Canadian Tech Works, but Differently
An old debate is ignited again with some thought provoking opinions
Last week Canada’s tech scene was shaken up by a long article from Alex Danco wherein he explains why Canada’s tech scene is not working all that well. To sum it up, he puts forward the notion that Canada’s start-ups are constrained and cannot grow because they are held back as they are supported by (a) the wrong kind of angel investors and (b) problematic government incentives (like SR&ED, IRAP). Danco does not suggest that tech in Canada doesn’t work, but that things designed to help start-ups actually constrain them and that in turn negatively impacts the entire ecosystem.
It is easy to be tempted by Danco’s reasoning and on many points he is indeed correct. When I was Danco’s age I had just arrived in Canada in 1999 and wondered what a time machine had done to me, sent me back to the 1970s? I argued vehemently for integration with the US which at the time was enjoying the internet boom and on its own Canada was going nowhere, at least that’s what I thought. Danco has a similar mindset, a sense of frustration that we cannot emulate the successes that come out of the Bay Area. But, I have learned lots over the past twenty years and Canada’s tech scene has grown spectacularly in the same time frame. Let’s do a quick inventory of Danco’s points, contrast them with some of my experiences and see how they stack up.
Angel Culture - let’s do a case study first. When closing a round for a Vancouver-based software company in 2019 where I both invested and ended up on the board, we had a few angels dithering and we needed them to close out the round. We had a good group of investors, immigrant founders that were working like there was no tomorrow and quite some excitement. This group of angels however asked if the company had done a formal market study, ie. where the founders sure about the market size for their product? Was it independently verified? My response was curt: the founders were working around the clock to grow their company, they had no time for exercises like this. The question somehow felt like only designed to protect the investors’ downside, ie. the more boxes we tick the safer the investment is (to the extent that is even possible).
The angel community in Canada has grown and become more sophisticated over the years. And it is a diverse amalgam of founders that have exited, real estate people, retirees looking for something new, wealthy people wanting to give back, immigrants keen to ‘get in’, and yes, angel funds and groups who all have developed their own models and procedures to invest. There are some odious players for sure. One key problem is that they invest in maybe one or only a few deals, they’re not portfolio players and thus their judgement may be clouded by certain emotions around taking a loss. I have seen many newbie angel investors come and go after one write-off or one mediocre deal.
Now this diverse group has grown in size and the number of dollars contributed has grown. This is in no small part thanks to the work of Canada’s angel organization NACO whose mission it is to mobilize more capital for start-ups, addressing one of the single areas of deep concern when it comes to developing Canada as a start-up nation. And I can say this is working. Given the absence of multiple Silicon Valley type stories and the sort of angels Danco likes to see, out of necessity we have created an angel pool that may pose challenges, but hey, they’re here and they are writing checks. The mere presence and growth of this group has enabled us to do over the past twenty years or so what before was impossible. And sure yes, we may be getting some ‘bad angels’ who do this for status and harass founders over P&L statements and ridiculous milestones as Danco claims. Many idiots have wasted valuable founder and ‘good angel’ time and I can share some really sad examples if you like. But this is a simple over-generalization. The growth of the angel community in Canada, across provinces that are very different in culture and economic make-up, has worked to the benefit and there’s a long list of success stories to prove it.
Government Incentives - let me give you a few fun case studies. In 2005 a young founder here in the Vancouver area with some cool, but not overly scalable tech found it impossible to fund his company. Angel interest was minimal, despite endless pitching. But he had character and vision. He only needed $100k to get a few prototypes going. He borrowed $50k from family members which was the matching piece required for $50k in NRC-IRAP (government) funds. He was able to launch two prototypes with a client which changed angel sentiment. He got funded. He exited five years later and started a new venture which exited at a considerable valuation last summer. No, not AirBnB type returns, but it was evidence that you can built success (both companies stayed in British Columbia post-acquisition by the way) and recycle capital successfully. The government money in this case proved to be an accelerant, a game changer.
Here’s another case study. A local and sizeable mobile developer here in town had perfected its SR&ED processes. Review meetings with the CRA were sort of ‘high five’ get togethers. The tax people loved the processes and documentation the company produced, an industry standard to be proud of so they said. And the claims were significant, covering the company’s cash burn for many months. The problem was, the company actually lived on SR&ED. It would and should have gone out of business by any objective business measure and was teetering on the brink of collapse year after year. The anchor for survival was SR&ED.
