Saskatchewan’s startup ecosystem will not bounce back like mature tech markets

Let me preface this post with the following: all opinions are my own; I’m optimistic Saskatchewan’s tech ecosystem will prevail, but we have a heck of a lot working against us right now and; there’s a lot of “gut feeling” below without evidence. In times like this, it’s difficult to find reliable data to predict the future.

Twenty nineteen marked a monumental year in the Saskatchewan tech space. According to the CVCA, our companies raised over $114 million in venture capital (more than the past 5 years combined). We closed out the year as one of Canada’s fastest-growing startup ecosystems, getting attention from across Canada as a formidable secondary tech market.

However, Saskatchewan is now feeling the full effects of the new COVID world, and there’s reason to be worried about our ability to bounce back compared to more mature tech markets. Below I dive into a few factors that will be uniquely detrimental to Saskatchewan in our ability to emerge from this pandemic and the new recession.

Disappearing angel investors

One of the biggest impacts in driving growth in the Saskatchewan ecosystem was the plethora of promising companies that had received angel investments from non-traditional tech investors. Through the 45 percent Saskatchewan Technology Startup Incentive (STSI) tax credit, the provincial government had created the most aggressive tax credit product in Canada to fuel investors, which has been a huge success in supporting our early-stage companies. Unfortunately, we’re likely going to see a significant number of these investors disappear.

My view is that Saskatchewan’s angel investors will take a lot longer to start investing again.

My view is that Saskatchewan’s angel investors will take a lot longer to start investing again. Our high net worth individuals likely have a greater exposure to oil and gas will get hit proportionately harder than individuals in Vancouver, Toronto, Waterloo, and Montreal. After watching a considerable portion of their wealth evaporate over the past month, angel investors across Canada will look to place their capital into safe harbours to weather the storm.

When they look to take on risk, it’s going to be in areas where they have had success in the past. As they look to start making investments with a higher risk profile, many people in mature tech markets will feel most comfortable investing in startups based on their past experience.

In Saskatchewan, most of our Angel investors made their first tech investments in the past few years (most of them in the past 12 months). Their investments will have been too recent to deliver returns. For many of these people, the places they know and feel most comfortable taking risk will be in the public markets, oil and gas, commodities, or real estate.

Lack of VC support

One of the great victories for the Saskatchewan startup ecosystem over the past couple of years has been the attraction of outside VC funds and professional tech investors into our province. Vendasta, 7shifts, Coconut Software, SalonScale, and SafetyTek have all been beneficiaries from bringing in leading investors from major markets [disclosure: all but Vendasta are Conexus Venture Capital Fund portfolio companies].

Our growing ecosystem, the impact of Co.Labs’ Uniting the Prairies Conference and Cultivator’s Sask Startup Summit, and the notoriety gained from SkipTheDishes were all key factors in attracting the eyeballs of these outside investors. However, one of the main drivers of this trend was the desire for outside venture capitalists to find markets with less competition. These investors decided that there was more benefit to executing deals without competition from other venture capital funds, even when factoring in the disadvantage of weaker relationships, and limited understanding of the ecosystem.

RELATED: Broad Street Bulls VC launches $2.5 million fund to support early stage Prairie startups

Now, as capital and competition dry up in their own markets, investors will likely return to focusing on investments in companies close to where they live. Compound this with the inability to build relationships through face-to-face meetings and it’s highly unlikely we see Saskatchewan companies attracting outside investors into their seed and Series A rounds over the next six to 12 months.

Recently, we saw the announcement for a new program launched by BDC to fuel VC-backed companies. While this new product is going to have a powerful impact for Canadian tech companies it’s unlikely we see a meaningful impact in Saskatchewan. If there’s 100 to 150 rounds completed through this program across the country, we should count ourselves lucky if we can get two to three of them.

Employee scarring

In what may win the award for ‘most unfortunate timing of an article,’ Mark Melnychuk of the LeaderPost wrote an article in early March highlighting the new trend in Saskatchewan of students graduating university to seek jobs at startups. With the benefit of hindsight, there’s a few particularly cringe-worthy quotes from yours truly.

