The Dark Side of a Weak Canadian Dollar for Startups
As the value of the Canadian dollar slides, there are concerns about higher prices for consumers products and more expensive vacations south of the border.
On the flipside, there is optimism that the lower dollar could be a positive development for startups. Canadian startups will be able to compete more aggressively on price with established companies while U.S. investors and buyers will find Canadian startups even more appealing because their investment dollars are worth more.
While these could be positive developments, it is also important to think about how a lower dollar will also drop the value of Canadian startups, making them more attractive acquisition targets.
For bargain hunters, Canada may become fertile territory. As the dollar declines, it makes startups less expensive for U.S. buyers. At some point, the hurdles that Canadian companies face when considering an acquisition could disappear because the price is right.
While getting acquired can be a compelling scenario for many startups and their investors, it should happen at the right time and for the right price, unless, of course, a startup decides to stay independent. In an ideal world, startups are acquired after they enjoyed significant growth and established themselves as vibrant industry players.
In Canada, however, startups tend to be acquired before they been able reach anywhere near their potential. In many cases, startups are snapped up soon after they demonstrate solid traction. These startups disappear before they turn into growth and hiring engines.
In a recent Globe & Mail opinion piece, Lightspeed Retail CEO Dax Dasilva argued that too many Canadian startups are prematurely acquired.
This view was reiterated by OMERS Ventures CEO John Ruffulo who recently said, “Personally, I do not think Canada has a starting-up problem, we have a finishing-up problem.”
While you can understand why startup entrepreneurs find it difficult to turn down a healthy acquisition offer given the financial rewards, being patient is a positive because it provides more time for a company to increase its value and it allows it to establish a larger base of well-paid employees in Canada.
Think about what would have happened for, for example, if Open Text had been acquired by SAP, Oracle or IBM. The company would probably still have many employees in Waterloo, but nowhere near the thousands of people that it employs.
Freshbooks is another good example. The online invoicing company could have been snapped up years ago, but it is still independent and employs more than 200 people in Toronto.
This risk is not only relevant to private companies but also high growth public technology companies such as Shopify, which are spending more than they earn to acquire new customers so they can maintain rapid growth their shareholders expect. They will eventually need to return to the markets for financing, and having to disclose their numbers quarterly doesn’t help shield them from potential acquirers earlier than they would like.
A lower Canadian dollar could make it difficult for startup entrepreneurs to resist an acquisition because the offer may be too good to refuse. For U.S. buyers, however, their money is getting attractive, making their offers even more interesting.
Canadian entrepreneurs need to have bolder, bigger visions. They need to strive to build world-class companies in Canada, which means focusing on growth and scaling their businesses rather than agreeing to be sold.
As important, Canada needs to support startups by making it easier for them to attract top-notch talent. This includes policies such as stock option taxation that would give startups ways to attract and talented employees in a tax-friendly way. In our last blog post, we recommended the Liberal government consider a $750,000 one-time exemption on stock options.
While the low Canadian dollar certainly has its benefits, there is also a danger that some startups could take the money – US$ – and run.