Kick-starting Canada’s technology sector

At a technology stakeholders’ event hosted in June 2012 in Kitchener-Waterloo, the Alpha Exchange unveiled its whitepaper, sub-titled “Building Connections and Fixing the Funding Challenge to Kick-Start Canada’s Technology Sector.” This article is a summary of our key findings. Read the full whitepaper.

Canada’s technology industry has underperformed since the Internet bubble burst 12 years ago, more so than elsewhere. A case in point: despite our reputation for being highly digitally connected, our Internet economy as a percentage of GDP is below the G20 average and is expected to fall behind Saudi Arabia and Mexico by 2016.

High-growth firms essential: High-growth firms produce the lion’s share of increases in employment. Countries which take part in the broader technology economy will reap tremendous benefits, as Internet-related businesses are expected to grow faster than the overall global economy.

Canada’s technology start-up environment is holding us back: Through a review of academic research and interviews with 22 players in the sector, we have scored Canada’s technology ecosystem on six functional characteristics. Despite our strong talent, history of public-sector investment and generally enabling regulatory environment, our shallow well of start-up management talent and mentors and our poor availability of funding net our technology ecosystem a C grade.

Funding for technology firms is broken: Part of the decrease in growth is because of a decline in available capital for early stage companies, with total venture capital invested dropping from a high of $5.9 billion in 2000 to just $1.1 billion in 2010. There are a number of causes for this, including a flight to lower-risk investments, poor historical returns and a fundamental lack of trading liquidity in this sector in Canada, leading to an absence of interest in funding larger, later-stage firms.

Short-sighted decisions: Many potentially successful Canadian firms are starved for funding and this may lead to slow growth. Firms also sometimes sell out to a “strategic buyer” earlier than they otherwise might, potentially robbing Canada of a future large employer, or they go to IPO too early. New issuers are then saddled with administration, compliance costs and quarter-by-quarter “short-termism” associated with public regulation and reporting.

Kick-start tech sector

We have identified five ways Canada could kick-start our technology sector, with little to no public money.

1. Connecting start-ups to talent and investors in both Canada and the U.S. ensures that new technology firms get advice from people who have “been-there-done-that” to help them optimize their businesses, sail though financing options, refine pitches to angel investors and venture capitalists, and find the right people to fund their opportunity.
2. Crowd funding can tap into the potential of the small investor and increase the pool of available capital by potentially hundreds of millions of dollars, while posing a modest risk to investors with the right regulatory framework.
3. A pre-IPO capital market helps increase liquidity and reduces the cost of capital to make the sector more attractive to funders, founders and management.
4. An exchange focused on the technology sector with clear and strict listing requirements, an innovative market-making program and technology focused marketing activities allows for an increase in confidence in the sector, helps technology companies focus on firms’ operating cash flows and growth, and supports a successful public offering process, thereby reducing the P/E multiples discounts that Canadian listed technology firms currently face.
5. An angel tax credit will grease the wheels of the new technology pipeline, by encouraging accredited investors to bet on promising start-ups and participate in the pre-IPO capital market.

Although each of these initiatives could be implemented independently, they form a reinforcing group of ideas that will allow Canada to reposition itself at the forefront of the global technology economy, critical to its overall economic growth.

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Jos Schmitt is the Chief Executive Officer of Alpha Exchange




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