Great at innovation, Canada is rich with clean technology startups. But companies struggle after taking the public plunge. What’s up with that?
Canada’s cleantech sector, by all measures, is doing remarkably well. The latest research from Analytica Advisors, which on October 30 released its 2013 Canadian Clean Technology Industry Report, shows that sector revenues were $10.6 billion in 2011, up 17 per cent from $9.1 billion a year earlier. Employment grew by 18 per cent. Investment in research and development was up by 7 per cent, surpassing $1 billion for the first time. Employment grew by 18 per cent. The average number of employees per company climbed to 64 from 62, and the number of companies grew 6 per cent to 712.
All of this, the report notes, happened against the backdrop of nasty debt crises in the United States and European Union. “The big part of this is a jump in general market demand,” said Celine Bak, a founding partner with the Ottawa-based research consultancy. “But some areas are growing faster than others.”
The biorefinery and industrial products markets both grew by more than 40 per cent year over year, with the latter seeing about 95 per cent of revenues driven by exports.
Bak said more companies, particularly those in the extractives industry, are beginning to think seriously about the role of technology in sustainability, and about the importance of resource efficiency. “They’re not doing it just from a corporate social responsibility perspective, but from a bottom line perspective, which is ultimately good for Canada’s productivity.
“It’s also to maintain a social licence to operate,” she added.
The cleantech sector is more than happy to help them out, and small and medium-sized businesses are clearly the driving force when it comes to developing and supplying the required innovation.
Nearly three-quarters of Canadian cleantech companies employed fewer than 50 employees in 2011, according to the report. If we narrow that criteria, 40 per cent of companies employed between six and 20 staff. (Indeed, only 24 companies in the space have more than 500 people and can be considered a “large” enterprise.)
They may be small, but they’re having a big impact. It’s why each year for the past five years, Corporate Knights has recognized the Top 10 up-and-comers in the Canadian cleantech sector.
These startups have tremendous potential and much to offer – be it making concrete less carbon-intensive, helping utilities store surplus energy or providing a non-toxic way for farmers to keep pests from damaging their crops.
But it would be a mistake to say that all in cleantech is rosy in Canada. Rafael Coven, managing director of the Cleantech Group’s market-leading indices, said the sector is increasingly becoming a game for bigger players.
There may be strength in numbers, but there are also major limits to small. This becomes increasingly clear when companies decide to shed their privately held status and expose themselves to the rough-and-tumble world of the public markets.
Most Canadian cleantech companies that go the publicly traded route find much of their time is soaked up complying with regulations and trying to raise capital. Few financial analysts show interest, and this makes it difficult to raise money for growth.
“Most of Canada’s publicly traded cleantech companies should have never gone public,” said Coven. “A lot of these companies are very speculative. If you look at the track record of most of them, it’s about a 90 per cent failure rate. The point is, if any of these catch fire, they’ll simply be acquired.”
That’s exactly what happened to Vaughan, Ont.-based RuggedCom, a maker of ruggedized network equipment for the smart grid. A profitable, growing company at the centre of a bidding war, RuggedCom was eventually scooped up in March by German industrial giant Siemens for $440 million, representing a share-price premium of 50 per cent.
Zenon Environmental, a Canadian gem in the water treatment space that was purchased by General Electric, and Xantrex, a maker of electronics for renewable energy systems acquired by Schneider, both followed a similar path.
But for every RuggedCom, Zenon or Xantrex, there are 10 companies like Railpower Technologies, a promising maker of hybrid locomotives that failed to be the little train that could.
It is with this caveat that Coven created the 2012 Clean 10 list for Corporate Knights. This list recognizes the most promising and successful cleantech companies that are traded on the Toronto Stock Exchange or its junior venture exchange. Coven, comparing what he sees in Canada to the giants of cleantech that exist in the United States, is frank discussing the list. “I’m sorry, but there are just not a lot of great ones out there. I’m scraping the bottom of the barrel in Canada.”
He does highlight pipeline inspection provider Pure Technologies, developer Brookfield Renewable Energy Partners, and TS03, a maker of eco-friendly sterilization equipment for medical devices as among his favourites. But he makes clear they’re unlikely to become standalone giants. Canadians will likely never see a Nortel, Research In Motion or Bombardier of clean technology, simply because the good eventually get gobbled up.
The open question is whether Canada needs a few big players to be recognized as a market leader. Can our collective smallness make a meaningful global impact in a world that desperately needs to clean up its act?