Multiple challenges confront entrepreneurs trying to grow startup firms in Canada

Startup founders face multiple challenges in growing their businesses in Canada, despite access to numerous government innovation programs and topnotch talent, entrepreneurs told Research Money’s 23^rd Annual Conference in Ottawa.

During a session on “Industry Opportunities & Challenges,” a panel of six entrepreneurs listed myriad hurdles they face in trying to establish, keep and grow their companies in Canada, including:

• Little to no government procurement or procurement by Canadian companies of startups’ innovative products and services.
• Existing government procurement processes that are extremely slow and bureaucratically cumbersome.
• No formal structure within the federal government for startups to propose procurement of products and services for individual departments and agencies.
• An export-support ecosystem aimed at selling made-in-Canada innovative products and services to other countries, but no similar system within Canada to encourage domestic sales and create a supply-and-demand link for innovative firms. (See Short Report item: "Canadian corporations lag firms in other companies in venture capital investment -- including investing in startups in Canada."
• Lack of knowledge by government decision-makers and innovation program deliverers about industry sectors and companies’ business models and needs.
• A risk-adverse civil service where there are no rewards for taking risks to support innovative companies.
• Government innovation programs that move much too slowly for the pace of innovation by industry and are too restrictive.
• Strong research in universities, but failure to commercialize and capitalize on these research ideas.

Several entrepreneurs on the panel pointed to lack of government procurement and little interest among Canadian companies in buying homegrown innovations as a major problem.

Ian Paterson (photo at right), CEO at Vancouver-based Plurilock which offers cybersecurity technology to governments and large companies, said his company spent “years and years” trying to penetrate the Department of National Defence and other Canadian government agencies.

As Canadians, he said. “We wanted to bring this capability here, to protect our own nation.”

However, the lack of interest meant Plurilock also had to pursue commercial markets in the U.S. The company’s first two customers were the U.S. Department of Defense (DoD) and a DoD agency.

“One of the questions we kept getting asked [by potential investors and customers] was, ‘Who’s using this in Canada?’” Paterson said. “We couldn’t get customers in Canada.”

Plurilock eventually bought a company in Ottawa to try to bolster its presence in Canada. However, Paterson noted that “even today, our Canadian presence is very, very small. The majority of our business is in the U.S.”

“I think there are a lot of headwinds [for Canadian entrepreneurs], and there shouldn’t be,” he said. “But there’s a complete lack of ability to functionally commercialize.”

Niraj Bhargava (photo at left), co-founder and CEO at Ottawa-based NuEnergy.ai, which creates organization-level AI government and AI trust measurement software, said his company spent three years going through the Innovations Solutions Canada (ISC) program and testing its technology with the government. About a year ago, ISC assessed NuEnergy.ai’s technology was market-ready and approved it for ICI’s Pathway to Commercialization phase.

“We had multiple departments with the money and ready to move ahead,” Bhargava said. “But we got stalled at the procurement.”

NuEnergy.ai was going through the process of scaling up the company’s team to deliver its technology to the RCMP and other government departments, only to discover “that the checks and balances for our procurement were mind-boggling,” he said.

The complex procurement process meant the company actually had to scale down and lay off people, and Bhargava didn’t take a salary for more than a year. Finally, after going through the lengthy procurement process, NuEnergy.ai received its first commercial contract a couple of weeks ago.

The company had a six-year advantage in AI governance technology over international competitors six years ago when it started, Bhargava said. “Now we’re not quite ahead anymore.”

“I think we can do better,” he said. “I think there’s a productivity problem on both sides of the table – not just industry but government as well.”

Structural problems prohibit risk taking and innovation

Neil Desai (photo at right), executive vice-president  at Viral Nation, previously served on the leadership team of Waterloo, Ont.-based Magnet Forensics, a public safety company which develops digital investigation software used by more than 4,000 police, national security and other public and private organizations in over 100 companies.

Desai said Magnet Forensics had no problem finding government departments and agencies and police departments within Canada and globally that wanted to buy and use the technology.

The company also received a substantial amount of federal and provincial funding, he said. “There is actually a lot of capital on the government side available to companies.”

However, “the thing I was disappointed about was not that we weren’t able to sell, it’s that we weren’t able to co-develop our solutions [with customers],” Desai said.

Customers had a lot of willingness at the operational level to work on co-development with Magnet Forensics, he said. But within government departments and agencies and police forces, “there was very little capacity and no structure that allowed people to take risks and be innovators.”

“In the public sector in Canada, we tilt toward the accountability piece and want to take no risk and get outcomes,” Desai said. “We have to start introducing risk into our structures.”

Another problem arose when the private capital markets looked at Magnet Forensics going public, he said. These markets valued every public dollar invested in the company at only 60 to 70 cents on every dollar, because the public money wasn’t recurring or tied directly to the company’s technology roadmap.

