by Christine Wong
Assessing the debris of the Research in Motiondebacle – longtime co-CEOs swept aside, stock price in shambles, failed PlayBook launch and customer confidence rocked by service outages – it’s easy to forget this fallen giant was once a Canadian IT startup.
While founder Mike Lazaridis and his former co-CEO Jim Balsillie took heat for occupying the top jobs at RIM for far too long (27 and 19 years respectively), today’s startup founders seem to be hanging up their entrepreneur’s hats way earlier. There are no outlets that officially track tech startup M&A deals. But according to an unofficial count by Techvibes, there were 35 Canadian startups acquired in 2011, up from 27 in 2010.
Why are so many Canadian tech startups cashing in their chips early instead of soldiering on to grow and develop their companies into the next RIM (pre-meltdown, of course)?
Well, besides doing a merger or being acquired, the most common exit strategy for startups is to go public on the stock market. But the IPO markets have been soft: companies that went public last year lost 13 per cent of their share value following their IPOs, the first negative return since 2008. Startups could also bide their time by building their war chest as they develop their products and services, but the market for follow-on financings is pretty weak too: there were just under 600 later stage Canadian VC deals in 2011, down from nearly 900 in 2007.
I asked Andrew Macdonald, COO of fashion resale Web startup Shopmyclothes, for his take on why Canadian startups may be more eager to exit through acquisition these days rather than staying the course to grow. Macdonald doesn’t buy the argument that a lack of follow-on VC funding is pushing more startups to take acquisition offers.
“I don’t necessarily think the financing climate in Canada is driving this, though it may be a contributor,” he said. “It may be true that there’s less late stage, large scale capital available in Canada. But there’s no reason Canadian entrepreneurs can’t access U.S. capital pools and avoid an early exit.”
Macdonald also pointed out that although VC disbursements today are smaller than in past years, that shouldn’t be a huge barrier to startups because it’s way cheaper and faster to get a startup off the ground than it was five or 10 years ago. Whereas startups a decade earlier needed office space, connectivity and servers, “nowadays all you need is a laptop and an idea, everything else can be sourced cheaply and on-demand as needed, like server space, storage, design resources and development talent,” he said.
Instead of going big – and taking on all the risk that comes with it – it might just seem safer to go home (early) for a lot of Canadian entrepreneurs today, especially compared to their U.S. counterparts, Macdonald added.
“I think it’s because the attitude towards failure differs meaningfully. Everything I’ve read suggests Silicon Valley entrepreneurs view failure as a rite of passage, while the same is not necessarily true of Canadian startups. I think a lot of us are just happy to build a viable business and then take some chips off the table,” Macdonald said.
Regardless of their motivations, why should we even care if Canadian startups choose to exit early rather than grow their businesses? If they went out on a limb, came up with great ideas and bootstrapped their businesses, why not just celebrate their buyouts and pat them on the back for their success?
Well, it may be worth worrying about whether this trend could have a long term impact on Canada’s IT sector. If all this great startup talent or innovation is being taken off the table so early in the game, does it chip away at our likelihood of building the next global category killer like RIM?
And these very same startups are already lamenting the lack of seasoned veteran IT entrepreneurs in Canada who can hook them up with great financing connections and advise them on strategy as they plot their business plans. Won’t the early exit trend deplete this pool of mentors even further?
Yes, the misfortunes of RIM and Nortel Networkshurt thousands of their shareholders and employees. Yet if those companies had called it a day at the startup phase, decades of job and knowledge creation that took place as those firms flourished never would have happened at all. And Lazaridis probably wouldn’t have donated well over $100 million of his personal wealth to charitable causes so far.
Each time a large Canadian company in any industry gets taken over by a foreign giant there are rumblings about the hollowing out of corporate Canada. Yet I haven’t heard the same concerns about an early exit trend among Canadian startups.
Many have sneered at the recent misfortunes of Lazaridis and Balsillie – but at least they can be commended for leading a Canadian startup that stuck it out.