Record investment deals, a historic tech initial public offering (IPO) rush, newly minted unicorns and the rapid adoption of technology to digitize our lives and enable remote work—it’s been an electrifying few years for Canadian tech companies. But the Covid-19 pandemic has made life much harder for a critical slice of our innovation economy: early-stage start-ups.

Early-stage companies are the beginning of Canada’s entrepreneurial pipeline. They have big ideas, product prototypes and even a few sales. More importantly, they have the potential to be Canada’s next homegrown tech titans. They’re not quite ready to scale up or cash out—they’re still surviving on coffee, maxed-out credit cards and angel or seed investments.

Seed financing is up during the pandemic. But it hasn’t kept pace with the amounts going to later-stage companies—through the first three quarters of 2021, 63 per cent of venture capital dollars were invested in later- and growth-stage companies. And angel financing, which rebounded this year after dropping at the beginning of the pandemic, has barely risen since 2009.

This presents a serious issue for early-stage companies, because tech talent is in extremely short supply and can cost founders an arm and a leg to hire and retain. Underfunded early-stage companies are hiring from the same ultra-competitive talent pools as well-funded start-ups. They are also forced to compete with the big tech behemoths setting up shop in Canada, and American companies that are remotely hiring and paying big U.S. dollar salaries.

To compete for talent and scale their ideas into landmark Canadian companies that fuel jobs and economic growth, our future tech leaders need to get creative.

The impact on early-stage start-ups

The DMZ recently conducted a survey of 42 DMZ companies—74 per cent of the respondents said a fundamental problem lies in simply finding candidates to interview. Nearly as many, 63 per cent, said they can’t compete on cash compensation. They specifically called out the usual suspects Amazon, Facebook, Google and Shopify as the companies outbidding them for talent. The competition for tech talent today isn’t by any means restricted to the tech industry.

In fact, it’s becoming harder to bring on tech talent in every industry across the country, whether it’s a government entity, a hospital, a school or a tech start-up. Today’s goods and services are being offered digitally, meaning we’re all trying to hire from the same pool of engineers, developers and data scientists.

A new report for the Innovation Economy Council found that the government should pay more attention to seed-stage companies with its Venture Capital Catalyst Initiative, and work to sell the Canadian start-up story and the opportunity we have to build thriving global businesses. It also finds that Canadian venture capitalists (VCs) need to stop overlooking earlier-stage investments. In order to continue building thriving Canadian businesses, VCs need to lean into risk to uphold their responsibility in igniting the trajectories of Canadian start-ups—their support is integral to a healthy ecosystem.      

How early-stage start-ups can fight back

Early-stage start-ups need to sell their purpose and culture—and highlight the lure of starting on the ground floor to build something better. At a legacy company, talented people will often find themselves siloed or pigeon-holed early on, whereas long-term personal development and growth is part of the start-up value proposition. When start-ups can’t compete on compensation, they need to raise the amount of equity offered, so their employees share not just risk but reward. 

Start-ups need to also get creative about benefits. In the DMZ’s survey of 42 companies, just 17 per cent of start-ups in business for three years or less reported that they increased their benefits during the hiring process. Flexible, personalized perks—some may want financial coaching or skills training, others childcare or fitness subsidies—can appeal to prospective hires in a way that larger employers may not be able to match. The appeal of bean bag chairs and beer on tap is dwindling. 

Attracting tech talent to early-stage companies is critical in our entrepreneurial pipeline. If Canada is going to compete for these workers, our early-stage start-ups and the ecosystem around them need to be inventive and use every advantage they have to get them on board.

Abdullah Snobar is the executive director of the DMZ, a tech incubator for start-ups.