Scott Stirrett is founder and CEO of Venture for Canada. Parm Gill is managing partner of the Gill Group and chair of Venture for Canada.
What do Verafin, Radian6, Kinduct, Coconut Software, Vendasta, AbeBooks, GranDuke Geomatics and New Horizon Interactive all have in common?
They are all very successful Canadian technology companies that emerged in mid-sized cities, which for the purposes of this article are defined as Canadian census metropolitan areas with anywhere from 50,000 to 500,000 residents.
More than 80 per cent of Canadians live in urban areas, with close to one in three Canadians residing in Montreal, Toronto and Vancouver. There is a tremendous amount of startup activity taking place in these three large ecosystems. With all of this activity, technology entrepreneurs have access to deep talent pools, diverse investment-growth capital, and global transportation hubs.
Nevertheless, founding a technology business in a mid-sized city is increasingly an attractive option for entrepreneurs. Compared with the largest urban centres, mid-sized cities generally have a lower cost of living and doing business. For instance, according to recent census data, the average monthly rent of a one-bedroom apartment is $2,020 in Toronto, whereas it is $900 in Halifax, $890 in London, $800 in St. John’s, and $750 in Saskatoon. As the cost of living increases, wages and commercial office rent rises, which puts pressure on a company’s profitability and overhead.
For entrepreneurs who have raised investment capital, building a business in a mid-sized city often means a lower “burn rate,” which is the level at which an enterprise spends money in excess of income. A lower burn rate often corresponds with higher capital efficiency, meaning that entrepreneurs need to raise less capital to grow their businesses and can retain more ownership of their companies.
Creating a business in a mid-sized city provides not only savings on wages, but also the ability to better retain talent in the long run. With the soaring cost of living in large urban centres, more and more millennials are flocking to mid-sized cities. As Patrick Sisson writes in Curbed, a website about homes and communities, millennials increasingly see mid-sized cities “not just as places to find a lower cost of living, easier commute, and closer connections with family, but also a more approachable, neighbourhood-oriented version of the urban lifestyle that sent many to the larger cities in the first place.”
According to The Economist, building a startup in an mid-sized city “reduces the odds of talented employees being poached by the tech giants and other startups – especially engineers, who are in high demand. Indeed, a startup in a place with cheaper housing and less crowded freeways […] can become the poacher.” Further to this point, Mick Cornett writes that mid-sized cities “have generated the power to create an energetic urban lifestyle at a price that [the largest urban centres] just can’t compete with. It is entirely possible to create a truly innovative company with a truly global reach that attracts world-class talent in a place far away from the country’s [largest urban centres].”
While mid-sized cities offer some talent advantages, they also offer challenges because of a lack of access to specialized talent. Consequently, at times it makes sense for technology companies headquartered in mid-sized cities to create satellite offices in larger urban centres to recruit for skills that may be hard to find in their home communities.
Many of the other challenges in building a business in a mid-sized city have been mitigated by technology in the past several decades. In a digital economy, an internet connection is all a company needs to be able to sell around the world.
Moreover, investors are travelling the world to find the best investments, and are broadening their focus from traditional hot beds such as Silicon Valley. As Ryan Baird writes in Entrepreneur, investors have “seen that startups can thrive anywhere, and they’re eager to find unexpected opportunities beyond their backyards.”
In spite of the increasing benefits of building a company in a mid-sized city, there can still be pressure for entrepreneurs to relocate to Silicon Valley or other large centres. Canada needs to further explore what should be done to catalyze more high-growth technology companies in mid-sized cities.
Building more technology companies in mid-sized cities is not just in entrepreneurs' own self-interest, it is in Canada’s national interest. We live in a vast country and it is important for the entire country to reap the benefits of the innovation economy. As we have seen throughout Canadian and world history, significant regional economic disparities are a recipe for instability, resentment and division.
Canada needs growing technology companies from coast to coast to coast, not just in our largest urban centres. Because of technological advances and economic shifts, there has been no better time than today for entrepreneurs to build companies in mid-sized Canadian cities.