Canada Has a Scale-up Problem, Not a Start-up Problem

n the twenty-first-century global economy, the countries that work hand in glove with their innovative companies are seeing the greatest economic returns for their efforts. The new knowledge economy is based on intangible goods (ideas) and the entire system is built, managed and regulated by the government and its various agencies. Intellectual property (IP) is the currency of the innovation economy; it is a government-granted temporary monopoly that restricts others from using an intangible good (idea) and forces them to pay for it. Countries that are successfully building their economies in the twenty-first century all have one thing in common: they are employing a sophisticated public-private framework that is capturing wealth from the ideas that are being generated within their borders. These countries are the United States, South Korea, Israel, Germany, Sweden and others. 

Countries with large assets of valuable IP are prospering at a stunning rate. Social media networks located in the United States are now worth more than the GDP of 95 percent of countries around the globe (Bilton 2016). Governments that understand the way wealth and value are extracted from IP are the most prosperous; they understand that in the knowledge economy, new wealth is generated not by export of a country’s natural resources, but instead by generating valuable IP and assisting the companies commercializing it to scale globally. In the age of innovation, intellectual property is the new oil or gold — the countries that have IP are wealthy, and the countries that lack it are seeing their prosperity erode.

In 2017, Canada finds itself at a crossroads: because the performance of Canada’s traditional economic drivers is waning, the need to find new revenues has never been more pressing. Canada is looking for economic growth in the right direction. The Liberal government has appropriately turned its attention to creating innovation policies, aiming to catch up to the countries that lead in ideas commercialization. The government is also starting to engage with Canada’s most successful innovators, and work collaboratively to build the much needed public-private framework that would allow Canada’s domestic companies to scale globally. 

Countries that focus their efforts on helping high-growth, IP-generating companies scale up, by assisting in their efforts to access more highly skilled talent, more capital and more domestic and international customers, will see greater returns in the forms of tax revenue and job creation within their borders. By working to advance their industries’ growth and innovation outputs, some countries that were hardly participants in the industrialized, commodified economy of the past 50 years have skipped an economic generation and have become leaders in the innovation economy. 

South Korea is an example. Within a generation, the East Asian nation went from being one of the poorest countries in the world, reliant on the export of rice and agriculture, to one with a robust economy, built upon technological innovations and sustained by a highly skilled workforce. Recently, South Korea was named by the Bloomberg Innovation Index as the most innovative economy in the world, outperforming the United States, Israel and Sweden; Canada, on the other hand, failed to rank within the top 10 (Jamrisko and Lu 2017).

Countries such as Canada are slowly coming around to the fact that governments are key players in the creation of wealth in the innovation economy. Already, what is beginning to be seen is the adoption of a strikingly different approach to economic development by government, compared to how governments of the previous century approached new and emerging industry sectors. This uptake in government intervention in the emerging fields of cyber security, health technology, clean and green technologies, financial technologies, and information and communications technology signals a progressive shift toward creating policies with industry that help domestic innovators thrive. 

How can the Canadian government build a sophisticated strategy that helps domestic technology companies scale from $10 million in revenue to $1 billion and beyond? It starts with government and CEOs working together to address the challenges that impede their ability to grow and scale. When Canada works with its business entrepreneurs to address issues regarding their access to customers, capital and talent, the opportunities for greater public and private wealth to be generated grow rapidly. 

Access to Talent

In the global innovation race, highly skilled talent is critical for a company to soar and reach new heights. Without it, the company cannot grow, and no amount of capital or customers can lift it off the launch pad. Canadian companies were struggling to acquire talent fast enough, as the wait times to process a worker for a permit or visa averaged at around 11 months. Domestic companies were forced to either wait out this timeline or contemplate packing up completely and moving their business to a location where highly skilled talent is easier to come by.

Years of brain drain, made more extreme by the limited language and cultural barriers that exist between the United States and Canada, have made finding the highly skilled and unique talent scaling companies need challenging. In 2016, after hearing directly from CEOs about their need for a faster way to attract, acquire and process the type of workers that the current domestic pool of talent lacks, Canada responded with a new strategy aimed at shrinking wait times and installing a new two-week standard for processing work permits. The Global Skills Strategy, with its reforms to Canada’s Temporary Foreign Worker Program, is set to launch June 2017, and, if implemented effectively, will provide Canadian CEOs with a government service that will help them scale domestically and compete globally.

Access to Customers 

A second new policy — referred to as the Innovative Solutions Canada fund — being rolled out by the government is modelled closely on the United States’ Small Business Innovation Research (SBIR) program, which is designed to help scaling companies in the United States access the US government as a customer. In the new globalized world, being able to sell globally to foreign entities, including foreign governments, can be difficult when domestic policies have made it impossible for a company’s own government to procure its services. 

The SBIR program and Canada’s proposed Innovative Solutions Canada fund aim to make it easier for government to procure services produced by domestic companies. When companies from South Korea or the United States bid on a service, they have the weight and support of their national governments behind them; Canada’s adoption of a similar procurement model positions domestic companies well for the ever-competitive global market.

