Getting growing tech businesses out of Canada’s ‘valley of death’

Canada’s scale-up problem isn’t just about capital. It’s about the impossible math founders face every single quarter.

There’s a moment every Canadian scale-up founder knows too well. You’ve got traction. You’ve demonstrated commercial viability, possibly even achieved profitability, and started expanding into the United States without taking outside capital. 

Then you sit down to plan your next growth stage and the math hits you. Marketing, sales, research and development, product development, data security, IP protection, and training all need significant capital at the same time, but your retained earnings cannot support all these plans. 

All are equally important. Do you invest in some at the risk of losing momentum in others? Or do you spread resources thin, knowing no area will have enough to grow at the pace you need?

This is the founder’s ‘Sophie’s Choice.’ Yes, it sounds horrible, because it is. It’s gut wrenching. You’re choosing between things that all matter and all deserve a 'yes'. You have to make these decisions every single quarter.

It’s the invisible toll Canadian scale-ups pay. The structural conditions for growth in this country force them. According to the Organization for Economic Cooperation and Development, Canada ranks third from the bottom in small and medium business lending both as a share of total lending and in absolute loan value per capita. The Senate’s Banking, Commerce, and the Economy Committee has been gathering testimony on exactly this problem and is preparing a report on solutions.

Canada produces world-class companies and then watches them get acquired, relocate, or stall out before they reach their potential. We’re also not paying enough attention to the struggles of the bootstrapped companies generating between $5-million and $25-million in revenue, profitable and poised, but having trouble growing. They are the backbone of a knowledge economy, and they are being quietly strangled by the commercialization gap often referred to as the “valley of death," the desolate stretch where promising companies stall, compromise or sell before realizing their potential.

My company Delvinia was one of them. We self-financed our next stage of growth, only to have our two major operating companies acquired by a U.S. buyer in 2021. The government programs that exist: National Research Council-Industrial Research Assistance Program (IRAP), Scientific Research and Experimental Development (SR&ED), and the Trade Commissioner Service’s CanExport are genuinely valuable, but fall short. They’re a helpful bridge across a gap that’s much wider than the bridge.

When firms like mine go to banks for help, the conversation is frustrating. The bank looks at your balance sheet and says “this is an equity play,” even when you’re generating more than $25-million in revenue and are profitable. And raising equity is expensive precisely when you have momentum. 

Giving up equity before you can demonstrate international traction means diluting far more than necessary. You aren’t a startup. You’ve proven profitability. You simply need to fire on all cylinders before bringing on external capital. We experienced double-digit growth in the period between when we first approached the banks and when we were acquired, doubling our valuation. The banks still wouldn’t support us. Canada’s venture community exploits our scaling tech companies with lower valuations, aiming to sell fast rather than having a long term growth plan. 

The Senate’s Banking Committee has heard several compelling proposals. The most promising is a Canadian Private Debt Growth Fund, which would allow pension funds to contribute capital deployed by a consortium of private lenders with the expertise to evaluate growth-stage companies, without requiring new government bureaucracy. We also need an IP valuation framework that lets knowledge companies use their intellectual property as collateral. 

A pharma company’s patent portfolio is recognized as an asset. So should a Canadian software company’s proprietary methodology, its data, its clinical protocol. I’ve argued for years that the Business Development Bank of Canada should place valuations on businesses and their IP, with the government guaranteeing a percentage to secure senior debt at favourable rates. If something like that had existed when Delvinia was scaling, we may not have been acquired when we were.

Canada’s respected tech entrepreneur Jim Balsillie says we need fit-for-purpose banks, and he’s right. We need institutions designed to serve the small and medium business market with appropriate risk models, the way Live Oak Bank does in the U.S., and Allica Bank does in Britain. These aren’t radical ideas. We have simply not committed to them here.

I spent 25 years building a company in this country. I know what it feels like to stare at a growth plan knowing you’ll have to leave something important on the table, not because you made the wrong choices, but because the system won’t give you room to make all the right ones at once.

The dollar problem is solvable. But only if we stop treating it as a company problem and start treating it as a national one.

Adam Froman is the founder and CEO of Delvinia, a digital innovation and investment company.

The Hill Times