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It’s time for Canada to nurture – and keep – its own tech unicorns

Time for Canada to nurture and keep its tech unicorns

Contributed to the Globe and Mail by Elio Luong and Sunil Mistry

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​Elio Luongo is CEO and senior partner, KPMG in Canada. Sunil Mistry is partner, private enterprise and technology, media & telecom, KPMG in Canada.

The refrain is frustratingly familiar: Silicon Valley is home to many Canadian tech entrepreneurs who couldn't get support for their ideas at home and had to turn stateside for investors, eventually taking their ideas and capital south.

But this is changing, with more Canadians finding the funding to develop and stay home.

KPMG International's latest global venture capital funding report found a record US$4.6-billion was invested in Canada in 2019, a 500-per-cent increase over the past decade. Canada is now the third-biggest VC market, after the U.S. and China in terms of overall value of investment, and the U.S. and Israel as a share of GDP.

Globally, we are rapidly seeing a shift in economic power from resources to technology. Data, intellectual property and computing power are the new currencies. We need to create the right environment and incentives to see VC funding continue to grow – but also to ensure more of these startups scale to maturity in Canada.

The good news is the tech ecosystem in Canada is now more independent and self-sustaining than ever before.

Canada's growth as a tech hub is driven by exceptional talent, strong infrastructure, government support and reasonable valuations that have produced strong returns. Global and domestic investors also see a country that is increasingly open at a time when many other countries are turning inward and tightening their borders.

Yet the tech sector in Canada is still largely characterized by companies that sell to larger, mostly foreign entities before they reach scale. Despite being the third-largest VC market, Canada lags in the number of startups that grow to unicorn status (companies that reach a billion-dollar valuation). Over the past two years, 204 unicorns were created globally. Only two of these were Canadian – Montreal fintech Nuvei Technologies and artificial intelligence startup Coveo Solutions of Quebec City – and these were the first domestic unicorns created in the past five years.

But change is afoot: Canada now has the building blocks to see the formation of a large number of homegrown, successful firms – who remain headquartered in Canada. These firms are critical to our future economy. They create high-quality jobs, foster more innovation and generate new investment.

And this potential is not limited to the traditional innovation hubs of Toronto, Vancouver, Montreal and Waterloo, Ont., but extends right across the country, in cities such as Halifax, Ottawa, Saskatoon and Edmonton.

We see three trends driving Canada's unicorn future.

1. Greater ability to retain the company. Entrepreneurs are now holding on to more of their companies during financing. Up until recently, the small size and slim track record of the VC market in Canada meant investors faced greater risks. To hedge against those risks, tech entrepreneurs had to give up greater shares of their companies to attract needed seed and development capital.

As a result, by the time many firms reached the scale-up funding stage, the creators were no longer holding enough of their own firms to make the next push – especially when an attractive offer to sell was put on the table.

The growing success of the Canadian sector has reduced investor risk, attracting not only more funds at the seed stage but, more recently, an increased number of growth equity funds that are focused on building these firms to scale. This new environment allows entrepreneurs the ability to retain more of their companies during the financing phases.

2. Growing availability of tech talent. The growth of tech talent in Canada has been steady with our colleges and universities doing a good job producing graduates with much-needed skills. But like most countries, this has not been enough to keep up with demand, driving the need for foreign talent to fill gaps. Historically, this has posed greater challenges for startups who've struggled to retain their people given that bigger organizations – on both sides of the border – have been able to pay and offer more.

But the recent changes to our immigration policies have given Canada a decisive advantage in attracting the world's best and brightest, especially in the tech space. In fact, the Organization for Economic Co-operation and Development called Canada's system the benchmark for other countries, saying we lead the OECD with the greatest share of highly educated foreign-born entrants.

3. Access to management talent. While developing and building an idea is the most important part of a startup, taking the business to the next level requires skilled and experienced chief financial officers, chief marketing officers and other key management roles to build business plans, go to market strategies, address regulatory requirements et cetera. A growing maturation of the domestic sector is building greater capacity, but more needs to be done.

It is critical that Canada nurture this talent stream in parallel with tech talent.

Canadian tech entrepreneurs operate in a very different world today than their predecessors did only a few years ago. The combination of innovative ideas, business success, strong infrastructure, a growing pool of investors, government support and an unrivalled talent pipeline has given the sector a newfound swagger that it can compete and succeed.

A swagger that will see more and more entrepreneurs hang onto their companies and build a unicorn culture in Canada.

https://www.theglobeandmail.com/business/commentary/article-its-time-for-canada-to-nuture-and-keep-its-own-tech-unicorns

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