman Foundation claims that startups – defined as companies less than 5 years old – accounted for all net job creation in the US between 1980 and 2007, despite the fact that on average, only half of the startups ever get to celebrate their fifth anniversary. However, the Kauffman report shows that for each pool of startups that reaches the five year anniversary mark, a handful go on to become very large companies and generate thousands of jobs.
With Nortel’s bankruptcy and entire industries losing ground, such as car manufacturing, the hope is that more than one breakthrough company like Research in Motion (RIM) emerges from the current crop of startups. Between 2001 and 2008 RIM increased its labour force from 1,200 to 12,000 (although a large part of that was outside of Canada), with R&D spending in 2008 of $383.6M.
As we drag ourselves out of the recent recession, we must keep a rosy outlook on the value of entrepreneurship. It provides a significant opportunity to commercialize some of the world-class research coming from Canadian universities and research communities.
It may be nothing more than a cultural observation, but there is something to be said for the fact that CBC is in its fifth season of the Dragon’s Den, a TV show where aspiring entrepreneurs pitch their business concepts and products to a panel of Canadian business moguls. University campuses are lighting up with startup competitions and the entrepreneurship-focused conference circuit is verging on oversaturated.
More than an uptake of entrepreneurism as a notion, Canada must focus on adopting entrepreneurship with rigor – which means fixing the broken links on the long chain of startup activity. Whether academic, government, private or public sector, we need to get better at entrepreneurship as a country. The nation needs to be 'schooled'.
Issues Faced by Startups
The Impact Group report illustrated the need for Canadian startups to enhance their entrepreneurship and commerce-based learning through:
promotion of role models and success stories
more opportunities for mentorship
better learning opportunities in educational and public policy realms
higher levels of entrepreneurship literacy and access to training
Canadian entrepreneurs need enhanced awareness of where the money and where the appropriate sources of funding are for specific enterprises. To this end, many organizations, like MaRS and TRRA, are undertaking large-scale mapping projects and releasing them as public resources.
Access to risk capital is a major issue for most Canadian entrepreneurs. According to CVCA, Canadian VC activity levels in the third quarter of 2009 were at their lowest level in 14 years. The $191 million invested by VC firms across Canada in the third quarter of 2009 represent a 51% reduction compared to the same quarter in 2008. In Ontario alone, the decrease in investments was 87% compared with the third quarter of 2008.
Unfortunately, there are no indications that the Canadian VC market will improve. New funds raised by VC firms in the third quarter of 2009 continue to fall with about 50% compared to the levels a year prior.
As part of a survey of entrepreneurs, MaRS solicited feedback to find out: Apart from funding, what is the biggest challenge facing your business at the moment?
23% of the respondents had marketing and sales as the biggest challenge for entrepreneurs. Issues ranged from lacking access to market intelligence to the hardships with sales due to the economic downturn. Market research reports are critical to startups for marketplace insight, but typically come at a preventative cost when purchased directly from established research providers.
A marketing strategy should be informed by keen knowledge of the marketplace: competitors, pricing trends, audience statistics and forecasting. Without this knowledge, it is easy for entrepreneurs to get caught up in assumption making – notably thinking that no one else is doing the same thing, that theirs is a unique business proposition and that the market opportunity is endless. Access to market intelligence is essential to get a sense of the horizontal landscape. Getting a handle on the competitive space will help inform a marketing strategy based on point of difference, which is critical to gain relevancy. For startups that are seeking external investors, understanding the drivers of their market and being able to quantify the size of the market opportunity is of vital importance.
Other concerns included the large cost for marketing implementation and assistance with the preparation of a business plan. Implementation of a marketing strategy, such as a website and other communication pieces, can cost upwards of tens of thousands of dollars. This represents a huge investment cost for a startup as well as a task that many have little or no experience with. The more intimate one’s sense of the marketplace, the more strategic one can be with positioning, inevitably mitigating some of the risk.
Marketing and sales are like vertebra on the spine of a solid business plan. It is no surprise that help with business planning preparation was a popular response.
Access to talent was the second most common challenge listed by startups, specifically finding the right personnel in the form of skilled professionals to build the team. Another issue is around team management and managing growth and hiring. Human resources as a management category can commonly be a weak spot for a new, lean team.
Following access to talent was mentoring, which is where issues around strategy and general business practices were raised. On mentoring, respondents listed such issues as:
business efficiency and business ethics
how to properly support multiple opportunities
the management of founder expectations
advice with regards to strategy
help sorting through the bureaucracy and time consuming nature of many legal issues
Strategic partners was mentioned as a top need closely after mentorship, and included specifics such as:
getting in contact with industry partners for research and development
purchasing and marketing needs
acquiring low cost manufacturing contacts
help with the commercialization of a product
Other needs identified included items such as lack of government financing and support, and protection for intellectual property.
Business Advisory Services From a MaRS Perspective
The mission of the MaRS Discovery Centre, a not-for-profit corporation located in downtown Toronto, is to build companies for economic and social prosperity. MaRS was founded in 2000 and opened its doors in 2005 with an aim to bolster Canada’s ability to commercialize its R&D and intellectual property (IP).
Since beginning its Advisory Services practice in 2006, and through the Government of Ontario’s Business Mentorship and Entrepreneurship Program, MaRS has served more than 1,850 clients. The program aims to make clear the distinction between advisory and consultancy.
