Companies with more money are more likely to grow and succeed.
This may seem obvious, but according to a University of Toronto study, it’s also a key explanation for the persistent problem of why the Canadian innovation sector lags so far behind that of the United States.
Canadian companies take longer to get investor funding than their American counterparts, and when they do raise capital, Canadians tend to get less money.
These observations come from Class of 2008, a report released Thursday by Charles Plant, senior fellow at the Impact Centre at the University of Toronto.
The report studied the trajectory of 2,429 companies founded in 2008 in Canada, the U.S., France, Germany and the United Kingdom, with a particular focus on the 983 startups that got at least $100,000 in capital investment.
Compared with the other countries, Canada is fairly competitive, but when compared with the U.S., startups here are losing out.
“We fund them later, with less dollars, so they don’t grow as fast, so we’re not as attractive,” Plant said. “Canadians are learning that you need to apply lots of money in order to grow fast.”
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This is something that Plum Inc. CEO Caitlin MacGregor knows quite well.
Founded in 2012, the Waterloo, Ont.-based startup aims to use industrial organizational psychology and machine learning to help companies make better hires. MacGregor said the company has about $1 million in annual recurring revenue, with more than 100 customers, and is looking for investor funding to help it grow.
If she were in Silicon Valley, she said, it would be a lot easier to find that money because there are many people who got rich from previous tech startups, and now are looking to put that money back into the ecosystem as angel investors.
“I can go to a party, talk about my idea and have people start writing cheques — if I was in the U.S.,” MacGregor said. “In Canada, when we go to the party, there’s nobody in the room pulling out their chequebooks.”
That shortage of early-stage funding has serious knock-on effects.
Plant said that cash-strapped Canadian companies wade in slowly, whereas American firms tend to have the money to make a big splash from Day One.
“(Americans) use more of their money to prep the market for the technology that comes out, either by understanding the market better, by having a product that fits better, or by actually starting to communicate with the market sooner,” Plant said.
“So when the products come out, they’re launched with a faster trajectory.”
Our slower pace leads to slower growth in Canadian firms, and when it comes to tech startups, if you can’t demonstrate huge growth numbers, you’re a lot less exciting for venture capitalists.
If there’s a silver lining, according to Alexander Munro, director of Capital Services at Toronto’s MaRS Discovery District, the gap has been narrowing between Canada and the U.S. since 2008.
“We are seeing a marked increase in talent coming into Canada, so that has been a quick surge in a lot of really good, high-tech startups,” Munro said.
“Generally, money follows talent, and for that reason we’re seeing that there is quite a wealth of capital that is pouring into Canada, particularly from the U.S. first, secondly from Asia, and thirdly I would say from Europe.”