From Surviving to Thriving: Why Canada must do more for its start-ups and scale-ups in crisis

From Surviving to Thriving: Why Canada must do more for its start-ups and scale-ups in crisis

Providing aid to support the growth of start-ups, scale-ups, entrepreneurs, and small businesses is key to Canada’s long-term economic recovery and growth
From Surviving to Thriving: Why Canada must do more for its start-ups and scale-ups in crisis
​Sarah Villeneuve
Policy Analyst
Darren Elias
Communications Intern
June 9, 2020
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Countries around the world are developing policies and programs to ease the impact of COVID-19 on businesses of all types and sizes, including small restaurants, early-stage tech start-ups and established firms. While conducting a scan to identify and categorize current COVID-19 response policies and programs from around the world, we recognized that many policies have focused on ensuring the survival of companies through the shutdown phase to limit impact of temporary business closures and decreased buying power. However, governments have not yet developed programs that address the need for long-term resilience and growth. 

Having a healthy and robust environment in which businesses of all sizes can thrive is important, not just for short-term survival, but for long-term economic recovery and growth. Start-ups, scale-ups, entrepreneurs, and small businesses are key drivers for economic growth in Canada. Between 2011 and 2015, Ontario’s revenue-based scale-ups generated $282 billion in revenue.

These businesses have the potential to increase the resilience of economies and societies in a post-COVID era. For this reason, it’s imperative that governments design proper supports to enable long-term growth and success.

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Current supports have not adequately addressed the less immediate challenges of this crisis, such as further decreases in business dynamism, increasing risk of market consolidation, and loss of competitiveness.

Current approaches fall short

Canada, like many countries around the world, developed relief programs and policies to support domestic businesses in the wake of COVID-19, alongside other programs aimed at workers and residents in Canada. The initial set of policies were directed towards a conventional set of businesses, including those where revenue is the most important metric of business performance. As a result, initial policies excluded businesses whose revenue is less of a performance indicator, for example start-ups that are still in the product validation stage and even scale-ups whose performance metrics don’t rest on revenue alone. Many of these initial programs require applicant firms to demonstrate stable historical and expected profitability. However, early growth firms, start-ups, and scale-ups are typically not able to meet these requirements and were therefore not able to access the support provided by these initial policies.

As shown in our scan, France has been one of the most proactive countries in establishing support measures specifically targeted at start-ups and scale-ups. The €4 billion scheme includes co-financed investment (split between state-owned bank Bifrance and private investors), loans, and the accelerated payment tax returns and public support payments. The French government acknowledges the significant role that start-ups play in its economy. French start-ups raised €4.7 billion in 2019 and were projected to contribute 25 percent of all new jobs in the country in 2020. French officials have made it clear that this scheme is meant to act only as a temporary liquidity bridge and not as a long-term solution. It is important to note that this approach is based on the key assumption that venture capitalists (VCs) will start investing at pre-pandemic levels again in the near future.

France’s measures pressured other countries in Europe to follow suit. In Germany, state-owned bank KfW can grant loans of up to three times the average monthly revenue generated in 2019 by the applicant firm. However, early-stage start-ups may not be able to meet the criteria needed to apply to the KfW loans, such as being active for the last three years or having two annual accounts. Some longer-term policies are currently in development. While specific details are yet to be announced, Germany is in the process of establishing a €10 billion “future fund” for start-ups aimed at mid-term stabilization to supplement its €2 billion in emergency support. The German start-up sector is demanding more, however, and entrepreneurs are stressing the importance of even longer-term stability measures to increase business certainty for the future.

Current supports have not adequately addressed the less immediate challenges of this crisis, such as further decreases in business dynamism, increasing risk of market consolidation, and loss of competitiveness. 

Protecting and supporting entrepreneurs as key drivers of economic recovery 

As governments continue to adjust eligibility criteria and develop new programs and policies to provide immediate financial support, we need to explore what policies can be implemented in Canada that will support start-ups and scale-ups in the long-term without developing any overdependence on government stimulus packages.

Recent analyses of the Labour Force Survey in March and April conducted by our colleagues here at BII+E indicates that the current economic crisis caused by COVID-19 is disproportionately affecting workers at smaller firms. For this reason, it’s critical that the government acknowledge these differences in impact in order to more effectively design and target support. If not addressed, this crisis is likely to exacerbate the current trend in business dynamism, which has been largely declining over the last 30 years. Additionally, entrepreneurship will likely be seen as an even riskier pursuit post-pandemic, thereby fueling an even further reduction in business dynamism, hindering the overall competitiveness of the Canadian economy, and raising concerns surrounding increased market consolidation.

There is a greater risk of market consolidation than existed pre-crisis with smaller companies shuttering their business and larger companies looking to acquire struggling businesses and direct competitors. This could increase the barriers to entry for aspiring companies post-crisis. In Canada, there is potential for this to cause a wave of acquisitions of promising tech start-ups by larger domestic firms or foreign firms. In the case of the latter, these acquisitions could contribute to loss of home-grown talent and intellectual property (IP). This has been a long-standing challenge for the Canadian economy. Federal policymakers have begun to tighten restrictions on foreign investments in Canadian companies during the pandemic, but these restrictions are largely targeting firms in the public health sector.

To ensure a strong entrepreneurial ecosystem, Canadian policymakers must develop programs that explicitly target early-stage start-ups, scale-ups, entrepreneurs, and small businesses. Chris Rickett, Director of COVID-19 Business Mitigation and Recovery at City of Toronto, points towards the importance of entrepreneurship as a mechanism to maintain diversity within Canada’s economy while generating jobs, particularly following a period of significant job loss and business closures. Rickett also highlights the need for public sector investment, explaining that “relying on the private sector to fuel the start-up ecosystem is not going to work. This ecosystem has relied on a lot of government funding, and we need to maintain and grow that. Prior to COVID-19, those investments were being trimmed and cut. The [policy] gap right now is a commitment to ensure that those investments are ramped back up.” 

As governments across Canada continue to refine and develop policies, there is much we can learn from other countries who are developing more robust measures to provide aid to smaller and younger companies, as well as mitigate corporate acquisitions during the pandemic. We are continuing to update our scan tracking COVID-19 start-up and scale-up support from around the world. If there’s a policy we have missed, please let us know using this form.

Thank you to Viet Vu and Steven Denney for their contributions to this piece.  

For media enquiries, please contact Coralie D’Souza, Director of Communications, Events + Community Relations at the Brookfield Institute for Innovation + Entrepreneurship.