A client does not pay a MaRS advisor. The model is more education-based where the advisor acts as a mentor to the entrepreneur-student. If the student fails to display the essential characteristic of a successful entrepreneur, namely, a work ethic or the “ability to do their homework”, then that proves to be a red flag from the outset. After all, entrepreneurship is based on risk, resolve and resilience.
MaRS’ Business Advisory Services takes clients that self-select in one of four categories: Health and related sciences, Information Communication Technology and Digital Media, Clean Technology, and Social Entrepreneurship.
All of MaRS’ services are offered free of charge and cover topics such as business planning, market intelligence, financial strategy and expertise in intellectual property. MaRS’ uniqueness lies in the fact that it is a convergence centre. It houses entrepreneurs and the groups they may need to help them through the commercialization process, such as VC firms, and advisors.
MaRS is based on a hub-model. We believe that the process of commercialization can be made much smoother by minimizing the typical hardships faced by startups. These are location based issues: if a startup cannot afford rent in the downtown core which is close to legal and venture capital firms, then relationship-building among critical players becomes a daunting task.
However, MaRS is not the only organization to offer free services to startup companies. In fact, it is one of many in Ontario:
Innovation Synergy Centre in Markham
RIC Centre in Greater Toronto Area
OCRI in Ottawa
Lead to Win in Ottawa
Communitech in Waterloo
Tech Alliance in London
There are also sector specific organizations:
The Health Technology Exchange for Medical & Assistive Technologies
OCETA for Cleantech
BioEnterprise for Agri-Food & Bioproducts
In order to mitigate the lack of risk capital, the Ontario Government has launched a number of funds and initiatives. One such fund is the $29M Investment Accelerator Fund (IAF), which is part of the Market Readiness Program that is co-managed by MaRS and the Ontario Centres of Excellence (OCE).
The IAF provides seed funding for early stage startups. Another fund is the $250M Emerging Technology Fund (OETF), a co-investment venture fund for technology startups in digital media, information and communication technologies (ICT), clean tech, and life sciences. These funds are complemented by the $50M Innovation Demonstration Fund (IDF), which offers funds to startups that need pilot scale demonstration projects as part of their commercialization cycle.
If there’s any argument to be made for growth, the following numbers are most convincing. In 2009 alone there was a 200% growth in the MaRS client portfolio, boosting the number of active clients to 400, and through the network of 70 advisors, 10,000 hours of mentorship were provided.
We conclude with a few of the success stories we have seen at MaRS.
ICT: Skymeter Corp. provides data needed to migrate roads and parking from taxpayer-subsidized to pay-per-use funding, cutting citywide emissions by 15 per cent and traffic congestion by 30 per cent. Its technology, including a small dashboard-mounted GPS device, generates financial-grade data and has been proven by Cisco Korea and California’s Department of Transportation. Applications include parking, insurance, car rental and emission metering services. MaRS has contributed to Skymeter’s development in many different ways. These include ongoing mentorship from the very early phases. Introductions to investors and potential business partners has helped Skymeter both to raise money as well as mature as an organization.
Life Sciences: INTERxVENT Canada helps organizations reduce medical costs and improve productivity through comprehensive, customized self-help and coach-assisted programs and health statistics reporting to enhance decision-making and resource utilization. INTERxVENT receives mentoring from MaRS advisors on issues focused on business development. Through MaRS INTERxVENT has received valuable introductions to both strategic partners and potential clients.
Cleantech: Everyone is trying to make solar energy more cost-efficient. Some work on cells to increase efficiency. Some use concentrated solar, where the sunlight is magnified onto a solar chip up to 500 times. Morgan Solar Inc. is a concentrated solar company that has patented a very interesting way of guiding light onto the chip. Using a kind of clear resin as a wave-guide (like fiber optics but larger) they can have light land on a surface, and at the same time, be guided along that surface horizontally to hit a chip. In December 2009, Morgan Solar closed their first-round investment of USD 8.2 million. Part of this financing was made possible by the direct involvement of MaRS advisors and Morgan Solar have been expanding their team as a result of the investment.
Social Entrepreneurship: Heliotrope is a new social enterprise based in Canada. They have created Prelude, a suite of educational tools that develops soft skills —imagination, intuition, hunch, affect and creativity—the value of which is beginning to be properly recognized in the education system and greater society. Like many early-stage ventures, Heliotrope was looking for strategic guidance and access to investment capital. In concert with MaRS Advisory Services (MAS), we:
linked Heliotrope to contacts with experience in developing online educational businesses and links to investment capital
provided hands-on business mentoring with MaRS specialists in the areas of intellectual property, patents, and strategic marketing
arranged meetings with VCs
introduced Heliotrope to networks for feedback and advice
attended meetings with prospective clients
helped Heliotrope develop an investor deck, and offered ongoing support
Canada has to get better at the practice of entrepreneurship, not just hope for more capital investment. MaRS and other organizations have established an enabling environment to support the growing number of startups and budding entrepreneurs by providing resources, access to advisory and capital services for greater chances of success. If Canada is to reap the benefits of entrepreneurship – job creation, economic and social prosperity – we must be prepared to nurture a strong entrepreneurial culture rather than seeing it as a short-term trend.