COVID-19 threatens the health and economic well-being of Canadians on an individual level, and it also threatens to upend the progress made to build technology ecosystems in Canadian centres. Without decisive policy solutions, there will be negative consequences for general business dynamism and the future of promising technology firms.
The rate of firm entries and exits has been on the decline for several decades now, both in Canada and the United States, across industries and geographies. Why does this matter? The process of firms entering and exiting the market—business dynamism—drives productivity growth and innovation. Simply put: Older, less productive or innovative firms make way for younger, more dynamic businesses.
Despite the decline in business dynamism, several Canadian cities—Toronto chief among them—have managed to build relatively dynamic technology ecosystems, especially for start-ups and emerging scale-ups. A recently published working paper by researchers at Innovation Policy Lab at the Munk School of Global Affairs and Public Policy, with whom I collaborate as an industry sponsor, shows how a class of technology entrepreneurs drove the shift in the Toronto region’s technology cluster from one dominated by multinational subsidiaries towards one with a better balance of foreign direct investment (FDI) and domestic firm growth.
COVID-19 is certain to worsen the crisis of business dynamism. The early numbers indicate that the rate of new firm creation is dipping. The trend isn’t a surprise given the current climate and conditions, but the pandemic threatens to accelerate this pre-crisis trend. Entrepreneurship is already a risky business; as an entrepreneur myself, I know this all too well. How much riskier will entrepreneurship be after this crisis? We have no way of knowing for sure, but I can all but guarantee it will be an even greater gamble than it was before.
While concerns about would-be entrepreneurs and firm formation are justified, there is a group of technology companies who have not only weathered the pandemic but have maintained steady growth: Technology scale-ups. Revenue growth may have been impacted by the pandemic, but these companies are financially stable and continue to invest in their technology, research and development, and labour. Any government support used by much of these firms is for the purpose of maintaining their growth path, not necessarily saving them from failure.
Data and analysis show that “knowledge economy” firms with more than 100 employees are weathering the storm better than others. Firms of that size have been able to shift business operations remotely and implement a work from home protocol with relative ease. However, there is still a degree of risk on the horizon.
How will the aftereffects of the pandemic impact Canada’s technology scale-ups? As The Economist noted in a recent article, “The pandemic will have many losers, but it already has one clear winner: big tech.” The piece goes on to describe how “Collapsing firms could be snapped up by the tech giants.” This is as true in the United States as it is in Canada, but it takes on another level of alarm here. Vulnerable firms will be susceptible to acquisition, and along with them their talent and intellectual property, but even more: Established firms will be targeted too.
During the pandemic, the focus has been on saving companies from collapse. While this has been important, technology scale-ups have been largely overlooked. However, for entrepreneurs running technology scale-ups it is the impact on their future in Canada, which the pandemic has affected, that is of most concern.
As the economy begins to open up and Canadian technology scale-ups return in full force to reignite their growth plans, the challenge will be to support these companies so that they continue to grow internationally and remain Canadian-owned and controlled.
The government’s focus on saving Canadian jobs and businesses was the right one, but the concern, especially post-lockdown, is that the attention on saving companies will have overshadowed the risk of losing a cohort of promising technology scale-ups to foreign investment and control.
As big tech will most likely feed on the carnage of the start-up community for the immediate future, it won’t be long before they focus on the companies who have demonstrated their stability and growth through the pandemic. Now that the government has tried to save technology innovators from demise, how will policy-makers plan on retaining the companies that have successfully endured?
The threat of big tech is what motivated some US congresspersons to propose a temporary halt on mergers and acquisitions. Even if that happens, which seems unlikely, it would simply move the attention of capital towards companies in Canada. There is no way to stop it, except by supporting the scale-up entrepreneurs to maintain their ability to grow on their own terms. As elsewhere, COVID-19 is proving to be an accelerator of pre-crisis trends; this holds true in the case of Toronto’s technology ecosystems.
The danger of losing promising technology to foreign control was a concern pre-crisis. The problem will rise to another level of alarm in a post-crisis market. Without an understanding of the threat and accompanied by clear and decisive policy action, Canada’s promising technology firms, and their talent and intellectual property, will be exposed to big tech and its penchant for market consolidation.
Adam Froman is the Founder and CEO of Delvinia, a global ResearchTech company. He is an award-winning entrepreneur, innovator and business leader who has grown his firm into a globally competitive group of companies over the course of the past two decades.