A new ranking of the world’s top startup ecosystems shows Canadian cities have lost ground to other centres due to relatively slower revenue growth and fewer exits of high-value companies.

Released today, the 2015 Global Startup Ecosystem Report by Compass (formerly Startup Genome) ranks Canada’s three largest cities, Toronto, Vancouver and Montreal, at numbers 17, 18 and 20. Waterloo Region placed “in the top 25,” said J-F Gauthier, Chief Financial officer and Head of Business Development for Compass, but precise rankings beyond 20 were not made public.

In the last Startup Genome ranking in 2012, Toronto ranked eighth, Vancouver placed ninth and Montreal did not make the list. Waterloo Region ranked 16th in 2012.

The top five ecosystems in the 2015 study, in descending order, were Silicon Valley, New York, Los Angeles, Boston and Tel Aviv. In 2012, the top five were the same, except the positions of Tel Aviv and New York were reversed, with Tel Aviv in second and New York in fifth. The top five were followed by London, Chicago, Seattle, Berlin, Singapore, Paris, Sao Paulo, Moscow, Austin, Bangalore, Sydney, Toronto, Vancouver, Amsterdam and Montreal.

Major changes in the study’s methodology since 2012 had a significant impact on the 2015 rankings, particularly for Tel Aviv and Waterloo Region, which have smaller populations relative to other top-ranked centres, Gauthier said.

In 2012, ecosystems were evaluated based on startups per capita, but that measurement was dropped in favour of a straight measure of the number of startups in each ecosystem, effectively eliminating startup density – on which Waterloo Region is particularly strong – as a competitive advantage.

As a result, Gauthier said, “Tel Aviv dropped a few spots with the removal of startups per capita from the performance index because its smaller population was helping it compete for the top spot against cities with larger populations,” Gauthier said. “Waterloo also got affected because its 0.55 million population gave it an artificial advantage under the 2012 methodology.”

In an interview with Communitech News, Gauthier added that, despite its absence from the top 20 in the latest report, “it’s again amazing that Waterloo ranks so high despite its very small population. It speaks to the quality and support of the community. It ranks higher than many cities five to 10 times its size.”

Aside from changes in the study methodology, a major factor behind Canadian cities’ lower standing in the rankings was a lack of big exits relative to other top ecosystems, particularly in the U.S., which in 2012 was still struggling to recover from the 2008 economic downturn, Gauthier said.

Since 2012, startup activity in Canadian ecosystems continued to grow along with all the other centres studied, but they didn’t grow as quickly, which contributed to the rankings slide in 2015, he said.

This slower growth in Canada “reflects their challenge with scaling up,” Gauthier said. “During our numerous interviews, Canadian experts all mentioned local sales, marketing and business development skills and experience as a challenge, and the difficulty of rapidly a scaling up in the U.S.”

Achieving early scale in the American market is crucial to Canadian startups’ success, due to the smaller Canadian market and the lower economic output of its cities.

“This challenge is also clear when looking at exits, the result of an ecosystem’s market reach and ability to scale,” Gauthier said. “Canadian startup ecosystems have had relatively few, lower-value exits. This can have a pervasive effect on ecosystem growth because very large exits galvanize the local entrepreneur and investor communities, while a lack thereof depresses them.”

Gauthier told Communitech News that quality of talent is not an issue in Canada; in fact, Waterloo Region ranked “in the top five” in the world for technical talent. But the lack of global (especially American) experience in sales, marketing and business development means we’ve been slower to produce the types of exits that attract entrepreneurs and investors to other cities.

“The importance of big exits is scale; it’s not technical talent, which Canada does very well at,” Gauthier said. “It’s having sales and marketing and business development talent and being able to penetrate the U.S. market very rapidly, to be able to grow quickly, which is what leads to the exits.”

These key findings of the 2015 report – which gathered significantly more data from a greater number of sources than were used in 2012 – support three priorities that tech leaders in Waterloo Region had already identified before the report’s release: getting startups to think globally right away; helping high-potential companies scale more quickly; and strengthening ties between the Waterloo and Toronto ecosystems.

“Yes, definitely,” Gauthier said when asked if these were the right areas of focus for Waterloo Region going forward.

Over the past year, Communitech has refined its focus to offer more help to high-potential companies achieve rapid revenue growth. Its Rev accelerator program, launched in March, was designed to do just that, and a new Revenue University program offers free instruction to startups that already have a defined value proposition and target market.

Communitech has also been at the leading edge of efforts to build a more cohesive tech corridor between Waterloo Region and Toronto, to take advantage of the two regions’ complementary strengths and build a world-leading “supercluster” of economic activity.

“Every country in the world is trying to create a technology hub to drive their economy forward, and it’s a global competition for capital, talent and customers,” said Iain Klugman, CEO of Communitech. “The data in this study confirms that we’re focusing on the right things – going international, scale-ups, and increasing connectivity in the Toronto-Waterloo corridor – however, now we need to deliver.”

Gauthier offered specific suggestions for building stronger Canadian startup ecosystems. Some involve emulating the success of Tel Aviv, a relatively small and geographically isolated tech community that nonetheless punches above its weight class:

  • Think globally right out of the gate. At about 3.2 million people, the Tel Aviv region is smaller than its top 10 rivals in the Compass study, but the Israeli city overcomes this through aggressive international networking. “In the Canadian market, you still find companies that don’t go to the U.S. market early, which would never happen in Tel Aviv,” Gauthier said. “They immediately go to Europe and the U.S.; they don’t even try to just scale first locally; they go out.” Instead of relying on attracting entrepreneurs and capital to its relatively isolated location, Tel Aviv has built a presence in other ecosystems where those things are already found in abundance, he said.
  • Hire sales, marketing and business development talent in the U.S. (especially Silicon Valley). “Creating more scale-ups is all about more networking, and the sales and marketing skills that are outside of Canada,” Gauthier said. “You can develop local skills in Canada, but they’re really experts at the Canadian market. They’re not experts at the U.S. market if they’ve lived in Canada all their lives.” Having sales and marketing people based in the U.S. provides crucial market knowledge and connections, he said. “They join a startup, they bring their Rolodex and they went to college with someone from Stanford and Harvard, and they can pick up the phone.”
  • Fly the Waterloo flag in Silicon Valley, and rally around it. “One thing that Tel Aviv does well is that the community has a sense of trust and belonging that’s very high” in the Valley, Gauthier said. “Canadians moving here have a sense of belonging, but they might not network as formally with each other” because they tend to assimilate with their American friends. Gauthier suggested Waterloo entrepreneurs would benefit from networking as a group in the Valley. “It’s like, ‘Let’s help each other; we are different; we are from Waterloo,’ like the Israeli community does, like other communities do,” he said. “It’s not about discrimination; it’s about trusting each other, sharing values because you come from the same place. If we start having a culture of helping each other, that will have a domino effect.”