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It is one of the central economic questions of the federal election – what can be done about Canada’s natural-resources sector, once an Atlas holding up much of the country’s economy, and now in free fall?
But amid all the panic about Canada’s slumping flagship industry, there lies another question with no clear answers – if the resource sector’s troubles really are here for the long term, is there any other sector that can carry the load?
Surprisingly, it might be Silicon Valley North that has the strongest case to make.
“It’s fair to say that the tech industry in Canada has never had as much promise as it has now,” says independent technology analyst Carmi Levy.
“All of the ingredients are there for Canada to be a tech powerhouse, and they’re there at a much greater density than they were five or ten years ago.”
As Mr. Levy notes, the odds that Canada’s technology industry will suddenly be able to offset the thousands of jobs lost in the oil patch during the recent slump are effectively nil – not only because of the sudden shift that precipitated the resources crisis, but also because this time around, the tech sector is growing far more evenly. Rather than one massive company surrounded by tiny ones, the sector is now a varied landscape, ranging from tiny startups to billion-dollar powerhouses.
Quietly, and by some key metrics, Canada’s technology sector has outperformed almost every other part of the country’s economy over the past year or two. According to the Toronto Stock Exchange, the technology and innovation sectors have grown faster than any other on the exchange since the start of 2013. Collectively, the companies that make up that slice of the exchange are now valued at more than $250-billion, a number greater than the aggregate value of the mining sector. Since the start of last year, more than 50 new technology companies have gone public on the TSX and the TSX Venture Exchange, outpacing every other sector.
For years, Canada’s technology sector was defined by the roller-coaster fortunes of a single company – BlackBerry.
Formerly Research In Motion, the company that created the world’s first commercial smartphone also helped create the modern Canadian tech industry. Alongside the University of Waterloo, BlackBerry was responsible for turning the area 90 minutes west of Toronto into what is now known as Silicon Valley North. So dense was the talent pool in and around Waterloo that a host of other big-name companies – from Google to Facebook – started to take notice.
But in the past half-decade, BlackBerry has in many ways become a far less colossal company. As its share of the smartphone market plummeted, so too did its profits, employee base and ability to function as the central anchor of the entire industry.
It is that story – one of an industry heavyweight suffering greatly and, in more recent times, gunning at a comeback – that has long dominated the Canadian technology world. But the landscape today looks much different, thanks to a host of new Canadian companies on the upswing. Chief among them are players such as Shopify. The software supplier for small businesses recently joined the $1-billion-valuation club after a wildly popular IPO earlier this year.
And although it has a ways to go before reaching the lofty valuations of companies such as BlackBerry, in its prime, Shopify stands alongside newer entrants such as social media giant Hootsuite as a harbinger of what’s to come.
As such, despite being shadowed by a much more vigorous discussion of what to do about the resources sector, technology has become a more central part of the federal parties’ platforms.
The Liberals have placed an emphasis on technology – alongside the environment – in their $1.5-billion jobs plan, which contains myriad proposals aimed at raising youth employment levels. Among those promises are tens of millions of dollars for co-op placements in the science, technology and engineering industries. The NDP has made similar promises, both related to employment and boosting the resources of space-related technologies. The Conservative government has also invested heavily in research and development tax credits – but has taken steps to limit the sort of companies and projects that qualify for those credits.
But in some ways, the Canadian tech industry can be just as cyclical as natural resources. Although not nearly as frenzied, the tech sector’s recent re-emergence is in some ways similar to the high-water mark it set 15 years ago. Around the turn of the century, high-tech companies made up an astounding 40 per cent of the TSX composite. But soon, the tech bubble burst, and the country’s technology behemoth, Nortel, all but imploded. By 2012, tech companies made up less than 2 per cent of the composite.
The key difference this time around, however, might be the way in which the sector is growing. Rather than one massive player, the Canadian tech scene today revolves around a number of smaller companies all trying to become the next massive player. It is, in other words, a startup culture.
In its annual report on the state of the global startup scene, the software research firm Compass placed three Canadian cities – Toronto, Vancouver and Montreal – on the global top-20 list.
On the surface, that’s great news for the Canadian tech industry. Outside of the U.S., no other country had as many tech hubs in the ranking.
However, a closer look at the list shows that both Toronto and Vancouver dropped nine spots in this year’s ranking, joining Montreal near the very bottom. Waterloo Region also dropped out of the top 20.
One of the central issues holding back Canadian tech growth is fairly basic – money. For years, members of the country’s tech community have complained about the levels of funding available to new companies here, especially compared with the situation south of the border. The average seed funding in the U.S., according to Compass, is between $800,000 (U.S.) and $850,000. In Canada, that number is about $200,000 less.
“[Startups] here still find themselves needing to cross the border to secure later-stage capital,” the research firm said.
But the other major impediment – and a big part of the reason both Toronto and Vancouver suffered such a precipitous drop in the global ranking – has to do with the sort of thing companies such as the old, giant BlackBerry are good at – buying up smaller companies.
In tech parlance, it’s called an exit – the moment a small tech company transforms into something else. That could be because it went public, got bought up by a bigger player or spun out in some other way. Regardless of how it’s done, an exit is in many ways an accurate indicator of a tech industry’s health.
And whereas year-to year percentage exit growth in many major tech hubs across the globe is in the triple digits, in places such as Toronto it is essentially flat.
“We really are being driven by companies started in a garage … but innovation will only get you so far – at some point, it has to pay off,” says Mr. Levy.
“Canada is an acknowledged leader in driving innovation, but converting that legacy into a company that becomes the next BlackBerry or the next Sandvine or the next OpenText, that has been a much bigger challenge for the Canadian economy.
“To a certain extent, we don’t know what to do with our tech companies once they get past a certain scale.”Report Typo/Error
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