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Too many Canadian startups are bought out

Too many Canadian startups are bought out

Posted by PanamericanWorld on January 07, 2016

Last year’s $131-million Shopify IPO signalled a lot more than just a big payday for the Ottawa-based e-commerce software company. It was proof that Canadian-born businesses can launch and mature in this country – something many young companies with roots here never imagined.

Canadian firms often have short life spans, with a string of the country’s most successful companies selling to U.S.-based acquirers. In the past five years, 183 Canadian companies have been acquired, nearly 70 per cent by U.S. firms. This doesn’t mean they failed – many recent deals have been huge. (For example, Toronto-based Eloqua’s acquisition by Oracle for a reported $871-million in 2012.) But there is a pervasive mentality that the only exit strategy is to sell – more of a fate than a choice.

According to PwC’s report on the state of emerging tech companies released earlier this month, 77 per cent of Canadian tech founders are currently planning an exit for their company. Nearly two-thirds, or 63 per cent, said that exit plan is to sell, most within the next few years. Compare that with the Silicon Valley spirit, where the predominant CEO attitude is to stay focused on building a billion-dollar business.

Canadian founders should feel that a long, bright future holding on to their companies is a viable proposition. For that to become a reality, we need to take a hard look at why so many Canadian businesses end in acquisition, and how our tech and investment community can step in to change that course.

Canada as a shopping mall

Some of the same elements fuelling incredible growth for Canadian companies are also making them attractive targets for other businesses, the first being an incredible wealth of talent throughout the country. Three of the world’s top 50 engineering schools are in Canada, with the University of Toronto, the University of Waterloo and the University of Ottawa all making the list. The problem? Other people are noticing this talent, too, and recruiting harder than we are: An estimated 350,000 Canadians now live in the the San Francisco Bay area. For those who stay to work at Canadian tech companies, the talent reputation makes buying companies primarily to acquire talent, also known as aqui-hires, an attractive bet for companies around the globe.

The quality and cost of living here are unimaginable compared to those in California, where skyrocketing rents are driving residents out of San Francisco in droves. The Silicon Valley lifestyle has become the butt of a joke big enough to spawn an entire HBO comedy. Meanwhile, in Canada, rent and daily living are affordable and the country continues to rank high in global reputation.

This lower-cost, high-quality lifestyle, as well as attractive tax credits from the government, have a put Canada on the map for investors and businesses alike. In just the past few years, Facebook, Amazon, Tableau and Salesforce have all opened offices here. Foreign investment in Canadian companies is spiking. This level of reputation and visibility is great for the country, but it’s also spurring attractive offers from big companies south of the border that can be hard for startups to turn down.

Taking down the ‘For Sale’ sign

A few years ago, U.S. investors saw the writing on the wall for Silicon Valley and invested in tech ecosystems sprouting up in other major urban areas. Those firms are starting to see a return on those investments as companies throughout the country reach a new level of success. This is spurring a tech renaissance in Canada, but a daunting crossroads is appearing for many of them.

This is the stage where companies hit roadblocks – when they start to see major growth potential and look for their second or third round of funding to achieve it. Canadian investment firms lack the large-volume capital that many of these companies need to make a real impact. There aren’t many success stories that young companies can look to for inspiration. Many end up relinquishing ownership to foreign investors, or selling out completely.

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