By Cameron Groome
At a time when Canada’s economic growth is under threat, there are policy solutions that would help SMEs access capital to create new jobs and grow the economy.
For the 15 years from 1991 to 2006, I worked on the “sell-side” of Bay Street. It was an exhilarating time when entrepreneurial new Canadian public companies in IT, life sciences, manufacturing, and natural resources were well matched with local investor capital. The era included the rich fruit from the ripening of BlackBerry, a company that symbolized our nation’s innovative spirit and technological prowess. But those fecund days are gone, and for all practical purposes, so is BlackBerry, once the global leader in smartphones and a source of national pride.
I’ve asked many former colleagues whether a BlackBerry-level success could be built today, and I’m told it would be impossible. This is because individual investor capital is no longer available in the sums needed for small and medium-sized enterprises to fruit. Yes, the very “SMEs” that all levels of government cite as our fountainhead of economic growth have close to zero access to investor capital in today’s Canada.
As a result of this desiccation, few new BlackBerrys are ripening, and our home and native land is becoming a relative desert of economic inactivity. No savvy 2020s entrepreneur considers the prospect of a Canadian stock exchange listing as a means of accessing sufficient investor capital and providing real trading liquidity. This is amply evidenced by the near-total absence of SME IPOs in Canadian markets. You can count TSX IPOs on the fingers of one hand in any recent year, and our promising companies either go to the U.S. (i.e., only onto NASDAQ) or never seek a stock market listing at all (i.e., most contemporary VC-backed companies).
Beyond the lack of access to capital and liquidity, a growing number of the successful private and public SMEs are selling their proverbial family farms – agreeing to be bought out and becoming branch-plants of foreign entities with superior access to capital and more liquid markets. In my sector of life sciences, companies from Halifax to Vancouver have been acquired, with head office jobs and decisions then migrating away from Canada. Bellus (QC), Biovectra (PE), Chinook (BC), Clementia (QC), Fusion (ON), IBEX (QC), and Inversago (QC) are but a few examples.
This lack of access to Canadian capital serves as a stark warning and a cautionary tale of what happens when the canals that irrigate growth and success are dynamited. Having identified these problems, what solutions do I thereby propose to political leaders who seem surprised and perplexed that we have growth and productivity crises? In short, and as usual, it is largely to “get the hell out of our way.” It is the current approach to investment regulation and taxation that are the root causes, and if we don’t fix them, all of Canada will become an economic Barrenlands where fruitful companies don’t grow.
Specifically, Canada’s penchant for oligopolies is our main issue, exemplified by our big banks. Not long after the independent investment dealer at which I worked was bought by a bank, I bellyached about the damaging effect of some new regulations. I was told by my new boss at the time, “You’re now with the bank. We like regulation. It keeps out the little people.” How true those words were and are. Nearly 20 years later, there are only a few remaining “Small Cap” investment funds, such as those that seeded BlackBerry. Most of them have been bought out and replaced with generic funds that only invest in mega multinationals or in the indexes themselves. Equally, advisors at bank-owned investment dealers are discouraged or prohibited from investing any client funds into Canadian SMEs.
What, then, are the solutions? Well, I’m not so naïve as to believe we’ll decouple banks from dominating investment management in Canada, but we should be encouraging the provision of capital to our SMEs if we hope to eat in years to come. Helpful policies would include the following:
1. Encourage the formation of new funds to invest in Canadian SMEs – both private and public.
2. Do not allow bank-owned investment dealers to indiscriminately discourage investment in Canadian SMEs.
3. Incentivize SMEs to list on domestic stock exchanges with preferential capital gains treatment relative to “large caps,” multinationals, or index funds.
4. Have our stock exchanges refocus on providing access to capital and liquidity (what should be their raison d’être).
5. Incentivize other investor types, such as VCs and pension funds, to support our SMEs.
We have to carefully cultivate our entrepreneurial lands to ensure that Canada’s prosperity doesn’t erode and is improved for our next generations. If we provide fertile policy grounds and enable decent liquidity, we will get many new SME fruits, many even sweeter than a BlackBerry. Personally and professionally, I hope that we will yet learn to be better stewards of the beautiful garden we call Canada.
Cameron Groome is CEO & President of Microbix Biosystems Inc., an Ontario-based and TSX-listed company that employs 130 professionals and creates, manufactures, and exports testing-related medical devices. He has worked in the Canadian life sciences industry for over 30 years.
