By David Sinkinson
It’s no secret that starting a business is fraught with risk. Depending on how you count it, 70% of startups will fail between years two to five. Even online businesses, such as ecommerce and tech startups, fail a staggering 80% of the time.[1] Entrepreneurs, particularly my Canadian peers, need to make timely and effective decisions – combined with a bit of luck – to reach the startup promised land.
My SaaS business was fortunate to reach a successful exit, but that ending was anything but guaranteed. Between the dizzying highs and agonizing lows, there were a number of important (and sometimes painful) lessons. These insights are exceptionally valuable for Canadian founders as they highlight the unique challenges and opportunities we face. Here are three startup myth “biggies” of which Canadian founders should be aware:
Profit is your Funding
Canadian startups have a complicated relationship with venture capital funding. Venture investment is a weak point in our national startup scene, particularly for online businesses. Take for instance a piece from BDC – Business Development Bank of Canada, literally the crown corporation meant to help improve the funding problem in Canada – entitled “Are Canadian corporations investing enough in venture capital?”.
“On a global scale, Canada is punching below its weight. Canadian-based enterprises accounted for 1% of global CVC [corporate venture capital] deal values from 2011 to 2017, while Canadian GDP is 2% of the world’s total, according to Global Corporate Venturing…
A lack of participation by these firms in Canada’s VC ecosystem endangers their future productivity and competitiveness. But it also deprives Canada’s start-up community of a formal link to traditional industries where Canada has a competitive advantage.”
Another piece by Global Corporate Venturing entitled “Where are the Canadian CVCs?” hammers this point home: “Only 6% of public Canadian companies with more than C$1bn in annual revenue are making venture investments in startups, according to a new report published today by Deloitte Ventures. This is compared to some 40% of their counterparts in the US.” Frankly, Canadian startups can’t rely on access to funding from Canadian sources.
But here’s the thing, it may not matter. 75% of US venture capital backed startups ultimately fail in years 2-5.[2] Funding is not a silver bullet; for many startups, capital is injected, the business is artificially inflated, investors urge founders to “get big fast”. After about four years, those businesses collapse because they, their product, or their market wasn’t ready.
For SaaS businesses, I would urge you to consider bootstrapping your business. You maintain control, grow at a pace that’s consistent with the market, and you can focus on acquiring and delighting customers. The less you focus on funding, the better you’ll be; you’ll have more time to work on your business and achieve market fit. You can always opt for funding later in your business’ life, but don’t rush to find early or seed funding – it can hurt more than it helps.
The Canadian Surprise Attack
We have an interesting business-dynamic with our neighbours to the south. Obviously, it’s essential that your business has a meaningful presence in the US market as it’s the “market of first resort”. Regardless of your industry or product, it’s likely that the American market is magnitudes larger than the Canadian equivalent. For example, my business was focused on higher education – there are approximately 150 higher education institutions in Canada and over 7000 in the US. No question, you need to be in the US market.
But you don’t have to rush to get there. Here in the great white north, we’re relatively invisible to our American counterparts. Why? For the same reasons as above – our market is tiny, equivalent to a single region of the US and also carries the complexity of expansion into a new country, which comes with regulatory hurdles. As such, American firms, particularly early in their startup journey, aren’t keen to enter or even consider our market.
This obscurity gives us two tremendous opportunities. The first is that we can carefully watch the actions of our US competitors and market. We can strategically analyze how our competitors operate, their strengths and weaknesses, and the general direction of the market. Conversely, US companies probably don’t care about and aren’t looking at us, allowing Canadian firms to get their feet under them and confirm the validity of their business model. In effect, Canada is a niche market in which Canadian startups can dominate without foreign firm interference.
The second opportunity is flexibility on market entry – that is, we can decide when, how, and where we want to enter the US market. Admittedly it was challenging for us to enter the US market, mostly because our clients weren’t referenceable in the US (more on that in a second). However, when we did get an early foothold with a handful of US firms, our competitors in America didn’t know how to counter our strategy or product offering. This led to tremendously quick success; we knew them, had a well polished product, and understood how to attack and capture their markets. Timed correctly, Canadian firms are uniquely positioned to surprise and upend US competitors.
Correct, the US is not Canada
My Co-founder and I had assumed that the similarities between Canadians and Americans would lend themselves to an easy transition into the US market. Unfortunately, we got that one plain wrong – the US is a fundamentally different place with different priorities that change rapidly across the various regions of the US (the Midwest, the Northeast, the South, etc.)
Further, our Canadian clients didn’t know and weren’t known by their American counterparts, making references to our Canadian client base materially less useful. Our experience in the US was effectively a restart – it didn’t matter that we had 50 higher education institutions in Canada because those brands meant nothing to our prospective market. Ultimately, we had to “buy” our first US customers with “sweetheart deals” – incredibly low priced and high value agreements. We needed noteworthy US brands to have any hope of capturing a meaningful share of the US market.
In the end, this strategy worked, but not after a few painful attempts. Crossing that border can be tricky; do whatever it is you need to do to get those important American customers so you can quickly capture significant market share in the US.
These are just three meaningful lessons for Canadian online businesses but there are many, many more. I hope that these lessons bring you both clarity and peace of mind in your company’s next move.
David Sinkinson is a proven SaaS entrepreneur who, alongside his brother Chris Sinkinson, created AppArmor, which helped keep people safer with innovative mobile apps and emergency notification solutions for individuals across the globe. David is also co-host of the Startup Different podcast and is the co-author of the forthcoming book Startup Different: The Myth-Busting Blueprint for Your Multi-Million Dollar Business.
[1] https://explodingtopics.com/blog/startup-failure-stats
[2] https://corpgov.law.harvard.edu/2023/09/29/startup-failure/
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Melody McKinnon is an internet entrepreneur with 25 years of experience in a wide range of online business models, backed by a formal business education and enhanced by training and mentorship. She has owned or managed both educational and ecommerce websites. Her book, 7 Recession Proof Online Businesses to Start From Home, is available from all major ebook retailers.
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SaaS has become much more successful then I thought it would. I overestimated the value of a product you can hold in your hand even if it’s software. It’s a profit-promising business idea that I’m seriously considering. Appreciate the guidance.
I’ve never seen so many affiliate sales as I’ve had with SaaS products. They’re sure selling in B2B anyways. Everyone loves a good software especially if it saves time and somehow makes more money.
Thank you for this well-written and insightful post. Your clear explanations and practical examples make it easy to grasp even the more complex topics. I appreciate the effort you put into providing such thorough information. This is a valuable resource for anyone interested in this subject.