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Few homegrown Canadian startups end up making it to an IPO, as Shopify did, before selling to an American company. (Richard Drew/AP)
Few homegrown Canadian startups end up making it to an IPO, as Shopify did, before selling to an American company. (Richard Drew/AP)

DAX DASILVA

Too many Canadian startups are bought out. Here’s how to change that Add to ...

Dax Dasilva is founder and CEO of Lightspeed, a provider of commerce tools for 25,000 retailers and restaurants worldwide

Last year’s $131-million Shopify IPO signalled a lot more than just a big payday for the Ottawa-based e-commerce software company. It was proof that Canadian-born businesses can launch and mature in this country – something many young companies with roots here never imagined.

Canadian firms often have short life spans, with a string of the country’s most successful companies selling to U.S.-based acquirers. In the past five years, 183 Canadian companies have been acquired, nearly 70 per cent by U.S. firms. This doesn’t mean they failed – many recent deals have been huge. (For example, Toronto-based Eloqua’s acquisition by Oracle for a reported $871-million in 2012.) But there is a pervasive mentality that the only exit strategy is to sell – more of a fate than a choice.

According to PwC’s report on the state of emerging tech companies released earlier this month, 77 per cent of Canadian tech founders are currently planning an exit for their company. Nearly two-thirds, or 63 per cent, said that exit plan is to sell, most within the next few years. Compare that with the Silicon Valley spirit, where the predominant CEO attitude is to stay focused on building a billion-dollar business.

Canadian founders should feel that a long, bright future holding on to their companies is a viable proposition. For that to become a reality, we need to take a hard look at why so many Canadian businesses end in acquisition, and how our tech and investment community can step in to change that course.

Canada as a shopping mall

Some of the same elements fuelling incredible growth for Canadian companies are also making them attractive targets for other businesses, the first being an incredible wealth of talent throughout the country. Three of the world’s top 50 engineering schools are in Canada, with the University of Toronto, the University of Waterloo and the University of Ottawa all making the list. The problem? Other people are noticing this talent, too, and recruiting harder than we are: An estimated 350,000 Canadians now live in the the San Francisco Bay area. For those who stay to work at Canadian tech companies, the talent reputation makes buying companies primarily to acquire talent, also known as aqui-hires, an attractive bet for companies around the globe.

The quality and cost of living here are unimaginable compared to those in California, where skyrocketing rents are driving residents out of San Francisco in droves. The Silicon Valley lifestyle has become the butt of a joke big enough to spawn an entire HBO comedy. Meanwhile, in Canada, rent and daily living are affordable and the country continues to rank high in global reputation.

This lower-cost, high-quality lifestyle, as well as attractive tax credits from the government, have a put Canada on the map for investors and businesses alike. In just the past few years, Facebook, Amazon, Tableau and Salesforce have all opened offices here. Foreign investment in Canadian companies is spiking. This level of reputation and visibility is great for the country, but it’s also spurring attractive offers from big companies south of the border that can be hard for startups to turn down.

Taking down the ‘For Sale’ sign

A few years ago, U.S. investors saw the writing on the wall for Silicon Valley and invested in tech ecosystems sprouting up in other major urban areas. Those firms are starting to see a return on those investments as companies throughout the country reach a new level of success. This is spurring a tech renaissance in Canada, but a daunting crossroads is appearing for many of them.

This is the stage where companies hit roadblocks – when they start to see major growth potential and look for their second or third round of funding to achieve it. Canadian investment firms lack the large-volume capital that many of these companies need to make a real impact. There aren’t many success stories that young companies can look to for inspiration. Many end up relinquishing ownership to foreign investors, or selling out completely.

Here’s how we change that:

  • Canadian venture-capital firms need to step up to fund mid- to late-stage companies. Canadian VCs invested about $1.9-billion into 379 startups in 2014 (compared with $48.3-billion invested by U.S. investors). The majority of this funding was from angel investors for seed rounds and small Series A rounds. The large-volume, late-stage funding that did take place was split among just a few of the top tech companies. If the Canadian tech boom is to continue, companies need to believe that local venture capital will be here to support them.
  • Companies on their way up need to think big and think differently about investment if a strong future in Canada is important to them. Don’t be afraid to rely on your own resources for your first few years. And when you are ready to take a larger investment, if traditional VC funding isn’t available, look elsewhere. For instance, OMERS Ventures, an arm of the Ontario Municipal Employees Retirement System, has invested in 23 of the country’s most successful companies, including Shopify, Hootsuite and D2L Corp.
  • Shopify’s IPO and Hootsuite’s impending one have been huge boons to the tech community. We need more of them. If Canada’s best continue to prove that it’s possible to build a lasting company in this country, others will follow suit. Young companies need role models and mentors. We have a great consortium of top tech companies that share advice and experiences, but we need more formal mentorship programs for those just getting their start.

I, personally, have had the pleasure to mentor aspiring entrepreneurs and companies on their way up. Their futures are bright, but fear and doubt about a long-term future in Canada are big concerns for them. I’ve never seen so much momentum and excitement in the Canadian startup scene as we have right now, but to keep this going, we are going to have to make some changes. A new way of thinking is in order, from startups and investors alike.

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