Ottawa tech mentor urges feds to reduce risks for venture capital investors
Head of Kanata’s L-Spark accelerator says Canadian startups need more viable access to capital to help them thrive in ultra-competitive global marketplace.
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A veteran entrepreneur and mentor to a host of successful startups, Leo Lax has no doubt that Canadian tech enterprises can thrive head-to-head against competitors from around the world.
But the executive managing director of Kanata’s L-Spark accelerator says in order for that to happen on a more consistent basis, young companies north of the border need a little help from their friends on Parliament Hill.
Fledgling Canadian tech firms are too often hamstrung in their quest to become global enterprises by a lack of capital in what’s traditionally been a very risk-averse investment climate in this country, Lax says. If more small companies are to scale up into Shopify territory, the federal government will need to offer some sort of incentive for investors to take a leap of faith on promising ventures, he adds.
“The only way (Canadian venture capital investors) are going to do it – because they need to be able to mitigate that risk in some way, otherwise they’re going to get fired – is to provide some cushion,” Lax says. “At this point, I would say the only cushion they can get is for the government to build some level of risk mitigation plan.”
Some of the brightest entrepreneurial minds in the high-tech world were trained here in Canada, he argues. But many of them wind up occupying C-suites in Asia, California or Europe, lured away by better opportunities in larger markets.
“I know that here in Canada we have the chops to actually make it happen,” Lax says.
“What we need is more (companies like Shopify). Some of it has to do with the confidence to actually attack the market aggressively – take the risks associated with that level of aggression. And some of it … is the (lack of) capital. If we were confident enough to know that here in Canada we had available to us organically the capital to scale our companies to be $500 million in revenue … I think we would start to feel more confident and say, ‘Let’s do it ourselves.’
“Today, very few companies get to that level of capability. Our companies get to a certain level and they have to go and look for growth capital elsewhere outside Canada. That puts them at a little bit of a disadvantage, and maybe that causes some tempering of confidence or arrogance, or both.”
Entrepreneurs need those qualities, Lax says. But they alone aren’t enough, as a recent business study illustrates.
The Business Development Bank of Canada survey found that only one in 1,000 Canadian small businesses grew beyond the 100-employee mark in 2013 – a 40 per cent drop from 2001. Last year, just four technology companies in the entire country raised capital in an IPO.
“Having the mindset and not having the capital gets you to the same spot – the bottom of the cliff,” Lax laments in typical tell-it-like-it-is fashion. “However, if you have that mindset and you know how to access that capital, then I think you’re ready to fly.”
The money is here to fund those who dare to build market-leading companies in Canada, he maintains, “but we need the people who own this money, who run these funds … to be able to take that risk of funding Canadian companies.”
The federal Liberals appear keen to kickstart that type of growth with their much-touted $1-billion innovation agenda, Lax notes. Now, he says, it’s time for the government to put its money where its mouth is.
“Innovation will require capital,” he says. “The capital exists in Canada, but we need to allow our capital managers to feel comfortable taking the risk in investing in Canadian companies.”
How exactly the government should help, Lax isn’t sure. He’s leaving that to the financial experts on the Hill, but he does have a suggestion for another way the feds can give tech startups a lift without turning to a room full of PhDs: By shopping locally, so to speak, when handing out lucrative procurement contracts.
“(The feds) are still one of the largest customers of innovative products – could be one of the largest customers for innovative products – if they were willing to take the risk of using our homegrown products in their own operations. That would also give us a huge boost.”
Bullish on L-spark
Lax is bullish on the work happening at L-Spark, which recently ditched the “incubator” label it had been using since its debut two years ago.
“The label of incubator has been used, misused, abused,” he says. “It’s actually lost all meaning and therefore it is quite confusing. At this point, nobody knows what an incubator does.”
While it might seem like just a subtle change in nomenclature, he says the decision to go exclusively with the term “accelerator” to describe the program’s two stages of nurturing enterprise software startups more accurately reflects what L-Spark does – that is, compress the amount of time it takes for its member companies to grow from a good idea into a viable operation that can be scaled.
L-Spark’s ultimate goal, he says, remains the same: To help its companies grow their revenues tenfold by the time they graduate.
“We want to get the best of the best,” says Lax, whose facility recently announced six new companies made the grade for its latest six-month scale-up program.
“Our objective is still the same – we want to attract the absolute best entrepreneurs … to come to our program so that Canada can in fact start making these companies successful at the same rate, with the same speed, that companies elsewhere are achieving growth.”
He’s particularly pleased at the recent news that a graduate of L-Spark’s first cohort in 2015, The Better Software Company, was one of just 10 companies from across the country to be accepted into the new Canadian Scale-up Program at Waterloo’s Lazaridis Institute.
As part of the new six-month program, Better Software executives will get advice on scaling up from world-renowned tech entrepreneurs and rub shoulders with potential investors in Silicon Valley.
“I think it’s amazing that we here in Canada now have that program in place,” Lax says. “It is a fantastic program.”
This story originally appeared in the Ottawa Business Journal.