Are we really producing Canadian Tech Tortoises? Recent research we did revealed three critical issues that may be impacting the ability of Canadian businesses to grow rapidly:
- Canadian companies wait longer before they start raising funds.
- They raise funds less often.
- They raise less money over time.
But why do Canadian businesses delay the fundraising process, which is essential to ensuring further growth? Anecdotal evidence suggests two things:
- That many Canadian technology companies wait until their products are completed before raising and spending funds on crucial functions, including marketing and sales (M&S).
- That Canadian venture capitalists (VCs) look for evidence of market traction before considering funding.
This is disconcerting because early expenditures on M&S may lead to faster market traction, more solid growth, and earlier VC funding. But practitioners in the Canadian technology scene have observed that many businesses underestimate the importance of M&S in their formative years.
The goal of this study was to determine whether Canadian technology startups do in fact delay funding M&S activities. To this end, we looked at job classifications of employees at over 900 private Canadian technology companies that had received external investments. We could argue that if Canadian firms postponed spending on M&S, we would expect to see no or few employees in M&S roles relative to total employment in the earliest stages of development, followed by a steadily increasing percentage of M&S-related employees as companies grow.
Job classifications were used as proxy to gain insight into how firms allocate money for various functions within the business. We discovered a striking pattern: while Canadian firms with the lowest recorded levels of external funding (our proxy for growth) have only 13% of their employees engaged in M&S activities, this percentage was significantly higher for businesses that had managed to raise funds. Firms with US$50,000–US$2 million of funding have 24% of their employees engaged in M&S. Thus in the early stages of development, Canadian tech firms are likely to have a larger fraction of their workforce dedicated to research and development (R&D) than to M&S.
A smaller contingent of M&S employees means that less time will be spent on vital startup activities such as market intelligence, product marketing, and business development. Companies that neglect M&S tend to approach the market only when a product is ready, therefore delaying their first revenue and growth.
But how do top technology companies in other countries approach the same issue?
Our analysis of more than 60 tech businesses in the US showed a different recipe for success: firms that scale quickly to US$10 million in revenue spend, on average, 73% more on M&S than on R&D. Leading American firms have 40% of their employees dedicated to M&S.
This is significantly different in Canada where even the highest funded firms only have 31% of their employees in an M&S role. This creates a vicious cycle: fewer M&S employees means less M&S activity, which slows down all the processes needed for customer traction and entry into the market.
Such patterns add to the perception that Canadian companies struggle with commercialization and market adoption. They also led us to conclude that, relative to US businesses, there is a striking difference in philosophy about when to approach customers and markets and that perhaps our technology companies grow more slowly than the leading US companies because they do not spend enough on M&S. Thus creating Canadian Tech Tortoises.