Analysis

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Why so many small companies fail to thrive

By: Roslyn Kunin

Posted: 02/25/2013 10:34 AM | Comments: 0

VANCOUVER — The recent B.C. budget was more modest and realistic than any government budget I recall seeing, especially since it precedes an election. The good news is that the budget anticipates a modest surplus, thus contributing to the long-term monetary health of the province. The not-so-good news is that it foresees a growth rate for this year in B.C. of only 1.6 per cent — below the 2012 rate and below the national rate.

Why should a province as rich and attractive as B.C. expect such lacklustre growth and, more important, is there anything we can do to improve this picture?

One reason is our heavy reliance on resources. Some people call this the Dutch disease. If so, we have a particularly bad case. Not only does B.C. feel every squiggle in lumber sales and copper prices. We also rely very heavily on only one customer, the United States, and are out there literally beating the drums to insure that we do not develop the infrastructure that would allow us to reach other markets and expand our customer base.

But are we not already moving beyond resources and developing Vancouver into an exciting high tech centre? Yes, we are. The B.C. tech industry generates $20 billion in revenue and employs 80,000 people. Tech is growing faster than the more established industries, if only because it is younger and starting from a smaller base. And ‘starting’ is the important word. Some 25 per cent of the top 100 startups in Canada are in Vancouver and almost four per cent of the B.C. working population is involved with startups according to a CIBC report. The international 2012 Startup Ecosystem report names Vancouver as one of the top 10 promoters of tech startups in the world.

All this great press and excellent entrepreneurial activity, however, has not yet turned Vancouver into the next Silicon Valley because many companies start up and very few grow up. For strong, sustainable growth and a choice of good jobs we need more of the bright new startups to mature into large, globally competitive companies.

Why do so many of our new, small companies fail to thrive? It is not for lack of bright engineers, scientists and techies with good ideas. Our educational institutions turn out lots of these and many do start businesses. Many new businesses fail; but, of those that survive, very few turn into Google’s, Apple’s or even Electronic Arts.

We can probably blame our financing systems for the sale of so many firms just when they are on the cusp of becoming big enough to be global. There is a serious lack of mezzanine funding (often referred to as subordinated debt or preferred equity) to fill the gap between the initial stages when companies rely on friends, family and home mortgages and the later stages when they are big and strong enough to get funds from the large institutions.

This gap is usually filled by angel investors who are willing to fund many high risk businesses knowing that most will not make it, but anticipating that the few that do will pay off big. In exchange for shouldering the risk, angel investors do want to be able to collect the funds from their winners in years rather than decades.

A stock market listing is one way to realize the value in a firm, but conditions in the stock market are not always favourable. Selling the firm to a buyer with cash can be faster and more certain. Unfortunately, major potential buyers with deep pockets are more likely to be outside of Canada. More and better mezzanine financing and an encouraging tax system would lead to more firms growing within Canada.

Another factor to help entrepreneurs grow and hang onto bigger firms is knowledge of business operations. Not only do our scientists and engineers lack business training, they often do not even realize they need it. When a firm gets beyond the idea in the garage stage, marketing, accounting and human resource management become at least as important as the technology and there may be no one with the training and experience to look after them.

This problem could be solved if educational institutions included at least a basic introduction to business for their engineering and science students. Many of them will be starting their own businesses and others would become more valuable as employees if they could see a company in its totality and not just the technical aspects. Engineers and scientists do not have to become accountants and marketers. They just have to be able to realize when they need these services. And they will if they are to become the pillars of a thriving B.C. economy.

Roslyn Kunin is a consulting economist and speaker.

—Troy Media

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