If You Want To See A Recovery, Focus On Scale-ups: And Here’s Why

By Adam Froman

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[vc_row][vc_column][vc_column_text]While we are not out of the woods yet, in Canada many businesses are now turning their attention to returning to the office after the bleeding from the initial wave of pandemic shock and economic shutdowns appears to have slowed down. While many businesses, especially small companies, continue to struggle, with the continued support of government subsidies we are slowly climbing our way back to pre-COVID economic levels – but the process is not without hurdles. 

According to June and July labour force numbers, unemployment continues to drop, temporary layoffs are decreasing, and the number of people looking for jobs has increased. We are still a long way from full recovery, and another significant outbreak could interrupt that rebound, but we are on the right path. Who is leading the charge?

The economic disruption did not affect everyone in the same way, and this bears repeating. As research out of the Innovation Policy Lab at the Munk School of Global Affairs and Public Policy has indicated, we are mainly living through a crisis of smaller firms. In the technology sector, startups and early stage companies have felt the brunt of the pandemic’s impact on revenues.  Larger firms, especially those in the knowledge economy, have fared relatively well. Of course, this group of firms, to which my company belongs, have business models that adjusted relatively well to new working conditions: Employees can work from home, clients need not meet face-to-face, and so on. 

Moreover, with the support of the Canada Emergency Wage Subsidy (CEWS), many of the larger firms who were positioned to grow were able to stay the course. Indeed, as survey interviews with Canadian technology scale-ups indicated, most firms were not immediately concerned with payroll, but maintaining revenue and collection of their accounts receivables.

The Labour Force Survey employment numbers by industry and firm size from April, when the economic shutdowns were fully in place, through July, which captures the early recovery, shows just how important medium to large knowledge economy firms are. The cumulative percent change in employment during this period shows that, outside of small firms (<20 employees), knowledge economy sector firms were the only ones to perform well. Businesses with between 100 and 500 employees in the knowledge economy sector added a significant number of jobs (gain of 15 percent). Those with over 500 employees added fewer new employees (4 percent).

The knowledge economy firms in the 100 to 500 employee category capture what are commonly referred to as the technology scale-ups, many of which will be Canadian-owned and headquartered firms, not the large multinationals that dominate much of the economic landscape in Ontario. As I presented earlier this year in my Bay Street Bull article titled, “Scale-ups Will Save the Canadian Economy,” these firms are the backbone of the Canadian knowledge economy. Market tested and productive, they will be the firms most likely to create (and maintain) new jobs and revenue for the government’s tax base. While a great deal of attention is still on saving the start-ups, if we are going to look for ways to successfully navigate an economic recovery from the pandemic, we need to take note of these firms. Even government funded incubators like MaRS have launched initiatives as part of Ottawa’s “Scale-Up Program” to support Canadian scale-ups.

The conversation about start-ups and early-growth firms, which is usually the focus among policymakers and researchers, is important. These firms will need support as they restart or are born again by post-pandemic entrepreneurs. But it’s time we centre the conversation on firms that will lead the recovery, in terms of both employment gains and increases in revenue.

The pressures that face scaling technology firms in Canada are significant. Big tech firms, such as Amazon and Apple, are in a position to further consolidate their market share through acquisitions, especially here in Canada where valuations are lower. The summoning of CEOs from some of America’s biggest technology companies by the US Congress is an indication of how troubling these companies’ monopoly power has become. Recently Canada’s Competition Bureau announced an investigation into Amazon Canada for anti-competitive behaviour. 

Even before the pandemic, Canadian scale-ups struggled to get the recognition and support they needed to grow their companies without selling out to foreign interests. Then, much like now, they continue to grow. Given the necessary intervention by Ottawa to prevent businesses from going under, the federal deficit has reached a historic level. It is still unknown if this monumental effort will have protected the economy from an absolute collapse when the subsidies end. Government should be giving more attention to ways to support the growth of companies who have benefited from the government subsidies so that they can pursue their growth strategies, continue to hire talent and protect their intellectual property developed here in Canada.

Given the political atmosphere in the United States, especially immigration restrictions, there is much excitement over evidence that skilled labour will be moving northward (from the US to Canada) for a change. There is opportunity here to lure higher-end talent to Canada’s crop of scale-ups. Our technology ecosystems are still built to attract FDI, not grow Canadian companies, but this can change. While we are all focusing our attention on economic recovery, let’s recognize who the engines of growth and recovery will be and adjust accordingly.[/vc_column_text][vc_separator][vc_row_inner][vc_column_inner width=”1/2″][vc_single_image image=”16896″][/vc_column_inner][vc_column_inner width=”1/2″][vc_column_text]Adam Froman is the Founder and CEO of Delvinia, a global ResearchTech company. He is an award-winning entrepreneur, innovator and business leader who has grown his firm into a globally competitive group of companies over the course of the past two decades.[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]