The much anticipated 2015 Startup Compass Report was released earlier this week with rather disheartening reviews of Canadian ICT clusters. Toronto and Vancouver both dropped 9 spots to the bottom of the Top 20, while Waterloo dropped to 24th from 16. Surprisingly, Montreal did make the top 20 (20th) primarily on the basis of a very strong talent score.
The compass methodology is based on five key performance indicators:
– Performance on the funding and exit valuations of startups headquartered in an ecosystem
– Funding on VC investment in the ecosystem and the time it takes to raise capital
– Talent on the quality of technical talent, its availability and cost
-Market reach on the size of the local ecosystem’s GDP and the ease of reaching customers in international markets
-Startup Experience on first-party survey data that is linked to success of startups, such as having veteran startup mentors or founders with previous startup experience
Toronto’s drop is largely due to its “stagnant” exit growth rate performance – that is 0% exit growth over the period studied. Vancouver registered average exit growth performance at 100%. Compare this to 15x for Berlin, 5x for Bangalore, 4x for Amsterdam, 3x for London and 2x for Tel Aviv. More broadly, Canada’s exit performance is abysmal. Flat growth in Canada vs. near 100% in the US, and over 300% in Europe. We’re losing the game.
Waterloo’s drop in the ranking is somewhat more academic. As the report notes, “the removal of the metric “number of startups per capita” (a measure of density) from the Performance Index” meant that smaller clusters such as the one that exists in KW took a significant hit. In the 2012 Compass Report, Waterloo punched far above its weight thanks in large part to the density of startups that cluster in the region. Across Canada, the primary critique leveled in the 2012 report as a deficiency in capital. This hasn’t changed this time around. As the following table highlights, average seed rounds are far below the US and North American averages. And the percentage of Advisor with a stake in the game is significantly lower as well. In both cases, this points to a continued lack of (in their words) super-angels and micro-vc players.
Table 1: Selected Startup Compass Data for North American Cities
| Foreign talent | Foreign Customers | Avg. Seed Round | Employees with startup experience | Advisors with Equity | |
| Silicon Valley (1) | 45 % | 36 % | $900 – 950 K | 48 % | 1.94 % |
| New York (2) | 34 % | 35 % | $850 – 900k | 53 % | 1.75 % |
| Los Angeles (3) | 29 % | 27 % | $750 – 800k | 47 % | 1.73 % |
| Boston (4) | 33 % | 33 % | $750 – 800k | 33 % | 1.92 % |
| Chicago (7) | 27 % | 23 % | $650 – 700k | 42 % | 0.98 % |
| Seattle (8) | 24 % | 22 % | $800 – 850k | 40 % | 2.12 % |
| Austin (14) | 14 % | 24 % | $900 – 950k | 52 % | 2.04 % |
| Toronto (17) | 44 % | 48 % | $700 – 750k | 35 % | 1.01 % |
| Vancouver (18) | 41 % | 60 % | $550 – 600k | 39 % | 1.54 % |
| Montreal (20) | 44 % | 57 % | $600 – 650k | 40 % | 0.76 % |
| North American AVG | 32 % | 37 % | $800 – 850k | 44 % | 1.38 % |
| Canadian AVG | 43 % | 55 % | $600 – 650k | 38 % | 1.10% |
| US AVG | 29 % | 29 % | $800 – 850 k | 45 % | 1.78% |
On this basis it would seem that while Canadian ecosystems are more diverse in terms of talent and customers. However the reality is that “foreign” for Canadian ecosystems include the US as the top export market for all three cities in the sample. For US cities, however, Canada hardly shows up as a key target market. The other three factors all show a significant gap for Canadian ecosystems versus their US contemporary and point to a lack of depth in terms of both capital and entrepreneurial experience. On the former, the report notes that Canadian VC investment grew by 13 % over 2013-2014, versus 82 % across the rest of the global sample. This stagnant supply of VC is part and parcel of the zero % growth in exit (compared to 46 % growth in the US and 314 % in Europe).
Overall, the report highlights four trends that need to be addressed for Canadian startups to flourish.
1.Reduce market reliance on US – only in Canadian cities do we see such a dependence on one key market. Looking to Europe and Asia needs to be a bigger priority. Our upcoming work on Canadian accelerators hones in on this.
2.Improve angel investor engagement – Ongoing early-stage funding deficiencies in early-stage funding efforts points to a need to bring more “super-angels and micro-VC’s” into the picture. Our upcoming work on Canadian accelerators also focus on this!
3.The depth of Canada’s talent reservoir is still developing – Canadian ecosystems are still playing catch up in terms of the depth of their entrepreneurial ecosystems (only Boston scores lower). I’m optimistic however that the data collected by Startup Compass lags reality, and (as I write here) that an impending startup boom in Canada will turn these numbers on their head.
4. Exit activity – broadly speaking we’re not graduating enough firms from startup to scaleup, and from startup through acquisition and growth. This relates in part to the second point on VC / angel activity but it’s also about inter-firm transactions. Activity begets activity insofar as it signals the market that something is worth paying attention to.
Finally, one additional issue bears mentioning. Waterloo’s drop from the top 20 is largely based on size as opposed to effectiveness. However, as the report notes, its proximity to Toronto means a constant competition for talent and financial resources. For Waterloo to flourish, the most successful strategy isn’t likely to be a competition with Toronto, but rather cooperation and collaboration in the development of a super-cluster along the 401 that better engages entrepreneurs, academics and sources of capital across both. DH.