Canada’s technology sector: An industry on the rise

While the oil-price collapse has left the energy sector in the doldrums, there’s one success story that’s lighting up the gloom of Canada’s struggling economy and jobs market.

Canada\'s technology sector
Canada's technology sector has, for the best part of a decade, been going from strength to strength. The arrivals of big international players such as Google and Facebook have complemented homegrown success stories such as Hootsuite, while behind the headlines sits a huge landscape of tech SMEs.According to figures from Industry Canada, the Canadian ICT (information and communications technologies) sector is made up of around 37,000 companies, of which 87.6 per cent are in software and computer services and 5.6 per cent are in wholesaling. The remainder are split across ICT manufacturing and communications services.Despite a narrative that tends to focus on the big players (and the start-ups and scale-ups in their orbit), the vast majority of tech companies in Canada, in terms of volume, are SMEs. In 2013, there were just 80 ICT companies in Canada that employed more than 500 people. By contrast, there were 32,000 companies with fewer than ten employees, making up 86 per cent of all companies in the sector.While smaller companies dominate the landscape in terms of volume, larger companies, including Shopify, Stingray Digital and Mogo Finance, have made a splash this year by going public on the Toronto Stock Exchange (TSX). Another TSX-listed Canadian tech company, DH Corporation, raised nearly CAD1 billion to fund a major international acquisition.A total of 50 tech firms – more than in any other sector – have gone public on the TSX/TSX Venture Exchange (TSXV) since the start of 2014, and analysts are watching keenly for the next 'unicorn' that will hit a valuation of a billion dollars or more.

ICT manufacturing powers ahead

Michael Kousaie, head of business development for technology at the TSX and TSXV, has also noted that tech and innovation have been the fastest-growing sectors on the TSX and TSXV since the start of 2013. Between them, they're valued at over CAD250 billion, more than the aggregate value of the mining sector. Furthermore, tech and innovation companies listed on the TSX and TSXV have raised nearly CAD12 billion in equity capital since the beginning of 2014.One subsector that stands out as having larger employers is manufacturing. In 2013, 14.1 per cent of ICT manufacturers had upwards of 50 employees, compared with 3.1 per cent of firms in the ICT sector as a whole. Manufacturing is declining in prominence in Canada's tech scene, however, as its decline in revenue share shows.Overall, tech revenue has been increasing significantly. From 2007 to 2013, it shot up from CAD133.4 billion to CAD159.9 billion, an increase of 19.8 per cent. Manufacturing saw a notable decline over the period, dropping by 16.1 per cent, but that was more than offset by gains in the other subsectors.The sector is a major source of jobs in Canada. As of 2014, it accounted for 3 per cent of national employment, according to Industry Canada. From 2007 to 2013, the job share of the software and computer services subsector within the overall ICT sector increased from 54.1 per cent to 61.7 per cent. Over the same period, manufacturing's share declined from 11.9 per cent to 6.9 per cent.Perhaps unsurprisingly, the ICT sector has a highly educated workforce. In 2013, 47.2 per cent of workers had a degree, compared with a Canadian national average of 27.4 per cent. The sector also tracks above the general population in terms of compensation. In 2013, ICT professionals earned, on average, CAD69,876 – 48 per cent more than the national average. Within the sector, the highest-paid employees worked in software and computer services, where average earnings were CAD75,425.If further proof were needed that it's an industry on the up, the tech sector is expected to outstrip the energy industry in terms of wage growth in 2016, making it the industry with the largest growth. A recent survey by consulting firm Mercer shows that the energy sector – long the leader in terms of compensation increases – expects to see wages grow by 2.9 per cent, with the tech industry pulling ahead at 3 per cent.

