Canada remains a “hotbed” for innovators and entrepreneurs looking to turn their business vision into a reality. That’s good news for those looking to innovate in marketing’s growing programmatic and media spheres, but according to a new report, startups are increasingly looking to make a hasty exit rather than attempting to build a bigger, lasting business.
These are among the findings of PricewaterhouseCoopers’s 12th report on the state of emerging tech companies. The 28-page report, entitled A Nation of Innovators , found that roughly a quarter of Canadian start-ups (26%) are currently in the pre-revenue stage, while 44% have annual revenues less than $500,000.
However, it also noted that nearly one fifth of start-ups (18%) are currently generating annual revenue of more than $1 million, with 4% of companies generating between $10 million to $25 million in revenue.
Despite the increasing prevalence of e-commerce, nearly half of start-ups (43%) said that they do not sell online, while 17% said that online accounts for between just 1% and 24% of total revenues. However, nearly one third of start-ups (30%) said that online revenues account for between 75% and 100% of revenue.
The report also suggested that start-ups are increasingly looking beyond Canada’s borders for revenue growth. While start-ups generated an average of 59% of their revenue in Canada last year, the U.S. is taking on an added significance – growing 5% to approximately 32% of average revenue.
Start-ups are also increasingly embracing customer-centric metrics as a gauge of their progress and success; 23% of companies identified customer engagement as one of the leading ways of evaluating their performance and potential.
“This change in emphasis… makes a great deal of sense in the context of emerging customers,” said the report. “The majority of start-ups are at such an early stage of their development that revenue generation, much less growth, is often flat.” Growing a customer base, the report said, is the foundation upon which future sales can be built.
Leaving money on the table
While nearly one third of companies said that funding is their most significant business challenge, the report notes that many start-ups are failing to take advantage of extensive government funding.
Nearly three quarters of companies that successfully raised funds last year did so through angel investors (44%) or family or friends (29%), with the majority raising what the report characterized as “relatively modest” amounts of $500,000 or less. The report said that angel investors remained a popular source of funding because they are faster and less complex.
While both the federal and provincial governments have added programs such as the Canada Accelerator and Incubator Program (CAIP), the Northleaf Venture Catalyst Fund and the Small Business Job Credit to existing stalwarts such as the Industrial Research Assistance Program (IRAP) and Scientific Research and Experimental Development (SR&ED) tax credits, more than half of companies surveyed by PwC said they don’t access those funds, which it called a “surprising and even alarming notion.”
The report concluded that a lack of awareness and knowledge of these programs are contributing factors, but said that many early-stage companies typically try to limit spending, and might feel that pursuing government funding is not worth the time and effort. “Yet the fact remains that these firms are simply leaving money on the table,” the report concluded.
Talent management also remains a key area of concern for start-ups, with 41% identifying the ability to identify and recruit new talent as a key challenge. More than a quarter (27%) also identified the ability to provide competitive compensation salaries as a key issue, with 14% identifying recruiting an experienced management team as a key management challenge.
Companies are using a combination of a defined corporate culture (64%), promotion opportunities (62%) and enhanced responsibility (58%) in an attempt to recruit talent.
The report also said that concerns over a dwindling number of women in the emerging tech sector in its 2014 report were “premature,” noting that the past year has seen a “sharp rise” in the number of female employees, particularly in management roles.
Planned exits
Yet there are also questions about the long-term prospects for many businesses, with nine out of 10 entrepreneurs indicating that they plan to exit their business in the next six years.
Nearly two thirds of respondents indicated that they expect to leave their company via merger or acquisition – including so-called “acqui-hires” in which company founders or staff are included in the deal. Only 6% of respondents indicated that they have any interest in taking their company public.
The study findings are based on a combination of online and in-person interviews with 150 start-up CEOs from start-ups operating in a broad range of businesses sectors, ranging from software as a service to enterprise software, mobile apps, e-commerce, digital media and gaming.