Access to Capital 

Access to research and development dollars to enable growth and new hires are often on the minds of Canadian scale-up CEOs who are looking to expand their operations. In Canada, programs such as the Venture Capital Action Plan, which was introduced under the previous Conservative government, recognize a need for government to partner with investors to incentivize participation and share the risk that comes with supporting new and emerging innovative companies. 

Canada signalled a further leap toward taking risks with its renewal of this successful program, which in its years of existence between 2013 and 2016 raised more than CDN$1.3 billion in venture capital (VC) funding for start-ups and scale-ups in Canada. The new Venture Capital Catalyst Initiative, which is set to launch in 2017, seeks to leverage CDN$400 million in government funding to attract an additional CDN$1.1 billion in private sector investment. This funding would be earmarked as late-stage VC, targeted toward scale-ups — more established businesses with sales and revenue — instead of new companies that are starting up.

These are some examples of the preliminary steps taken in Canada to build a solid public-private framework that could grow new revenues for the country. These measures were designed with Canadian innovators in mind; as Canada builds out its innovation agenda, this type of collaborative approach, in which industry presents a concern and works with government to address it, should be maintained. 

The role of government in helping companies scale up in the innovation sector should not be misunderstood as one of the government giving handouts to companies that could simply go it alone. In the innovation economy, the presence of a corporate backer as large and powerful as a national government creates conditions and rules that give the advantage to entrepreneurs who can bring big private and public wealth to their economies.

Too often in Canada, public discourse is dominated by proponents of traditional economies who argue that government has to get out of the way of business. This view is both perilous and inadequate for the twenty-first-century economy driven by innovation. While the hands-off approach has worked well for traditional governments, it does nothing for entrepreneurs creating and extracting wealth from IP. 

Companies attempting to scale up globally can only do it with the help of public policies that allow for stealth growth around the world. CEOs leading high-tech companies must navigate complex freedom-to-operate issues, such as standards and regulations strategies, IP rights strategies and harmonization strategies that establish common architecture, policies and other critical processes for industry. A single decision by a government agency can make the difference between a $10-million company and a $1-billion company. All of these decisions are made by legislators, judges, regulators and agency heads.

Indeed, in the United States, the role of government in helping its technology companies is being questioned by some of the most accomplished and progressive economists. In 2015, economist Robert Reich wrote in The New York Times (Reich 2015) about the growing influence America’s largest technology firms were having on public-policy makers in Washington. 

Warning of the inherent risks of a well-funded lobby having the ear and attention of the US government, Reich outlined how the largest multinational companies — Google, Apple, Microsoft and so on — were lobbying lawmakers to rewrite the rules and regulations that govern their industries, effectively helping the companies secure monopolies, both domestically and internationally.

Given the winner-take-all nature of high-tech growth and Canada’s proximity to a large concentration of IP heavyweights south of the border, for Canada to succeed in the innovation economy it needs the government to implement an approach similar to that of the United States in order to help grow and protect Canada’s homegrown innovative sectors. Canadian technology firms have long struggled to scale up globally without the kind of strong relationship with government that is needed to build a dynamic environment for domestic technology companies to thrive. Canada does not have a start-up problem, but rather a global scale-up problem. 

When CEOs have a direct line to public officials, they can work with the public officials to remove roadblocks and advance the interests of scaling companies. When public officials have direct and unfettered access to data from the front lines of Canadian industry, they can devise strategies that help — not hurt — Canadian high-growth companies.

Building a sophisticated public-private partnership focused on scaling Canadian companies is easier said than done. Navigating the complexities is not easy, for the CEOs or for the public-sector leaders. Canada’s public officials did not have the benefit of direct feedback from Canadian scale-up CEOs until late 2015, when the Council of Canadian Innovators was founded. 

Finally, it is important to come back to Canada’s scale-up ecosystem and the challenges both the sector and its leaders face: a report commissioned by the Centre for Digital Entrepreneurship and Economic Performance recently pointed out that the Canadian technology ecosystem lacks a quality network of mentors who can help current CEOs manage freedom-to-operate issues, while providing advice on growth strategies (Williams, Herman and Clarke 2014). The number of Canadians who know how to navigate strategic regulations, harmonization, technology standards and IP regimes, and how to take a technology company from $10 million in sales to billions, can be counted on one hand. Among them, most are currently outside Canada. That is a significant challenge facing Canadian innovators and the economy as a whole.

Addressing this is of paramount urgency, but rushing through a strategy would be as disastrous as treating the innovation economy similarly to the automotive one. All Canadians have a vested interest in the outcome of growth of the technology sector: the dividends of a successful company in Canada are received through the payment of corporate and personal income taxes, which, in turn, support important public priorities such as health care, education and critical infrastructure.

The solutions to the talent gap, the scale-up knowledge gap, the access to new customers gap and the capital gap all exist in the dialogue and conversations that must take place between government and the business leaders who are building innovative companies through their everyday operations. 

At 150 years strong, Canada is poised to secure its place in the global innovation economy. To get this right, Canada must continue working with its technology leaders who are working hard to commercialize Canadian IP within Canada’s borders. If Canada can become not only home to a diverse population and a majestic landscape, but also a rich pool of strong innovative companies, the country will remain a prosperous land for many generations to come.