There is no need to belabour my point I think. Government funding helps in targeted amounts, but it does have a tendency to create incredibly self-destructive behaviours. I have often argued to reform the various programs, and get them aligned with what all the provinces are doing, if only to create clarity and simple processes.
Interestingly Danco does not talk about investor tax credits, the drug of choice for many angel investors, at least in some provinces. You get 30% of your money back from the government if you invest. When I shared this concept with start-up people in Europe, they fell off their chairs in disbelief saying, ‘the government insures the downside’? The credits have worked great for angel funds here in BC and for many BC-based start-ups. But it instantly creates a constraint because as a fund we cannot invest outside our province as it is regulated under BC tax credit rules. Or even worse (here are Danco’s bad angels): “I love this deal, but I only invest if there’s a tax credit!“ The tax credit is now culturally woven into the investor mindset (both the good and the bad angels) and very hard to get rid of which is why it needs to be harmonized across Canada in my opinion, or alternatively, wiped out entirely. Like do it right or don’t do it at all.
One of my last trips before the pandemic was to Israel, the ultimate start-up nation. Wild successes, spectacular exits, lots of capital invested. But in some respects very similar to Canada. While culturally different (let’s say they work just a tad harder over there) the dynamic of a government supported R&D lab is very recognizable. And by their own admission, Israeli start-ups very often have a hard time scaling, they are just not nearly as commercially sophisticated as their US counterparts.
So the deeper issues in my mind are culture (which comprises of course politics) and geography (which includes diverse regional mindsets in one country). Canada does not have the market size and therefore it is - as compared to the USA - much harder to make quick and larger bets on a continuing basis. We just lack the scale. And Canadians - at least that is what I think - have a somewhat different view of engaging with 24/7 capitalism and the need to achieve and that goes in particular for the West Coast. Balanced lifestyles with a supportive social network that includes free healthcare creates a very different work and achievement ethic. Immigration and competitive pressures are changing that, but it often seems to me that many here simply are comfortable with the pace of life and would freak out if a Bay Area work routine was imposed on them. There’s a reason fresh immigrants opt for Canada and not the US and there is also a reason why some of these immigrants carry on and move south after assessing the maple leaf landscape. And yes, that was where my mind was too at some point twenty years ago.
Look at it this way. Silicon Valley provides the best and unique model for generating start-ups that scale in no time to billion dollar companies. Hollywood provides a similar template for moviemaking. And NASA may be the benchmark for space travel. And you just can’t copy this. What you can do however is try to make it work in your setting and end up with your local version of it. It may produce a few blockbusters, but never to the scale that the Bay Area or Hollywood do. But you can still get them and at the same time develop a vibrant and well funded ecosystem. Culture and geography always ensure that you will get your own version. If barriers come down, you can adapt, improve and increase your rate of success, but it will still be the most optimal version given your and your country’s particular circumstances.
In today’s world of pandemic and political meltdowns people will look at me incredulously when I argue we should dissolve the US-Canada border. They’re probably right. But we need lowered barriers to make it easier to build and scale companies wherever we are on this continent. Canada’s political culture and regional differences may pose a barrier to tech success. At the same time I think that Canada is building a growing and sustainable angel community that has the ability to produce both unicorns and medium size success stories. We also want to ensure that billion dollar companies stay and create the local network effects that we now miss through overly aggressive M&A where tech and talent disappear across the border. Yet the more we build, the more successful founders and investors we create and the deeper the pool of capital and talent to keep it all growing.
Photo: last February the Vancouver Angel Forum and Victoria’s Capital Investment Network (all ‘good angels’) held their annual Victoria Summit at the Oak Bay Beach Hotel. One of the attendees, Charles He, took this wonderful photo.
Life is full of trade-offs. So it holds true for the start-up ecosystem everywhere in the world. I believe that the Canadian start-up ecosystem DOES work - but differently as Pieter has pointed out. It's very much a matter of values, culture and what one wants out of life. In my local Vancouver ecosystem, I've witnessed much self-selection of many serial entrepreneurs and angel investors over a period spanning almost 2 decades. As entrepreneurs and angel investors move in and out of our local community, those with "staying power" have built an incredible local infrastructure that has proven beneficial to our startup ecosystem. Arguably, they could've made a "bigger killing" if they emigrated to Silicon Valley but instead they chose to ply their trade here - and make a life for themselves here - and many have done so very successfully without compromising what is important to them.