To win the software business, Canada must play a different game
Modern software businesses are the closest thing you will find to a money tree. Every month they grow an ever increasing amount of cash. You don't even need to pick the cash off the tree, you can just hook it up to your bank account and watch it fill up continuously. When these money trees are well engineered, the minimum cost to keep them growing is just a tiny fraction of what they produce. With extra nourishment, they can grow at astonishing rates, sometimes tripling in a single year. At these growth rates, they can become extremely large very quickly, producing well over $100 million/year. We call these money trees unicorns and we love to talk about them. Everyone wants to make unicorns because they are worth billions of dollars.
I don't know about you, but I wouldn't mind just having a small money tree. One that produces a mere $5 million per year. Or even $1 million - ideally I could get a few of those! Well then, it might surprise you to learn that many such small money trees get cut down every year! Yes, you heard me right - people are cutting down money trees!
Why on earth are people cutting down money trees? Well it has to do with financing. Investors are very eager to make unicorns so they invest extremely large amounts of money to nourish their most promising money trees. It makes a lot of sense to spend $50 million on fertilizer to produce a money tree that will generate over $100 million per year. Unfortunately, when that doesn't work out, you are left with a mere $5 million/year money tree that's become so accustomed to oodles of fertilizer it can't live without it. The only logical decision is to cut it down.
We've grown a few great unicorns in Canada. It's tempting to figure out how we can grow some more. I think the greatest opportunity though is to grow an entirely different style of tree that no one else in the world is growing. A smaller tree, but one that can be grown reliably and in large quantities. A type of tree that we can become the global experts in growing.
Concretely, there is so much untapped potential for software to revolutionize every nook and cranny of the world. These nooks and crannies might not build $100 million/year businesses, but there are countless $5 to $50 million/year opportunities. The challenge is to figure out how to build these businesses in a sensible way. The opportunity is smaller so the chance of success must be greater. Where a VC fund might be fine to lose on 9/10 investments if the tenth is a unicorn, a smaller money tree fund might need to have high conviction that at 50-75% of the portfolio will succeed. Initial valuations need to be lower so that investors get returns with smaller outcomes. Burn rate needs to be lower so that companies are cash flow positive sooner. Founders need to understand how to build the right cap table for their business. They need to know that building a $5 million/year money tree can be quite a rewarding prospect if you go about it the right way.
Canada is well suited to this niche. Aspects of our economy that are typically thought of as weaknesses become strengths. A weak Canadian dollar means every dollar earned from a US customer goes 30-50% further. Lower salaries mean early stage companies can survive on smaller initial investments. While our best university graduates often head south for mammoth salaries, coop programs allow modest startups to leverage this talent at affordable prices before they move on.
How do we do this? Most of the work needs to happen in the private sector. We need thought leadership that this is a thing that can be done and can be rewarding. We need funds with a new approach to investing that can grow these kinds of businesses sustainably. We need to celebrate these success stories and inspire a generation of new graduates to try their own hand at building modest but mighty software businesses in Canada.
What can the government do? Get out of the way. Don't make things complicated. Make it easy for small businesses to hire people. Make it easy for small businesses to take investments from individuals. Make it possible for individuals to have money to invest. Don't dangle government funding carrots in front of entrepreneurs. Every minute spent writing a grant application or talking to government employed innovation advisors is a minute not spent building a business. Cancel IRAP. If you really want to give out money, try something like the Thiel fellowship at Waterloo/UofT/etc. and give top students $50k/year to drop out and start a company. Keep SRED, but make it more straightforward for software businesses (ideally 20-25% of the payout wouldn't end up going to SRED consultants). On the tax side, let entrepreneurs enjoy the natural rewards of their pursuits. Match the long term capital gains exemption (LCGE) to the U.S. qualified small business stock exclusion and provide a way for early employees to participate in those rewards too with good tax treatment (e.g. LCGE equivalent treatment for early employee option holders).
Please, please, please don't start some innovation thinkcentre superhub. Please do not use tax dollars to pay people six figure salaries to offer "strategic advice" to aspiring entrepreneurs. This entrepreneur doesn't want a strategic advisor. This entrepreneur just wants a doctor.