Is Canadian Entrepreneurship Vanishing?
Is Canadian Entrepreneurship Vanishing?
According to recent studies, the rate of startup creation has been decreasing for years. Are we witnessing the slow death of Canadian entrepreneurship?
Entrevestor recently completed its second survey of Atlantic Canadian startups, and one of the striking figures was the number of companies that vanished in 2014.
Here are the basics. Of the 290 companies that were surveyed last year, eight were acquired or merged with other startups. Nine moved outside the region. There were 43 that either went out of business or never really moved beyond a group of dreamers with an idea.
So the headline number is that about 15 per cent of the startups that Entrevestor tracked at the end of 2013 went under or never got going. But the deeper truth is more complicated, nuanced by the makeup of the startup community and by its attitude toward failure.
According to Entrevestor, the startup community is a pyramid, with a clutch of strong companies at the top and a broad range of the weak and experimental at the bottom. The bottom tier includes teams that intend to develop into companies but in actual fact are just a few people coming together to work on an idea. Entrevestor includes them in their dataset because some do morph into robust companies, and it’s impossible at the early stage to tell who will survive.
US Entrepreneurship Vanishing as well?
According to INC.com, its a similar trend in the US startup scene where the startup rate has been falling for decades. The Kauffman Foundation, citing its own research and drawing on U.S. Census data, concluded that the number of companies less than a year old had declined as a share of all businesses by nearly 44 percent between 1978 and 2012. And those declines swept across industries, including tech. Meanwhile, the Brookings Institution, also using Census data, established that the number of new businesses is down across the country and that more businesses are dying than are being born. All this at a time when entrepreneurship had reached its cultural apex and was widely viewed as the sole sizzling ember in an otherwise cooling economy.
The implications are huge. “New businesses are disproportionately responsible for the innovation that drives productivity and economic growth, and they account for virtually all net new job creation,” says John Dearie, executive vice president for policy at the Financial Services Forum. “I would say, as a policy person, this is nothing short of a national emergency.”
According to many sources, the underlying worry is churn. In a dynamic economy, businesses are born, grow, and die; jobs are created and lost; and resources are reshuffled according to their best use. If there are fewer new companies and more aging ones, then labor and capital hang tight in old industries. The economy is not refreshed and growth slows.
As we all know, launching and running companies is not for the faint-hearted. In his book Where the Jobs Are: Entrepreneurship and the Soul of the American Economy, Dearie and his co-author interviewed more than 200 founders about the challenges of building businesses. Their subjects cited five: insufficient access to capital; difficulty finding people with the right skills; immigration policies that keep talent out; onerous taxes and regulations; and economic uncertainty. Those go a long way toward explaining why companies struggle to scale. But they offer only a partial explanation for why fewer companies start in the first place.
What about the Canadian High-Tech Sector?
The case studies in the high-tech sector don’t point to a hopeful scenario for Canadian entrepreneurship either. RIM, which has been Canada’s top tech name for much of the past decade, is trying to arrest a steep decline. The BlackBerry maker’s rapid reversal of fortune means that, for the first time in at least a generation, Canada lacks a single, healthy large-capitalization tech champion.
According to the Globe and Mail, the air is quickly coming out of Canada’s high tech sector – or what’s left of it. High-tech companies now account for a razor-thin 1.6 per cent of Canada’s benchmark stock index, the TSX composite (excluding SXC, which is now counted as a health care stock). That’s down from a staggering 41 per cent in July, 2000, near the peak of the tech bubble, when Nortel Networks Corp. accounted for more than one-third of the index. That steep decline isn’t just due to Nortel’s demise: High-tech names have been vanishing from the radar in Canada at an alarming rate. Last year, 45 Canadian tech firms were snapped up by foreign buyers, up from 32 the year before and less than 15 per year in the mid-2000s, according to Branham Group, an Ottawa market research firm.
Worse, most of those companies are selling out too early, before they have a chance to grow into larger, global businesses that could fuel further innovation and success in the tech sector, say industry insiders and observers. The blame is squarely pointed at what they call a “broken” financing system, starting with wary, previously burned angel investors, a timid, underfunded and inexperienced venture capital industry, and moving up to institutional investors who are still smarting from their experience with Nortel stock. Many Bay Street investment dealers have lost all interest in the sector, content with the flow of deals in mining and oil and gas. Equity offerings from technology companies represented less than 4 per cent of deals on the TSX in each of the past four years, down from more than 20 per cent a decade ago. That means investment banks are cutting back on technology research.
Canadian Entrepreneurship – A Problem of Funding?
The issue is money, or lack thereof, is due to a lack of investor interest in Canada. It’s a pattern that manifests itself at all levels in Canada, and can best be explained as a Nortel hangover. Until the late 1990s, Canada had a healthy, if not flashy, high-tech sector, centred in the Ottawa region around telecommunications, dating back decades. With the rise of the Internet, “at a time when the world said ‘We need connectivity,’ Ottawa said, ‘We can do that,’ and it took off” led by Nortel, Mr. Lazenby said. “We were in the right place at the right time.”
But unlike the U.S., there was almost no risk capital to support the growth of the tech industry here. The first experience many investors had with tech here was Nortel’s outstanding stock market success, and that of other shooting stars that briefly sported inflated valuations during the Internet bubble. Nortel’s massive size at its peak was also unnaturally high, meaning many ordinary Canadians felt the pain – either through their portfolios or their Canadian mutual funds – when it melted down.