Now as we see the abundance of layoffs happening in the startup space, we could see the lure of working for a startup quickly erode.

The general theme of the article, however, was true. Graduating from university or leaving a stable career to seek a role at a startup is still a relatively new phenomenon in Saskatchewan. Saskatoon is ahead of Regina in the matter, but in both cases, we’re mostly looking at a first generation of employees looking to join tech startups. Many of these people took a risk and had to justify this risk to their parents, partner, or former colleagues on why they were making this move.

Now as we see the abundance of layoffs happening in the startup space, we could see the lure of working for a startup quickly erode across the province. Since our ecosystem was just finding its footing before all of this, we’re not going to have the long roster of individuals that have previously seen five to seven-figure cheques derived from their stock options in successful exits that mature markets have. Much like the angel investors, employees across Canada will get impacted in a relatively similar way, but the ones looking to jump back into startups are going to have previously seen the financial upside in working for a startup.

Reasons for optimism

These are the three trends that are keeping me up at night. I have true concerns about our ability to survive the impacts of COVID and the accompanying recession.

However, there’s reason for optimism.

The episode of Startupville with Mike Wolsfeld and Jordan Dutchak provided a good overview of the impacts COVID could have on Saskatchewan. As my doomsday scenario was playing out in my head, it was therapeutic to hear a more balanced overview from these two ecosystem drivers. I particularly agree with Jordan’s view that our founders need to be metric driven and Mike’s follow up suggestion that we already have a competitive advantage in this regard.

The ecosystem stakeholders that have played such a key role in driving growth over the past few years haven’t gone anywhere.
 

As mentioned earlier, our province’s startups raised more VC capital in 2019 than the past five years combined. While that’s a great example of our growth as an ecosystem, it’s also a reminder that only a few years ago Saskatchewan founders were forced to be a lot more capital efficient. SkipTheDishes was largely bootstrapped in the early days before bringing on investors like Matt Golden and Eva Lau. GasBuddy never brought on a single investor as they scaled up to over 26 million active users before being acquired by OPIS.

The combination of entrepreneurial spirit that flows from Saskatchewan’s agrarian roots along with the forced efficiency through a history of capital scarcity has made Saskatchewan tech entrepreneurs naturally more metric and profit focused. While we may not be able to sustain the kind of growth we’ve seen over the past 12 to 24 months, many of our scrappy founders will be able to navigate their way out of this.

RELATED: SkipTheDishes co-founder launches “venture-builder” for Prairies startups

As we look beyond our world-class founders, the ecosystem stakeholders that have played such a key role in driving growth over the past few years haven’t gone anywhere. We may not have the initiatives and programs in place today that will help our province’s startups prevail in the face of COVID, but we still have a startup supportive government, two high impact incubators, a few early-stage funds, a bold credit union, and a bunch of influential business leaders that have all made big contributions to get us to where we are.

As a proud employee of this bold credit union, and a close contact to many of the groups above, I can assure you that all of these ecosystem stakeholders are looking for opportunities to help. When you put that mentality into a province whose strengths lie in our cohesive business, government, and investor relationships and dialogue, there’s a reason to be optimistic for new measures put together to respond to COVID.

If we’re able to drive new COVID response initiatives (primarily focused on helping provide capital to startups) and pair that with our natural product building entrepreneurs, more cohesive ecosystem, and operating cost advantages, Saskatchewan will not only save itself from ruin compared to the other ecosystems but could realistically outperform.

This article was originally published on LinkedIn.

Image source Cultivator via Twitter.

Sean O'Connor

Sean O'Connor

Newest Saskatchewanian and VC Fund Manager who on behalf of Conexus Credit Union is improving the economic well-being of Saskatchewan by investing in promising Saskatchewan based startups and helping fuel the provinces startup ecosystem. Experienced finance professional with a track record of building business relationships in banking, tech, and a variety of other early stage ventures. Prior to Conexus Ventures, Sean was on the leadership team of a Canadian fintech, Grow Technologies Inc. He graduated with a degree in Finance and International Business from McGill University.