Canada has been losing technology companies at a dizzying pace of late, with Gennum Corp. and RuggedCom succumbing recently to takeover bids. Veteran technology executive Adam Chowaniec, who once ran Tundra Semiconductor (another company that was sold), believes there are things Canada can do to stop the bleeding. In this Streetwise guest post, he lays out his views.
Although entrepreneurship is alive and well in Canada, and we create a lot of new technology start-ups, we do not get many of these companies to a size that has the potential to impact the economy in a major way. Even for companies that have managed to grow sufficiently to become publically traded in Canada, they are too often lost to acquisition.
So why do we lose so many companies either because they fail or get acquired? I think there are three reasons.
First, we are more risk averse and with a smaller pool of risk capital than other countries and so finance our companies more poorly than their competitors are financed.
Second, we have less experience and weaker business skills as the pool of successful companies is small on a global basis.
And third, because of these two factors, we lose too many promising companies to acquisition at too early a stage of their evolution.
We need companies to grow up to build the critical mass behind the tech sector -- critical mass that then enhances the ability of more start-ups to prosper.
This is particularly troubling for companies that do manage to grow their way to public company status. These are the future ‘anchors’ of the critical mass in major technology clusters in Canada. Think of what Nortel Networks Corp did for Ottawa or Research In Motion Ltd. RIM-T for Waterloo.
I believe we are now losing these prospective anchors at a faster rate than we can create them. In just the past 12 months, we have seen the acquisition of Mosaid, Zarlink, Dalsa, March and Bridgewater. Now Gennum and Ruggedcom are in play. Before that we saw names like Cognos, Tundra, ATI, Newbridge, and many more disappear.
So why should we care? Some acquisitions are the right step for some companies. We should care because these public companies are the training grounds for that much needed experienced business talent we are lacking. Most business functions after an acquisition are centralised back to the acquirer, leaving an ‘R&D branch plant’ that does not develop business talent. We should care because public companies are big enough to create local infrastructure, buy services and hire and train especially non-technical talent that helps entrepreneurial players grow up.
Most importantly, we should care because going public is almost the only route to securing risk capital for the quantum jump companies have to make in their evolution to economic prominence. We have no developed private equity capital in the technology sector in Canada. As the number of public tech companies diminishes, there are fewer analysts covering the tech sector, fewer investment bankers with sector knowledge, less institutional (investor) knowledge, and therefore less risk capacity.
As a consequence, it’s a much harder path to taking companies public. Less risk capacity means poorer valuations for the remaining public companies which of course makes them more vulnerable to acquisition. And hence the spiral goes on.
So our companies are more vulnerable than say our U.S. peers because of a lower risk appetite in Canada, and therefore poorer valuations. We need to have a debate as to how we can change this risk culture. Especially because our public companies are also east targets for acquirers because our securities legislation gives them much less protection than their U.S. peers.
