In 1961, President Kennedy challenged America’s science community to put a man on the moon within a decade. At that time, NASA had only ever launched astronaut Alan Shepard into suborbit for a short 15-minute ride. Going to the moon was a huge leap forward from that. Most would have thought the feat to be impossible, but by putting out that lofty goal, the ingenuity and innovation to make it come true was spawned.
Governments can be there to create the vision, call the moonshots and set the foundation that will help us to reach those lofty goals. They can put the required heft behind kickstarting the required initiatives by funding ground-breaking research or by de-risking the environment for others to jump in after them.
The 2017 Federal budget announced the goal of building upon the innovation networks and clusters announced last year by working to spur innovation in six identified opportunities. With support for incubators and accelerators, government programs like SR&ED and IRAP, existing venture capital investors and the recently announced Canadian Business Growth Fund, the ecosystem for nuturing and growing high impact companies is forming.
The budget has also set aside $50M for a new procurement program called “Innovative Solutions Canada” to purchase from early-stage research and late stage prototype entrepreneurs. This program sounds like it may be an expansion of the BCIP program to enable startups earlier in the development cycle to get someone to take a chance and test out their product or service. This could lead to uncovering the next big thing and this type of support is always helpful.
But not every tech startup will become a unicorn (a billion dollar company) and many will flame out long before you hear of them. The reason for the failure may be it wasn’t the right team, bad timing or the wrong technology. In some sectors, growth capital is needed to fund getting into the market quickly before others have a chance to steal market share. For others, slow and steady growth works best to build a sustainable business. As an entrepreneur working towards a successful business you need customers, and one great saying I’ve heard often is that the best type of funding is a paying customer.
Playing Small Ball By Being A Big Customer
The reality is that the Federal will spend $330 billion according to the 2017 budget, which adds up to a lot of goods and services. So how could the government quickly implement policies that would spur small business growth?
One place for guidance is the United States, where there are programs at the Federal and State levels to support small businesses under the “disadvantaged business enterprises” (DBE) moniker. The programs designate between 3-5 percent of a contract to go to businesses that are at least 51 percent minority or women-owned. Taking the best traits of what’s been created, eliminating unnecessary bureaucracy and making it Canadian, the program could strengthen small businesses, spur hiring, increase partnerships between large and small businesses, and grow the economy.
As of December 2015, data published by Innovation, Science and Economic Development Canada shows that 73.5 percent of all businesses in Canada have less than 10 employees and 54 percent have less than four employees. With over 850,000 small businesses, the top five sectors are professional services (120K businesses), construction (114K), retail trade (95K), non-public administration services (93K) and, health care and social assistance (80K). Many of these sound like sectors the government spends money on buying products and services each year.
So how could this Small Business Enterprise (SBE) program work? The KISS rule of thumb is a good start.
First, set qualification for the SBE program based on revenue thresholds of between $50K to $500K in each of the past two years, with perhaps different levels for goods versus services businesses. This provides a modicum of confidence that the business is viable and sustainable outside of only government funding, while providing the opportunity for them to get over that next hurdle of growth. It also removes incentives of establishing majority-controlled but minor benefit corporations, where the funding never gets to the people it intended to support.
Next, place the onus of vetting SBEs on industry. It may sound ominous, but something as simple as an official letter from the company’s accountant to a report/statement from Canada Revenue Agency indicating eligibility could work. It would foster more interaction and collaboration between small and large corporations, enabling industry to identify longer-term partnership opportunities that could equally increase their operational efficiency. More importantly, it would eliminate the need for a large bureaucracy at relatively low cost to industry.
Finally, governments need to maximize the number of goods and services they procure with a set aside for the SBE program. With just a $1B sliver of the $330B government spending falling under SBE participation guidelines, over $50M would be pumped into small businesses across Canada each year with minimal program overhead. That additional revenue would be put towards expansion hiring, new equipment and more importantly, immediately back into the economy. If we could then get provincial governments onboard to adopt similar policies, we are talking $100M or more being pumped into the small businesses that employ three quarters of all Canadians.
So while supporting efforts to find and grow a few more Canadian unicorns is great news and important, building ourselves a stable of Clydesdales would be equally helpful in powering Canada forward for the next 50 years.