Exploring Technology Innovation in Canada
Commentators have long criticized Canada’s inability to scale high-tech companies to world-class size. Although Canada has created an ecosystem that produces many startups, few of these companies grow to become Unicorns. These are defined as privately held companies with valuations in excess of one billion dollars. Certainly, we have had world-leading companies such as Blackberry and Mitel, and more recently Unicorns such as HootSuite and Kik Interactive. But most of our successful startups are sold before they reach world-class size. Overcoming this growth hurdle is crucial to positioning Canadian companies favourably in global markets.
The Impact Centre conducts research on all aspects of innovation, from ideation and commercialization to government policy and broader themes such as the connection between science and international development. We study how companies of all sizes navigate the complex path between a discovery and its market and how their collective innovations add up to create a larger socioeconomic impact.
Our objective is to understand how we can improve our ability to create world-class technology companies, how governments, companies, and academia can identify and adopt best practices in technology commercialization.
The prevalent Canadian narrative is that as a country, we struggle to compete in the global innovation economy. One metric that is often cited as proof of this is the number of patents we are granted in comparison with other advanced countries. In this Brief, we have looked more closely at Canada’s performance in the numbers of patents granted.
What we found isn’t that we have a problem securing patents, it’s that we have a problem with the commercialization of them. Canada’s success in obtaining patent grants in the US has improved by 143% over the last ten years. The number of patents with one or more Canadian inventors climbed to 8,903 patents in 2015, placing us eighth on a per GDP basis against competitor countries in 2015.
However, of the patents granted to Canadian inventors by the US Patent Office in 2016, 58% were assigned to companies domiciled in other countries. This is up from 45% in 2005. This means that Canada earns a return through commercialization for less than half of the patents granted in the US to Canadian inventors.
Patenting is an international, not a local activity; and the nuances of the process must be considered before the numbers are aggregated into a single indicator for the purpose of policy making.
Anecdotal evidence suggests that many Canadian technology companies wait until their products are completed before raising and spending funds on crucial functions, including marketing and sales (M&S) and that this practice is delaying success in raising funding.
The goal of this study was to determine whether Canadian technology startups do in fact delay funding M&S activities. To this end, we looked at job classifications of employees at over 900 private Canadian technology companies that had received external investments. What we found was that in the startup phase Canadian firms have significantly fewer employees in marketing and sales than US firms do. Even among the best-funded firms, Canadians have 25% fewer M&S employees than US based Unicorns do.
In order to provide a tool to enable entrepreneurs and investors to gauge how attractive firms are from a financial standpoint, we are pleased to introduce a way to measure Financial Velocity. Financial Velocity is defined here as the amount of funding a firm has raised divided by the number of years it has been in existence. It is expressed in millions of dollars per year. This measure reports the rate at which companies raise and consume capital.
We have assembled a list of the top Canadian businesses based on Financial Velocity and are pleased to introduce the Narwhal List. This list shows Canadian venture capital backed companies with the highest Financial Velocity.
This study reveals three critical issues:
1. Canadian companies wait longer before they start raising funds.
2. They raise funds less often.
3. They raise less money over time.
And as a result of this pattern, even our best companies are not particularly attractive to investors as their growth rates fall well below that of the most successful US companies.
Our success as an “Innovation Nation” depends not only on our ability to come up with novel ideas or inventions but also on our ability to market and sell those ideas. Unfortunately there is a striking difference in the spending behaviour of Canadian and American on marketing and sales (M&S). While mid-sized US software companies spend, on average, 34% of their revenue on M&S, comparable Canadian firms only allocate 20% of their budgets to those expenditures.
The lack of venture capital in Canada has been denounced consistently in studies and think tank reports, and by the media, entrepreneurs, and even venture capitalists themselves. But while the general consensus is that Canada does not have enough venture capital, we somehow manage to rank #4 in the sale of technology companies.
How can we have too little venture capital funding but be so successful at selling companies? The answer lies in how we are funding companies and what stages we are able to fund.
While many commentators claim that Canada lags behind the United States in its ability to innovate, we found no evidence of this in our recent study on corporate culture. While these results may appear inconsequential, they allow us to eliminate a potential cause of Canadian innovation problems by highlighting the similarities in the Canadian and American beliefs about a culture of innovation.
Business expenditures on research and development have been under-reported by Statistics Canada for almost 20 years. While many reports bemoan Canada’s lack of spending on Innovation compared with the OECD, we haven’t been using the same definition of R&D and this has caused it to be under-reported.
The Impact Centre’s latest study has determined that Founder CEOs outperform Professional CEOs in both Unicorns and venture-backed Canadian companies. But in Canada we are 2.6 times more likely to replace a Founder CEO with a Professional CEO.
Our recent study on attitudes towards innovation found that there are 29% more Americans than Canadians who have a strongly positive attitude towards innovation. Americans outscore us in almost every dimension of attitudes towards innovation, among managers and employees, men and women, and among all age groups.