Are We Creating Financially Unattractive Companies?
Policy experts and innovation practitioners have criticized Canada’s innovation system for its inability to grow and scale companies. This has been a baffling issue because Canada’s technology sector has been successful at starting companies and generating innovations with high potential.
In this study we wanted to approach the problem from a slightly different angle: Is the way in which Canadian companies raise funds also adding to the scaling problem?
To this end, we looked at 49 private US companies that had received $100 million–$295 million in VC funds since inception. We compared them to 49 of Canada’s largest funded tech companies that had attracted $30 million–$250 million in VC funds per firm.
The data reveal three critical issues:
- Canadian companies wait longer before they start raising funds.
- They raise funds less often.
- They raise less money over time.
These fundraising patterns demonstrate remarkable differences between high-tech firms in North America. What US companies raise in four years, Canadian companies take ten years to raise. US companies (in this study) have six times the capital on hand to spend in their first five years of existence on critical functions, such as marketing and sales, which contribute to growth and long-term sustainability. The result is that, starved for funds, Canadian companies grow at a 47% compound annual growth rate (CAGR) while the US firms in our study grow significantly faster at a CAGR of 63%.
These funding trends also create companies that don’t look attractive from an investment perspective, lending validity to questions such as “Why would a US VC who is willing to locate offices in Europe, China, or India relocate to Canada to invest in slower-growth companies?” or “Why wouldn’t a Canadian VC sell a company that cannot get sufficient capital to compete globally?”
Download a full copy of the report, A Failure to Scale.