We need to stop complaining about access to capital

An article in the Globe last week quoted David Wolfe from the University of Toronto - Munk School of Global Affairs & Public Policy regarding a study they had done. The study reports among other things that “capital becomes a major barrier to growth as the firm scales.”

This is a refrain that is often heard when asking entrepreneurs about their challenges and because governments hear it all the time, they base policy on it. Unfortunately, it just isn’t true, and it is an example of why you can’t find out what is going on in the tech community by surveying entrepreneurs.

In reality, there is no limit to the amount of capital available to Canadian companies at any stage of their development. Let me repeat that. There is no limit to the amount of capital available. The data is proof of this.

The first piece of proof is in the following chart. Foreign investors, who used to invest only in later stages are now investing in Canadian firms in all stages of growth.

While companies with more than $25 million of funding have a majority of foreign funders in their top five, even under $1 million of total funding, more than 20% of their funders are foreign.

And as I wrote last week, foreign funders are responsible for more than 50% of the funding in Canada and have been for quite some time. So where is the limit to the funding of Canadian companies? Since they can get funding at any stage outside the country and already are, the limit is the total amount of funding available from any country and for all intents and purposes, that is $315 billion in 2023. I think since Canada had access to $315 billion last year, that is more than enough and we should all stop complaining that Canadian firms have limited access to funding.

Why do we keep trotting out this hoary shibboleth?

What’s happening here is a problem called Survey Sample Performance Bias. (I just made that term up.) If you ask a representative sample of entrepreneurs what their challenges are, you’ll be getting responses from a range of founders, some whose businesses are doing well, and some who are doing poorly. The problem isn't the availability of capital, it’s that some of those companies are not worth investing in. They have ugly babies and don’t know it and VCs will never tell you that you have an ugly baby in case it grows up to be a beautiful teenager.

Based on the averages, only the top 15% by performance will have no trouble getting capital and will get it from foreign firms, another 35% or so (the above average performers) will have some difficulty but can often access Canadian VC capital. It's the bottom 50% who have ugly babies who will not be able to get capital and rightly so. No one should be investing in those firms to begin with as they won’t earn proper rates of return for their investors. Some of them even manage to get capital from governments in Canada (which is why government VCs rank lower in terms of investee growth rates than the other two).

When you do a survey with a statistically representative sample, 50% of the respondents will have trouble accessing capital because they don’t deserve it in the first place. The problem isn’t the availability of capital, it’s the availability of good companies. The same will be true of their ability to source personnel and customers. The companies that are performing well don’t have these barriers because there aren’t any barriers that are particular to Canada. We share the same barriers as all firms do that export. Except perhaps for US firms, founders need to find capital, personnel and customers outside their home country, and this is a bit harder than finding them locally but for the good firms this is not an issue.

Researchers continue to find results such as these because of the way they do research. In fact, even huge government commissions such as Dominic Barton’s Advisory Council on Economic Growth from 2016 was based on surveys of entrepreneurs. Because the vast majority of firms have a level of performance and potential that would make them unattractive for venture capital, debt, personnel and customers, the answers to those surveys will always come back showing just what the Munk’s School survey showed.

The worst part is that ?government policy is based on these types of surveys and not on a careful examination of the underlying data. Let’s put this bluntly, surveys aren’t data.

We're focussing on the wrong problems in looking for ways to improve

The government is fixated on companies getting patents when there is no correlation between patenting and growth, and they are fixated on pumping capital into the market when it isn’t needed. What we need is companies that grow faster. The following chart shows that we lag behind US firms in the growth rates of scaling software companies and far behind in scaling biotech ones.

In the next series of blogs I’ll show you some data on that issue and what I think the underlying causes to our lower growth levels are. Stay tuned, same bat time, same bat channel.

OK, enough of my rant, I’ll get off my soap box. I do feel a bit better as a result of writing this.