The hidden reason why BC’s startup scene struggles
B.C.’s startup scene is in its current position because of a lack of liquidity events.
People blame the struggling startup scene in B.C. on many things. Cost of living, brain drain, office space, investors, risk appetite, and more. These are part of the problem, but they aren’t the largest part of the problem. B.C.’s startup scene is in its current position because of a lack of liquidity events.
A liquidity event, also known as an exit, basically means a large amount of the company’s capital and investment turns into cash (or equivalent). This usually happens either through an IPO into a stock market or an acquisition by another company.
The status of Vancouver’s biggest startups
When you look at B.C.’s biggest startups over the past 20 years, you see a lot of mature companies that raised a bunch of money, grown their teams, and built successful businesses but haven’t managed to make it to a liquidity event.
I often wonder about an alternative history where Hootsuite exits during the peak of social media hype in the early 2010s. This alone would have freed up a bunch of talent and flushed the ecosystem with capital. The startup scene in B.C. would be completely different, but Hootsuite isn’t the only potential game-changer.
Although these companies continue to grow and stay alive, the longer they go without a liquidity event, the more potential trouble they run into. Many of these companies have lost their founders, done massive layoffs, raised money on worse terms, or ran out of steam. For example, arguably B.C.’s biggest startup, Dapper Labs, did three rounds of layoffs in the last year.
Most importantly for B.C.’s startup scene, a long-running startup without an exit means raising more money, which dilutes equity (and upside) for founders, employees, and local investors. It also means talent burning out and delays the next generation of startups.
What’s the problem with a lack of liquidity?
The lack of big liquidity events creates three deficiencies in the startup scene: capital, available talent, and investor legitimacy.
A liquidity event frees up capital. This often takes the form of stock turning into cash. Everyone from early employees to early investors has cash they are looking to use. Although many might invest conservatively or finally be able to afford a house, there is still often capital left.
Where can this capital go? These people probably want to invest somewhere they are familiar with and have a competitive advantage. This means investing in startups in your industry, region, and friends (“network”). If you look at any successful startup ecosystem, you see a series of startups “paying it forward” to the ecosystem and generating “alumni networks” of new companies.
Successes out of these new companies then turn the flywheel and a startup scene (hopefully) blooms.
There isn’t an overwhelming amount of startup talent in B.C., especially founder-tier or executive talent. Much of it moves to the U.S. as fast as possible, but the relevant talent we do have is in these companies. The next generation of potential founders and early employees work for these companies, and they don’t have a good reason to leave. They have golden handcuffs because their future earnings are dependent on their company’s exit.
A liquidity event frees talent up to move around. Some start their own startups. Others learn what it takes to exit a company, move to the next generation, and help them do the same. Like anything, practice makes perfect, and without exits, employees aren’t getting any practice.
A lack of exits means there are probably many people in these companies not living up to their potential. The only way for B.C.’s startup scene to succeed is if more people are living up to it.
As an investor, B.C.’s startup scene doesn’t have a promising track record. Investors judge success on big exits. Without these, it is harder for them to rationalize investing there.
Liquidity events are how investors make money, both for their fund and their ability to raise future funds. A track record of creating “successful” (liquid) companies creates legitimacy. Without this happening in B.C., investors will spend their time looking somewhere else.
Praying for exits
Starting a company is difficult enough. A successful liquidity event is another level beyond this. It takes a ton of work and skill to build a company in this situation. It’s easy for me to be a critic on the sidelines (we’re working on it), and I respect all the founders and teams in the arena at these companies. I’m calling this out because I truly want BC and its startup scene to succeed and understanding where we are is critical to doing that.
All the companies I listed can still create successful exits. The crypto space remains especially promising, even though it is in a lull period. LayerZero Labs seems to be an incredible company. It looks like a critical piece of crypto infrastructure and Bryan Pellegrino is an impressive founder. Blockstream is another company in a similar position.
A new generation of startups are also coming like Dooly, Sanctuary, Cuboh, Durable, and more. B.C.’s biotech industry continues to grow and had a liquidity event that sparks further growth. The future of B.C.’s startup scene (and its economy) rests on seeing those same liquidity events elsewhere.