Where's the plan to fix Canada's "grim" business climate?

Report: New business creation in Canada has stalled

Whenever we had a “stats problem” at Wellington Financial, I’d gleefully call out to one of my suitably-trained brainiac colleagues: “here’s a chance to put that Major to work.” The question likely related to determining if the R-squared was relevant or not to the topic at hand; was it casual? Causal? Good question!

In business, I’ve always enjoyed paying attention to statistics. In my experience, over a meaningful timeframe, metrics will either confirm what you’re feeling intuitively as a business leader, or highlight something that you were trying to ignore. It might be your firm’s relative performance against a competitor, a portfolio company’s growth rate vs. burn, or a colleagues’ multi-year success/failure against their new business production targets.

All this came to mind as I read the Globe’s timely coverage about Canada’s woeful new business creation stats, both relative to i) how entrepreneurial we were as a population in 2019 and ii) the current entrepreneurial optimism on full display south of the border.

The piece outlines a variety of apparently Canadian-specific culprits, that are standing in the way of new SME creation:

• Corporate Work From Home policies have undercut some of the appeal of starting your own business, if that sort of workplace flex was a driver in years gone by

• Canadian banks aren’t lending to start-ups, and the lack of “Open Banking” is a hurdle to domestic innovation

• Ontario’s extended COVID lockdowns

• Entrepreneurs are getting older

• Corporate concentration

• Higher business interest rates, relative to 2020

• Attractive employment offers from large employers

I don’t doubt that many of those interviewed contributed to this representative list of irritants, but there’s nothing about these challenges that many U.S.-based entrepreneurs couldn’t also cite. States such as California, Illinois, Washington and New York all had tough lock-downs. U.S. Regional Banks, the source of most SME lending in the U.S., have been fighting through a variety of at-times life-threatening headwinds. Corporate domination seems to be an international reality, and demographic trends aren’t materially different in either country. On the WFH front, U.S. employers seem to have the upper-hand right now as many high profile large firms push for a return to pre-Covid office traditions.

As for the cost of borrowing, Canadian entrepreneurs are getting a bargain on a relative basis, with CDN Business Prime at 6.95%, as compared to the U.S. base business rate of 8.25%. For context, rates were 6-7% some 20 years ago. We are finally back to the normal cost of doing business, and nothing more.

For those Canadian startups who are finding it difficult to access the bank debt market, I can assure you that things are waaaaay better than they were in 2017, for example. CIBC’s acquisition of Wellington Financial in January 2018 “spurred” (to quote journalist James Bradshaw) every other domestic bank to try to better serve the venture space; some might even be succeeding ;-).

On the venture fund and private equity side, there’s nothing in the CVCA data to suggest that — compared to pre-Covid — good stories can’t get funded on the equity front:

Canadian VC Wraps Up 2022 With a Surprising Second-Highest Record in Both Deal Count and Deal Value

Canadian PE Deals Reach Record High in 2022, Despite Downshift in Total Investment Value

In my mind, the sad reality underlying the weak Canadian business creation data is simple, and it’s the only distinguishing factor that might explain why there are suddenly a lot fewer would-be Canadian entrepreneurs than a few years ago: a tangible lack of confidence in the economic direction of the country.

This isn’t a partisan statement, even if folks are watching for hints from me on that front (sorry Matt Roberts). It reflects exactly how I’m feeling as an entrepreneur, and the anecdotal insights I pick up whenever I speak to Founders, Angel investors and VCs. To my opening point, there’s also data to back it up, in the form of the recent ROB Nanos Survey. According to my friend, Nik Nanos:

If you had to sum up the mood of Canada’s most powerful CEOs, it would be grim. As chief execs tell it, this country has earned a reputation as an inhospitable place to do business.

If Canada’s “Top CEOs” are feeling “grim” about Canada’s business climate, think of the anxiety a would-be Founder must be facing. I’d expect anyone in the “Top CEO” category would be mortgage free and have their retirement plans already funded at this stage, unlike the vast majority of Canadians thinking about forming a new business. If you think that your home market has negative momentum, and you’re not yet even remotely financially comfortable on the personal front, one could argue that it would be imprudent to start a new business — no matter how confident one might be in the merits of your new idea.

Until this Canadian-specific “grim” business outlook begins to turn around, we shouldn’t be surprised that Canada’s would-be entrepreneurs are sitting on their very talented hands.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo credit: “Covent Garden Market Porter,” London, 1950, by Irving Penn)