That helped to create an aversion to the tech sector as a whole, and it also meant Canadians didn’t recover as quickly as Americans, who were more accustomed to the ups and downs of technology investments.
Worse, according to a damning 2009 study by Impact Group of 18 early-stage tech companies that died or were bought out, the few Canadian venture capital firms that do take on tech investments tend to lack the experience, appetite for risk and know-how to help their portfolio companies – unlike U.S. venture capital firms, which typically employ one or more successful entrepreneurs. Canadian VCs also lack the financing to help take their companies through the full investing “life-cycle” until they become self-sustaining. “In Canada we don’t have the ability to take companies from the beginning to the end,” said Scott Clark, managing partner with Covington Funds, one of Canada’s more successful VC firms. “The biggest challenge companies have is getting a second round of funds.”
As a result, Canadian tech startups typically raise only about one-third of what their American counterparts do, and are often pushed by risk-averse investors to sell out just when they could be making the investment to become something much bigger.
Is it a generational problem?
Steve Jobs was a Boomer. So is Richard Branson. Also Bill Gates. And Oprah Winfrey.
Over the past decade, the portion of founders in their 50s and 60s has increased, according to Kauffman data. By contrast, the portion of 20- and 30-year-old entrepreneurs has declined. In 1996, young people launched 35 percent of startups. By 2014, it was 18 percent. “We’re now past the peak demographic bulge we got from the Boomers,” says Dane Stangler, Kauffman’s vice president of research and policy. The Millennials, meanwhile aren’t expected to start launching companies en masse for five to seven years.
According to the Global Entrepreneurship Monitor (GEM), a consortium of academic teams in more than 70 countries, until last year 25-to-34-year-olds were significantly more worried about failure than 35-to-54-year-olds. But there’s a hopeful sign for startup rates: In the past year, young people have begun to display more confidence. In 2014, just 34 percent of 25-to-34-year-olds said fear of failure would prevent them from starting a business, down from 41 percent a year earlier. Still, this remains a cautious group. “The fear of failure among 25-to-34-year-olds can reflect a greater level of caution, and a preference for more stable employment when there is high uncertainty and a less favorable environment for entrepreneurship,” says Donna Kelley, a professor of entrepreneurship at Babson College and GEM team leader for the United States. Massive student debt can also contribute to young people’s fear of risk.
The broader problem for Canadian entrepreneurship may be that Canadian population growth is shrinking. According to the Globe and Mail, in Canada about a quarter of a million business owners, or a fifth of businesses with employees, are now aged 55 and over. That number that has climbed 4 per cent a year over the past decade, more than double the rate in the 1990s. By the end of the decade, almost 350,000 business owners will be over the age of 55 — raising questions about who will take over thousands of Canadian businesses once current entrepreneurs retire.What seems like a scattered problem today could spiral into a macro-economic issue in the coming years. “The changing demographic landscape of Canada suggests…the sheer number of business owners that will retire in the coming decade is turning this micro issue into a potentially damaging macro problem.”
Almost six in ten business owners between the ages of 55 and 64 haven’t yet started planning their exit strategy. At least one study, published earlier this year, proposed tapping into one available pool of labour for the country’s small and medium-sized businesses: immigrants.
A look at Europe and Japan, both aging societies, and their entrepreneurship rates are also decreasing at a fast pace. A report by Toronto-based Maytree foundation suggests tapping into one available pool of labour for the country’s small and medium-sized businesses: immigrants.
“Skilled immigrants can boost innovation in small businesses by bringing new perspectives, speaking international languages, providing insight into the diverse domestic markets and by helping SMEs do business in the global marketplace,” said a Maytree report in April 2012.
Hopeful Signs for Canadian Entrepreneurship – Canada’s Millennials?
According to new national research for Intuit Canada (released on October 9th 2013), Millennials are twice as likely as the average Canadian to predict they’ll be their own boss within the year.
The survey of 1,002 adults, 16 per cent of those aged 18 to 33 said they intended to fulfill their entrepreneurial dreams within the next 12 months, compared to just eight per cent of other respondents. If you do the math, it means as many as 1.2 million new businesses could be helmed by young Canadians by this time next year – assuming those polled see their plans to fruition.
For instance, young wannabe entrepreneurs were nearly five times more likely to be motivated by the allure of charting their own course, and following a passion, than they were by money or status: 78 per cent versus 16 per cent. The opportunity to be their own boss was cited by 23 per cent of respondents. Sixty-four per cent said they’d begun seriously planning their start-up. Preparation included market research (51 per cent), visiting entrepreneur-focused websites (49 per cent), taking a course on launching a business (35 per cent), and writing a business plan (31 per cent).
Certainly Millennials have been socially and culturally primed for entrepreneurship: Their vaunted individualism and idealism suggest they are temperamentally suited as well. And when the time comes, they may be the best-educated entrepreneurs in history. An informal survey by Inc. of top business schools found interest in entrepreneurship programs at least holding steady and in some cases growing substantially. At Northwestern’s Kellogg School, for example, enrollment in entrepreneurship courses more than doubled between 2011 and 2014.
The Intuit Canada poll found that millennials’ business locations of choice include:
online (28%); and
So why haven’t you started a company yet? Send us your comments.