The three things holding back BC’s tech industry

Content by IT World Canada

KPMG report says British Columbia’s tech industry is doing well but there’s lots of room for improvement

VANCOUVER, BC, NOVEMBER 13, 2014 (via IT World Canada) – British Columbia’s technology industry is outperforming most of the province’s other sectors still lags behind tech sectors in other provinces, according to a report by professional services firm KPMG.

The British Columbia Technology Report Card 2014 Edition highlights three big challenges for the province’s promising high-tech industry.

One of the biggest problems for BC is the lack of venture capital funding, warned Bill Tam, head of the British Columbia Technology Industry Association (BCTIA), who wrote the foreword for the report.

“That’s the most concerning area,” he explained. “We’ve seen a reduction in the number of funds that provide the first round of institutional capital for these startups.”

Putting money in the right places

BC has a wealth of angel funding, which helps companies reach the stage where they need venture capital (VC). Angel money has been steadily growing, reaching $97 million in 2012. But VC funding is more cyclical and has yet to recover to pre-2009 levels following a nosedive that year.

This is symptomatic of a broad Canadian problem stemming back to the early 2000s, says Tam. Institutional and retail capital pulled out of the tech business after the dot com bust affected fund performance. The tremors from that quake are still resonating around the industry.

The lion’s share of the venture capital that is available is late-stage money, leaving slim pickings for the seed rounds. Only 8.6 per cent of BC venture capital was early-stage money in 2012. This leaves many firms with a funding gap, which feeds into BC’s next problem: growth.

A lack of large companies and talent

BC has a strong base of small companies, but needs more ‘anchor’ firms to help encourage growth, said Anthony Lindsay, a partner at KPMG.

“The history of BC technology is that as companies become successful, to take that next leap to a global scale company many feel the need to enter into a merger and acquisition transaction,” he said. That can lead to smaller firms relocating out of the province, and a shortage of talent.

Unsurprisingly, then, talent was the third key chokepoint for the BC tech industry, which underperformed relative to other provincial tech economies in graduate technology degrees.

Per capita employment in BC’s tech industry was lower than provinces with significant technology sectors, said KPMG. Yet salaries in that sector are relatively high, outperforming both other provincial tech sectors, and BC’s non-tech industries.

All of this points to a provincial technology sector that shows promise, but which is lagging behind those in other provinces. We can see this materially in the news.

Let’s take Vancouver’s digital media segment as an example, which provides the third largest portion of tech industry revenues, and jobs. In 2012, the year that the last KPMG Report Card was released, we saw Activision close its Radical Entertainment studio in Vancouver, laying off 90 people. Rockstar Games ditched Vancouver for Toronto two weeks later. In April 2013, EA closed two studios in the city.

A year ago, Disney shuttered its Vancouver Pixar branch, said to employ 75-100 people, and then Microsoft closed down its Victoria games studio in December 2013.

Could government help? Tam and Lindsay both argue that the province already has the right attitude to the tech industry, but local digital media industry group DigiBC has called for a renewal of the Intermediate Digital Media Tax Credit (IDMTC). This provides a 17.5 per cent tax break on staff salaries for companies developing interactive digital media, but it is currently scheduled to expire in September 2015.

Vancouver’s tech sector is also lagging behind in both manufacturing and exports. In Ontario, manufacturing contributes 22 per cent of the tech sector’s GDP, whereas BC has only half of this. And exports from the BC technology sector have grown by only five per cent since 2009, compared to a total cross-sector export growth of 20 per cent in the province. The BC tech sector’s export intensity is lower than those of other provinces, the report said.

These things could be seen as problems, but Lindsay prefers to see them as opportunities. “That tells us that there’s huge potential. So we’ve identified the gap, and it’s clearly an area that the sector is focusing on,” he said.

Encouraging more VC funding

What can BC’s tech sector do to improve its performance relative to other provinces?

“Certainly one of the big ones is venture capital,” said Tam. He would like to see BC take advantage of the federal government’s Venture Capital Action Plan, announced in the 2013 budget, which carved out $400 million to kickstart private sector investments in early-stage risk capital. Tech is an investment with high risk, and potential high reward.

In January, Ontario partnered with the feds to move that forward, via a deal with VC firm Northleaf, who will administer some of that federal money. Just this week, Teralys in Quebec announced a similar agreement, becoming the second such province to do so.

“Looking at ways that we can participate actively with the federal government on reinvigorating that program is key to this, especially in the series A area,” said Tam, adding that getting the BC government to participate in a ‘fund of funds’ program would be a great step.

“We think that there’s sound rationale for working in concert with the federal government to rejuvenate and reinvigorate the venture capital sector here in BC,’ he said. “Given the fact that we occupy one of the most robust and vibrant tech ecosystems in the country, it would stand to reason that this would be a place of great interest for that sort of investment.”

In BC, the tech sector has huge potential. Taking advantage of some of that government money would help give its many innovators an early foothold on some much-needed growth, while keeping them in the province.

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