THE GROWTH OF VANCOUVER AS AN INNOVATION HUB: CHALLENGES AND OPPORTUNITIES.

• Author: Hutchison, Camden

The authors would like to thank Ryan Black, Brian Cheffins, and Sancho McCann for helpful feedback on an earlier draft. We would also like to thank the anonymous journal referees who provided useful comments and suggestions. Finally, we would like to thank Elizabeth Keyes for excellent research assistance.

1. INTRODUCTION

   Vancouver, British Columbia--known for its temperate climate, mountainous scenery, and progressive urban politics--has emerged in recent decades as a dynamic entrepreneurial hub. Dubbed "Silicon Valley North" (1) Vancouver ranks highly in international startup rankings (2) and was recently selected by the federal government as one of five "innovation superclusters". (3) Members of the local startup community describe Vancouver as "a vibrant early-stage ecosystem", (4) "a super exciting market, a super exciting opportunity" (5) and "one of the fastest growing tech ecosystems in the world" (6--)an image projected by local companies to attract talent and investment capital. By all accounts, Vancouver would appear to be one of the most entrepreneurial cities in North America.

   The reality is more complicated, however. Although Vancouver performs well compared to other Canadian cities, it lags many US cities in terms of number of startups, amount of venture capital, and creation of intellectual property. Unsurprisingly, the number of startups in Vancouver pales in comparison to Silicon Valley, the world's leading entrepreneurial hub. Even when adjusted for population, however, Vancouver also trails its southern neighbor Seattle, as well as secondary US tech hubs such as Denver, Austin, and Raleigh-Durham-Chapel Hill. Like many Canadian cities, Vancouver struggles with "scaling" startups into large, profitable companies, which is an important driver of economic growth. (7) Given Vancouver's many advantages (including its desirable locale, open culture, and strong research universities), the city may be failing to realize its full potential.

   This article examines legal explanations for Vancouver's entrepreneurial performance. There is a broad literature within the fields of law, economics, sociology, and history connecting legal institutions to innovation and entrepreneurship. Many scholars have emphasized law's importance to the formation and growth of innovative firms. Beginning with the work of James Willard Hurst, (8) scholars have viewed legal structures as facilitative (or inhibitive) of risk taking, investment, and technological innovation. Recent scholars including Douglas Cumming, (9) Michael Ewens and Joan Farre-Mensa, (10) Ronald Gilson, (11) Josh Lerner, (12) Jeffrey Macintosh, (13) J Ari Parades, (14) and many others have explored relationships between specific areas of law and the prevalence and success of entrepreneurship. According to these authors, laws regarding taxation, labour, insolvency, corporate finance, and immigration can have a significant impact on entrepreneurship, both within and across jurisdictions. The implication of this research is that jurisdictions can promote entrepreneurship by enacting more efficient laws.

   This article contributes to the literature on law and entrepreneurship by comparing Vancouver to analogous regions in the United States--most notably Silicon Valley. We focus on Vancouver due to its similarities with northern California in terms of geography, (15) political culture, (16) and financial/institutional history. (17) As the laws that affect Vancouver startups are both federal and provincial, our analysis focuses primarily on federal and British Columbia law. Our results are not limited to Vancouver however: given the substantial homogeneity of Canadian provincial law, (18) our findings have implications for the entire country of Canada.

   Our comparison reveals that legal differences between Canada and the United States cannot explain differences in startup activity. (19) Not only are the two countries' laws similar, the differences that exist are not consistently in the US's favor. We therefore offer an alternative explanation for disparities in startup activity: Rather than differences in law, the variance in entrepreneurship between Canada and the United States is due to broader institutional factors, including underdeveloped business networks, a lack of Canadian venture capital, and "brain drain" to the United States. Although certain of these challenges are amenable to policy reform, others are an inevitable result of the size of the US economy. Given this economic reality, the best strategy for strengthening the Vancouver startup economy may be greater integration with the United States.

   This article is organized as follows. Part II presents statistical data on the Vancouver startup economy. These data show that while Vancouver produces more startups and receives more venture capital investment per capita than other Canadian cities, it underperforms many US cities on equivalent metrics. Part III compares Canadian and US law in the areas of tax, securities, corporate law, labour, bankruptcy/insolvency, trade policy, and immigration. We argue that, taken as a whole, none of these areas explain Vancouver's weaker economic performance. Part IV suggests alternative institutional explanations. Part V concludes by summarizing our findings and presenting specific policy recommendations.

