John Kelleher is a partner at McKinsey & Co. and a board member of The Next 36. Laura McGee is an associate at McKinsey & Co. and co-founder of Summit Leaders.
"New technology is always dazzling, but we don't want technology simply because it is dazzling – we want it, create it and support it because it improves people's lives."
So spoke Justin Trudeau at the World Economic Forum in a bid to convince investors that Canada is both innovative and resourceful. The speech reflects the Prime Minister's growing focus on technology and innovation as important drivers of our future economic growth.
Canada is not alone in this arena. Countries such as Israel, Germany and Britain have also doubled down on support for "startup ecosystems" in cities such as Tel Aviv and Berlin. These ecosystems are outpacing Toronto, Waterloo, Vancouver and Montreal in global rankings. Canada has an opportunity to change this, but doing so will require a serious national effort that seeks to further enhance and boost the impressive technology ecosystems that our country already possesses.
Three key trends should be top of mind for policy-makers seeking to cultivate a thriving startup ecosystem:
- Capital growth rates. According to a report by Compass, total venture capital investment saw 95-per-cent growth from 2013 to 2014, with cities such as Bangalore, Boston and Seattle seeing up to a fourfold increase in venture financing. In contrast, Canada saw a comparatively weak 5-per-cent growth rate, which was accentuated by the fact that startups continue to struggle for late-stage investments. This affects Canadian startups’ ability to scale, and represents a major improvement opportunity for Canada.
- Exit growth rates. The number and value of startup “exits” (i.e., mergers and acquisitions or initial public offerings) has seen significant growth across the top 20 ecosystems. There was 314-per-cent growth in Europe, 209-per-cent growth in Latin America and 46-per-cent growth in the United States. By comparison, Canadian exit values have flatlined at 0 per cent. Since lucrative exit opportunities are a key incentive for startups, this is another improvement opportunity for Canada.
- Internationalization. Startup ecosystems are increasingly reliant on foreign talent and investment. Canada excels at attracting talented foreign engineers and expanding internationally, especially to nearby U.S. markets. However, Canadian startups have become too dependent on foreign investment to fund growth. A third improvement opportunity is to increase access to Canadian-sourced late-stage financing.
So how can Canadian policy-makers and companies leverage these trends to cultivate our own startup ecosystems in Toronto, Waterloo, Montreal and Vancouver?
The first priority is a more comprehensive funding strategy. Government programs often overinvest in early-stage ventures and fail to provide adequate follow-on capital. If the government wants to encourage later-stage growth, a portion of or additional government funding should be reserved for expansion-series rounds.
Second, research and development funding should be focused on projects with clear commercialization potential. Specifically, we need a national strategy to commercialize the high-quality research that has already been done in Canada's labs and universities. The Creative Destruction Lab at the University of Toronto is a remarkable program that specializes in getting technology to market by providing milestone-based coaching and multiple rounds of funding. This program could be used as a model for other universities.
Third, we can learn from other countries' use of tax policy to incentivize startups. For example, Silicon Valley startups benefit from U.S. tax exemptions for incentive stock options. ISOs compensate for the greater risk associated with startup work and have proved to be an effective way to recruit and retain employees.
Fourth, the Canadian startup community needs to develop a closer sense of kinship that emphasizes connections, connectivity and idea-sharing. This sense of community is a structural advantage in Silicon Valley for the simple reason that frequent meetings accelerate development, mentorship and commercialization. Innovative programs such as Canada's The Next 36 have done much to turbocharge a passion for entrepreneurialism in the country generally and should be further supported by government and the corporate sector.
Fifth, Canadian startups require support in their efforts to seek out foreign talent. The federal government's "Startup Visa" program is a great way to attract high-quality founders and engineers. This program should be promoted at international academic and technical hubs.
Finally, we need to develop a national marketing plan. Tech hubs such as the Toronto-Waterloo corridor have helped Canada gain an edge in industries such as financial technology, machine learning and telecommunications. If we want to maintain that edge, we must think of our tech ecosystems as brands and promote our success and expertise.
If these policies are adopted, Canada is well positioned to claim a place at the very top of the world's most advanced and thriving technology ecosystems.