Technology start-ups, including pre-revenue or early growth firms, will not save the Canadian economy from the COVID-19 crisis. This is not a slight to them. The reality is that tomorrow’s anchor firm is yesterday’s start-up, but already established and market validated technology scale-ups are those most likely to help the economy recover once the government begins to lift restrictions on movement and economic activity.
Sometimes referred to as “high-growth firms” or “threshold firms,” scale-ups are market tested companies with strong and consistent revenue (and employment) growth – typically 20% annual average growth – that meet minimum employment or revenue thresholds. Depending on the precise definition used, research finds that strikingly few firms qualify as high-growth. One study of Canadian firms between the period 2009-2012 finds that less than one percent of all firms are high-growth. Studies elsewhere find a higher percent of firms qualify, but seldom does this figure exceed around 5 percent.
Regardless, they have a disproportionate economic impact on both revenue and jobs. For instance, in 2011 to 2013, Canadian firms with between 100 and 499 employees showed the strongest revenue growth of all firm sizes. More recent research on scale-ups in Ontario by the Brookfield Institute finds similar evidence of lopsided employment and revenue contributions.
Research also shows that scale-ups contribute more than other firms to productivity growth, meaning these firms make the most of their business inputs, namely labour. Productivity growth is considered to be the most important variable in an economy. It drives increases in standards of living and consumer welfare, reduces strain on government budgets, and generally makes society as a whole better off.
Are technology scale-ups better positioned to weather the current economic crisis caused by COVID-19? It’s hard to say for certain, but early evidence suggests they are. Two reports published by the Innovation Policy Lab at the Munk School of Global Affairs and Public Policy – the first on how Canadian technology scale-ups view the usefulness of available federal business supports and the other on their payroll behavior – indicates that scale-ups are well positioned, relative to start-ups or small firms, to ride out the current crisis. Notably, they are probably those least likely to layoff staff in the short- to medium-term. Research published by the National Bureau of Economic Research suggests the same for American firms.
In 2011 to 2013, Canadian firms with between 100 and 499 employees showed the strongest revenue growth of all firm sizes.
None of this is to say that start-ups don’t need government support and intervention. Small firms and start-ups constitute the vast majority of all firms in Canada – 95% of all goods and service firms in 2017 had less than 50 employees, according to a federal report. The government should, through its wage subsidy, loan programs, and other supports help those who can survive do just that. We obviously cannot have all of these firms going under.
However, these smaller firms simply are not the market-tested firms in a position to lead the recovery. So let’s not confuse the difference between a start-up and a scale-up, which is a common occurrence. This is especially important, because while the desired outcomes from government support may be the same, the wants and needs of a start-up and scale-up are structurally different.
A prime example is whether a scale-up can qualify for the Canadian Emergency Wage Subsidies based on how they recognize revenue. Also, just because a scale-up may not have shown a drop in revenue, the real concern comes 60 to 90 days from then, when their clients either delay payments or can’t pay their invoices. These companies may get caught up in creating their lines of credit and not being able to make payroll as a result.
While the attention is understandably focused on preserving jobs and helping the small and medium enterprises from going under, let’s not lose sight that it will be the technology scale-ups who continue to manage their ability to weather this pandemic, by refraining from laying off their staff wherever possible, and managing their cash flow to sustain their day-to-day business operations. As a result of the entire world being placed into self-isolation nearly overnight because of COVID-19, this is also an opportunity to use the government debt mechanisms to prepare for these scale-ups to accelerate their growth once the restrictions have been lifted.
For the sake of the country’s current and long-term prosperity, we need to shift the conversation about innovation and technology from its almost singular focus on start-up firms and ecosystems to scale-ups and the support they need to continue to grow here on home soil. We’re in the midst of one of the worst economic crises in a century. Let us seize the moment to change the narrative around policy-making priorities to ensure the economy rebounds and scale-ups remain profitable over the long-term.
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.