2. DATA ON THE VANCOUVER STARTUP ENVIRONMENT

   The best means of comparing startup regions is by analyzing empirical data. In this Part II, we use original data to compare Vancouver to other major tech hubs--including US regions such as Silicon Valley and Canadian cities such as Toronto and Montreal (20--)in terms of startups, venture capital, and technological innovation. For the majority of our analysis, we use business and financial data collected from Crunchbase, a widely used commercial data source. (21) Other data sources are specifically cited when used.

   1. STARTUPS AND VENTURE CAPITAL

      Figure 1 shows that over the last decade, more than 2,000 startup companies were founded in Vancouver--more than Montreal, but fewer than Toronto. (22) Although Vancouver trails Toronto in total number of startups, it exceeds Toronto on a population basis. Figure 2 shows that Vancouver has an annual average of 8.46 startups per 100,000 residents, while Toronto has had only 7.75 startups per 100,000 residents.

      In addition to number of startups, the amount of venture capital investment is another important indicator. Figure 3 shows that from 2010 to 2019, over US$3.7 billion of venture capital was invested in Vancouver. Again, while this is less than Toronto, Vancouver comes out ahead on a population basis. Figure 4 shows that Vancouver has seen an annual average of US$150.60 in venture capital investment per capita, the most of any major city in Canada. (23)

      Vancouver's record is less impressive compared to cities in the United States. Figure 5 shows that Vancouver's startup creation rate is only 30% Silicon Valley's. This is not necessarily surprising, as Silicon Valley is by far the world's leading startup region. As Figure 5 also shows, however, Vancouver has a lower rate than several US cities. The gap is even wider with respect to venture capital investment. Figure 6 shows that Vancouver's venture capital investment per capita (US$ 150.60) is only 39% of Denver's (US$383), 30% of Seattle's (US$494), 25% of Austin's (US$607), and 4% of Silicon Valley's (US$3,743).

   2. INSTITUTIONAL CHARACTERISTICS

      Although the number of startups in a given city is an important indicator, it does not necessarily measure entrepreneurial success. In order to contribute to long-term economic growth, startups must "scale" into growing, sustainable businesses. Unfortunately, Vancouver faces challenges in scaling up small tech companies, a problem shared with other Canadian cities. To date, Vancouver has only produced three home-grown "unicorns" (i.e., privately held companies with a valuation of at least one billion dollars), an increasingly common indicator of entrepreneurial success. (24) Interestingly, a very high percentage of Vancouver startups go public, (25) another common success indicator. Equating Vancouver's initial public offerings (IPOs) with sustainable economic growth would be misleading, however. Our analysis shows that the Vancouver economy is characterized by premature, low-value IPOs, presumably due to a lack of professional venture capital.

      Vancouver startups go public at a much higher rate than startup companies in peer cities. Figure 7 shows that 9.64% of Vancouver startups founded between 2010 and 2019 have gone public, compared to only 2.69% for Toronto and 1.53% for Montreal. This rate is even more striking when compared to US cities. Only 0.3%-0.5% of startups founded in Silicon Valley, Seattle, or Austin from 2010 to 2019 have gone public.

      In addition to going public more often, Vancouver startups go public early in their growth cycles and at low valuations. On average, Vancouver startups that ultimately go public do so only two years after their founding. This is half the time of Silicon Valley, where the regional average is four years. Nearly 70% of Vancouver companies that undergo IPOs have annual revenues of less than $1 million, and more than 90% have 50 or fewer employees. It is important to note that many of these startups are in the mining industry, which accounts for 34% of Vancouver IPOs. (26) Even with mining startups excluded, however, Vancouver's IPO rate (approximately six percent) is still more than twice Toronto's and more than twenty times Silicon Valley's. As shown in Table 1, most of Vancouver's public companies are listed on the TSX Venture Exchange (TSX-V), a secondary "junior" market for public venture finance. The TSX-V is a direct descendant of the Vancouver Stock Exchange, a global center of "penny stock" investing in the 1980s and 1990s. (27)

      Given their small size, many Vancouver startups need additional growth capital following their...