13, December 2023
Canada has a hard time growing companies.
Canada has a thriving startup sector but has a hard time growing those startups into viable ongoing businesses.
Strong startup sector.
The graph below shows the growth of start-up activity in Canada over the last 10 years. The data is taken from the Global Entrepreneurship Monitor reports for Canada (Ref 1). It measures the Total early-stage entrepreneurial activity (TEA) calculated as a percentage of the population ages 18-64. This contains two parts – those who are actively planning to start a new business, and those who are running a new business less than 3.5 years old. Because it’s expressed as a percentage of the adult population it is normalized for population growth. The graph shows steady growth from about 12% in 2013 to about 20% in 2023.
So a rising share of the population has been involved in start-up activity over the last decade.
Declining established businesses.
Now look at a graph from a recent Business Development Bank report (Ref 2), showing the total number of self-employed people with employees. This is the BDC definition of entrepreneurship, as their mandate is to create jobs and wealth for society. This graph shows a slight decline between 2000 and 2022. This graph is in absolute numbers, so as a proportion of the Canadian population the decline would be steeper, as the population has risen during that period. This is consistent with Statistics Canada data that shows that in 2000 about 16% of the labour force was self-employed, and by 2022 that number had declined to 13%.
Source: Business Development Bank, Statistics Canada LFS
What is going on?
The reasons why Canada has a declining number of businesses as a proportion of the population are not well understood.
If you dig into the TEA data some more, it becomes clear that of every 100 people who are planning to start a business, only three quarters actually go ahead and start one. And of the businesses that do get started, the GEM data hints at some of the reasons why they don’t continue – an opportunity to sell the business, the business was not profitable, and challenges in recruiting and retaining skilled employes. The BDC report identifies four skills needed for entrepreneurial success: grit and relationship skills, leadership and people skills, marketing and finance skills, and operational administration skills.
There are some very positive hotspots. Deloitte’s Technology Fast 50 lists 50 technology companies in Canada that have a three-year average growth rate of 300% or greater. (Ref 2) However, a three year growth spurt doesn’t necessarily predict a stable future.
Some insight can be found in a report by McKinsey (Ref 4). They analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 1980 and 2012 and claimed to have found a recipe for sustained growth, based on four principles:
- Growth happens in phases – growth stories typically unfold as a prelude, act one, and act two.
- In act one, there are five critical enablers of growth: market, monetization model, rapid adoption, stealth, and incentives.
- The drivers for growth in act two are different.
- Finally, successful companies master the transition from one act to the next
It could be that Canadian companies have difficulty transitioning from one phase to the next. The McKinsey report suggests that a company has to re-invent itself for each stage of growth.
Software and online service companies may not be representative of the whole market, but they do represent a significant driver of growth. Just how unusual these two sectors are shown in a quote from the report “If a health-care company grew at 20 percent annually, its managers and investors would be happy. If a software company grows at that rate, it has a 92 percent chance of ceasing to exist within a few years.”
Canada has a very high rate of startups, by international comparisons, but has difficulty growing them into established businesses. The reasons for this are not well understood. McKinsey’s research suggests some reasons, but it is not clear how well factors, developed for software and online service companies, would apply to the rest of the economy. The BDC report identifies skills needed for entrepreneurial success.
Unless something changes it looks as if this trend will continue. As the saying goes, if you do what you’ve always done, you’ll get what you’ve always got.
Ref 1. The GEM Canada Reports are all available at www.thecis.ca
Ref 2. Entrepreneurship in Motion: Skills to Succeed in a Changing World, Business Development Bank, October 2023. https://www.bdc.ca/en/about/analysis-research/entrepreneurship-skills
Ref 3. Deloitte Fast 50, November 2023, https://tinyurl.com/49ayb7f2
Ref 4. Grow Fast or Die Slow. McKinsey and Company, 2014. Thanks to Richard Hawkins for bringing this to my attention.