“These are some of the problems in the structures of the programs we’re creating to help companies to scale,” he said.

Last year, Magnet Forensics was acquired for $1.8 billion by U.S. private equity and growth capital firm Thoma Bravo.

Tim Dutton (photo at left), director of corporate affairs at Kitchener-Ont.-based medtech business, Intellijoint Surgical, which develops technologies to improve patient outcomes in joint replacement surgery, said the company had two years of conversations with government about bringing forward its technology – without success.

Government has a structure for considering and funding proposals for infrastructure and facilities, he noted. “Nothing like that exists for technologies. It’s hugely problematic.”

So Intellijoint ended up going to the U.S. “and found tremendous success,” he said. In 2020, Intellijoint was named the fastest-growing company in Canada by the Deloitte Fast 50.

For a homegrown medical device company in Canada, the challenges to scaling are access to capital, talent and customers, Dutton said.

“The logical decision at every single point and turn would have been to build this business in Boston or in Silicon Valley or in Austin,” he said. “That is too often still the challenge that entrepreneurs face in Canada.”

Entrepreneurs need customers, not more innovation programs

As for support from existing government innovation programs, Paterson said Plurilock did receive some funding from the National Research Council’s Industrial Research Assistance Program (IRAP).

However, the company actually gave back some of the IRAP funding when the business grew so quickly Plurilock wasn’t able to maneuver fast enough within the IRAP funding’s budget and restrictions to develop what customers were asking for.

“In the early days, the amount of overhead to access the programs and get the dollar was in some cases not worth the dollar itself,” he said.

The innovation programs that worked best were those that were these least pre-defined in terms of what sort of innovation was expected, such as the Scientific Research and Experimental Development (SR&ED) tax credit program and a provincial business investment tax credit program, Paterson said.

“For the most part, entrepreneurs don’t want [government] programs. We want customers,” he said.

Being able to show that someone in government has put their reputation on the line with a purchase order for a procurement “is so much more useful on many levels,” Paterson said. For example, having customers enables co-development of the innovative product or service.

“So having an actual customer that gives you money, even it’s less money [than funding from an innovation program], is quantifiably but also qualitatively so much more valuable,” he said.

Lori Weir (photo at right), CEO and co-founder at Saint John, N.B.-based Four Eyes Financial, a regulatory technology software company that provides compliance, risk and suitability software for wealth management firms, said IRAP was quite helpful in the company’s early days. However, the company had a lot of problems with SR&ED, which Weir noted is expensive in time, resources and expertise to apply for and obtain.

The usefulness of a particular innovation program largely depended on the person running the program, the relationship manager who worked with the company, Weir said.

There’s a need for deliverers of government innovation programs to take the time to build a relationship and understand the company they’re trying to help, she said.

Desai agreed, saying: “I think we have to understand some of these business models more if we’re going to deploy public resources in these spaces.”

Alex Johnston (photo at left), CEO at 360 Concussion Care, said: “If you’re a decision maker in government or an advisor on decision-making, you need to work at being really informed about what’s going on in the sectors and companies before you can help them, and be prepared to take some risk.”

360 Concussion Care is an integrated network of concussion clinics offering physician-led, multi-disciplinary care, and operating as a learning health system with a mandate to develop and share world-leading concussion research and best practices.

Johnston noted that the top 10 universities in the world for research output in her sector are Canadian.

But it’s not enough to write academic papers and think that will lead to improving Canadians’ lives and well-being, she said. “We can’t invest this massive public investment in our universities and not expect to do something with it. We need to start to capitalize on that and turn it into value beyond the academic.”

Paterson pointed out that Canada has an entire ecosystem aimed at helping companies sell their innovations to other countries.

“We’re effectively trying to outsource the risk through the Trade Commissioner Service to export our innovative products and services,” he said.

But what Canada needs, he said, is a similar service that works with every government department and agency within the country to determine what innovations would be helpful for them, and then bring those ideas back to companies to develop and commercialize.

“It would create that bridge between supply and demand,” Paterson said. Trying to match supply and demand is something that is absent here in Canada,” although other countries such as the U.S. and Israel have such domestic procurement services.

Panel moderator Sue Couelsan (photo at right), vice-president, strategy and partnerships at Natural Products Canada, asked about the impact on entrepreneurs and startups of the federal 2024 Budget’s proposed increase in the capital gains tax inclusion rate.

Desai said the move will hit hard those entrepreneurs and their employees who have taken a risk on their company and are now being “demonized” for doing so.

Founders convince university graduates and other young people to come and work for their companies, for much less than they could be making elsewhere, on the potential that what they invest in the companies together will be worth something,” he said.

As a result of the increase in the capital gains inclusion rate, “the majority of stock options issued in this country will be worthless,” Desai said. “[The government is] calling it ‘fairness for generations.’ It’s demagoguery.”

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