Key locations

Geographically, the tech sector is concentrated in four main areas. Vancouver and Toronto dominate, while Montreal has a sizeable tech market mainly focused on videogames and biotech. Waterloo also has a cluster, anchored by Blackberry, and west of Ottawa there's Kanada, which has a 20-year-plus tech history dominated by hardware.CBRE, one of Canada's largest real-estate firms, recently put both Toronto and Vancouver on its Tech Thirty list of the biggest North American cities for technology. It pegged Vancouver as having 34,000 tech workers, while Toronto had 98,000.Despite Toronto's size, Ross Moore, director at CBRE, told Re:locate that Vancouver had the fastest-growing tech workforce in the country. "Vancouver is tied very much to what's going on in Silicon Valley. It's in the same time zone, and Seattle, where you have Microsoft, is only a two-and-a-half-hour drive away, so there are great synergies there."And, with the exchange rate, tech workers, by and large, are significantly cheaper here when you compare against Seattle or San Francisco."Sony, Microsoft and Amazon have set up in Vancouver recently, while Electronic Arts, Hootsuite and Industrial Light & Magic all have bases in the city.Over in Toronto, companies including Google, Apple, Cisco, Facebook and LinkedIn all have bases. "Part of it's to service the Canadian marketplace, but it's also considerably cheaper to operate a software developer department here than in the US," says Ross Moore.

Sourcing talent

The exchange rate is a significant factor for companies setting up in Canada, with the Canadian dollar having this year hit an 11-year low compared with the US dollar. But it's not just about the financials, according to Ross Moore."There's great talent. That's what it's all about. There's good talent, it's affordable, so I think it makes a lot of sense to locate here."It's not just domestic talent, though. Setting up in Canada is often appealing to firms from a relocation perspective, but bringing talent in can be tricky.Many hires will enter the States using the H1B visa route. "It's a very clunky people programme," Danielle Lovell, co-founder of mobility firm Blankslate Partners, told Re:locate.The visa is for skilled workers, but it is over-subscribed by multiple thousands of applicants, has a limited window for applying, and takes months to come through, even if the applicant is successful."Getting someone a visa in Canada is not that onerous," says Ms Lovell. "Then, once they've worked in Canada for 12 months or more, they likely qualify for an L1A or L1B, which is an inter-company transfer for specialised knowledge or a senior manager. Then they can transfer to the US with relative ease."Workers in the games and visual effects subsectors can benefit from a variation on the Temporary Foreign Worker Program that negates the need for firms to advertise positions within the country in the provinces of British Columbia and Ontario (which encompass the clusters in Vancouver, Toronto and Waterloo) before looking abroad.Hootsuite and Shopify are examples of Canadian companies that have ballooned in the last five years to become global companies. "So that's had a huge impact on the market here, because some of those employees have equity and some of them have stock options," says Danielle Lovell. These employees suddenly gain the option to invest in start-ups or form their own, injecting new blood and fresh capital into the sector.An older example of this phenomenon is the so-called 'PayPal mafia', a group of former employees of the company who benefited when it went public and went on to fund many companies from the next round of start-ups.While a start-up culture has grown up around Canada's tech sector, there are gaps in the talent pool."At the more junior to intermediate level, there tends to be talent in Vancouver or in Canada," says Ms Lovell. "What we find is that it's the more senior levels – the directors, the team leads – where we look outside Canada. Though the Canadian technology and gaming sectors have been around for years, they've really had a growth spurt in the last five to ten years, and so the talent hasn't quite caught up, because people will often go to the US first."Experienced developers, particularly those conversant with Ruby on Rails, various permutations of Javascript, and full stack development, are particularly in demand.Typically, when firms need to hunt for talent abroad, they will look to the US first, but other countries, such as New Zealand and the UK, can also be big sources of hires, Ms Lovell says.

Challenges ahead

Despite all the reasons for positivity, there are challenges facing Canada's tech sector. On the talent front, Danielle Lovell notes, "It's hard to compete with the money in Silicon Valley. If someone's considering an offer from San Francisco and one from Vancouver, probably the one in San Francisco will pay more. If someone's looking only at cash, that can be a challenge.""I think that real estate, as time goes on, is becoming a bigger and bigger issue," Ross Moore told Re:locate. It's particularly an issue in Vancouver, where rents are approaching those of San Francisco. Many people also bemoan the lack of venture capital funding available in Canada compared with its neighbour south of the border, though it's on the rise.Research firm Factset said that, by November 2015, the amount raised in venture capital investment rounds by Canada's tech companies had already hit a record high of USD768 million, topping 2014's USD735 million and soaring past the yearly average of USD512 million over the last decade. That's a drop in the ocean compared with the US, which raised USD13.4 billion in the first quarter of 2015 alone, but it's certainly trending well.While the Canadian technology sector has a fair way to go before it surpasses energy or becomes a true challenger to Silicon Valley, it certainly seems to be pointing in the right direction.
Re:locate Winter Issue
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