Overview | Bolstering Growth
The Next Frontier for Canadian Startups
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This report, done in partnership with ventureLAB, a Markham, Ont.-based technology hub, proposes that a resilient post-COVID Canadian economic recovery will depend on the success of Canadian-grown small and medium sized businesses (SMEs) and their ability to compete on the global stage.
Innovative and timely incentives for Intellectual Property (IP) development, a business culture that rapidly responds to opportunities, and a tailored investment-attraction strategy are critical to advancing a competitive Canadian economy.
Key themes of this report include the following:
i. Creating, protecting, and incentivizing Canadian IP
ii. Promoting a built-to-scale Canadian business culture
iii. Establishing Canadian anchor companies, and leveraging trade
COVID-19 response measures have dramatically impacted on the Canadian economy:
- Large-scale economic slowdowns across nearly all sectors
- Record-high unemployment rates
- Disrupted global supply chains
- 1000% forecasted increase in Canada’s federal deficit (expected to reach $343 billion)
Successful small and medium sized companies represent 99.8% of all businesses in Canada and will be critical to a post-COVID recovery.
Startup: A new business venture in early stages of development, working toward innovation, development, deployment, and commercialization of new products, processes, or services driven by technology or intellectual property (IP)
Scale-up: A growth-stage company that is adding revenue faster than new costs with annual growth of at least 20% over three consecutive years
Creating, Protecting, and Incentivizing Canadian IP
“The IP system is slow, imperfect and, at times, expensive, but it is also the innovation economy’s ‘central bank.’ Business leaders who understand that it is a commercial — not just a legal — priority will be active players rather than bystanders in the disruptive markets of the near future.”
— Gordon Harris, Gowling WLG
What is IPP?
Intellectual Property Protections (IPPs) enable companies to execute temporary monopolies over technologies, processes, inventions, and brands, giving them a competitive advantage over other companies.
Why Bother with IP development?
Intangible assets like data and intellectual property (IP) are the standard currency in modern, digital economies. Their importance to both digital and traditional business is growing.
Intangible assets represent 90% of total value of tech giants like Microsoft and Amazon and 84% of the value of the top five S&P 500 companies. Canadian SMEs that hold formal IP (patents, trademarks, copyrights, and industrial designs) are
- 2 times more likely to have experienced high growth (20+% per year) than companies that do not
- 3 times more likely to expand domestically
- 4 times more likely to expand internationally.
Patents increase the probability of receiving venture capital funding.
IP Protections by Company Type
Companies that use widely accessible or easily replicable technology (consumer electronics or software tools, for example) rely mostly on trademarks, copyrights, and design, rather than patents.
- Companies with products or processes based in deep technologies tend to rely on patents
- Companies with difficult to replicate products will have lower infringement risks and are less inclined to pursue patents
Canada’s Global Standing in IP Development
Canada lags foreign counterparts in the development of patents and industrial designs.
Barriers to IP
Formal IP can be expensive (the process can cost millions of dollars)
- Formal IP requires costly enforcement to be effective
- Patents have an expiry date
- Filing a patent requires making an invention public (some companies prefer trade secrets instead)
- COVID-19 has refocussed SME priorities (survival vs. patent seeking, etc.)
Supports for IP
New initiatives such as the Business Development Bank of Canada’s $160 million allotment for supporting the growth of IP-rich scale-ups will help Canadian companies prioritize IP protections.
In 2018, the federal government launched Canada’s Intellectual Property Strategy to help Canadian innovators get the most value for their inventions.
Prioritizing IP in Partnership and Investment
When Canadian companies neglect IP rights in their partnerships with foreign investors, companies, and other institutions, they risk losing their rights to file for and exploit IP in foreign markets.
Canadian companies and academic researchers engaging in R&D activities with foreign investors and partners need to prioritize IP rights early in the process to ensure commercialization rights and freedom to operate in key markets in the future.
The patent box (a.k.a. “innovation box” or a “knowledge development box”) is a policy tool many governments use to incentivize commercialization of regional R&D and attract foreign investment.
A patent box is essentially a reduced tax rate on income derived from qualifying IP (usually about 10%):
- 14 of the 28 EU member states had a patent box regime in 2019
- Canada and the US do not have any form of a patent box at a national level
- British Columbia had a patent box policy from 2006 to 2017.
- Quebec introduced an “incentive deduction for the commercialization of innovations” in 2020 (it is one of the most competitive corporate tax regimes in North America: 2% provincial tax derived from qualifying IP)
Building to Scale
From 2012 to 2016, more than new 72,000 Canadian businesses were created. The viability of the Canadian economy depends on survivability of startups.
- 88% of SMEs survive the first two years of operation
- Only 65% of service-based SMEs and 68% for goods-producing SMEs survive beyond five years
- Less than 44% (services) ad 46% (products) survive past year 10
Help Wanted: Diverse Founding Teams
Investors often consider the composition of a company’s founding team as the most important factor in their investment decision.
- Venture capitalists replace up to 40% of founders with more seasoned managers at critical points in a startup’s growth
- The most successful founding teams value experience and business acumen as much as technical know-how
Foreign Direct Investment (FDI) Can Help Grow Startups to Scale-ups
In 2018, just 12% of Canadian startups met the criteria needed to grow to “world-class size” and maintain growth trajectories (University of Toronto Impact Centre assessment)
- FDI provides a pool of financial and technical resources for local startups
- FDI allows Canadian startups to gain knowledge, business expertise, and access critical distribution networks and international markets
Attracting FDI, however, needs to be coupled with policies and practices (“performance requirements”) that ensure benefits to Canada.
Common performance requirements imposed on investors:
- Specified portion of local goods and services needs to be used in the project
- Set quota for new job creation in the host country
- Enable knowledge exchange from the investor to local businesses
- Require a portion of R&D activity in the host country
One noted challenge to foreign investment is a conservative business culture in Canada:
“Business culture in Canada is different from the Netherlands. It’s more difficult at first to sell in Canada. It takes more time. You really need to build a personal connection to do business in Canada. It’s not really like that in the Netherlands, and even less in the US.” CEO, Tech Startup, Netherlands
Creating Globally Competitive Tech Companies
More so now than prior to COVID-19, leveraging and building relationships, and taking advantage of formal supports in place can help Canadian SMEs succeed.
Canada lags certain other countries in export capability and the diversity of its export markets:
- Only 11.7% of Canadian SMEs exported good and services outside of Canada (in 2017)
- Over 90% of exports went to one country — the US
- By contrast, Israel exports nearly 80% of its high-tech products all over the world
- About 35–40% of Israel’s GDP is tied to tech sector exports
Lessons learned from Israel’s export success include the following:
- More than 4% of Israel’s GDP goes to R&D (one of the highest percentages among developed countries)
- Israel Innovation Authority receives annual government funding for investment into local startups (in 2019 more than $500 million USD was spent on 1,650 projects)
- Israel broke records for foreign capital raised in 2019 (up 15% from the previous year)
Export-ready SMEs are critical to the success and resilience of the Canadian post-COVID economy.
Leveraging Canada’s International Partnerships and Trade Agreements
Trade agreements reduce the barriers for the movement of goods and services between countries, and make it easier to do business internationally:
- In 2017, CETA (Comprehensive Economic and Trade Agreement) opened the EU market to Canada
- CETA eliminates 98% of tariffs on goods and services between Canada and the EU
- In 2018, Canadian exports to the EU increased by 4%
Canadian SMEs with export intentions are supported through funding and other levers provided by The Trade Commissioner Service (TCS), Export Development Canada (EDC), and the Business Development Bank of Canada.