It wasn’t so long ago that Calgary’s burgeoning tech sector was being held up as a potential case study in diversification, a lighthouse to chart a course toward in a province rocked from oil-and-gas downturns.
Six months ago, many technology companies even said they had multiple positions left unfilled, citing the high skill levels required of any potential hires.
But changes introduced in Alberta’s provincial budget — including the elimination of grants many tech companies relied on — have forced Calgary’s tech sector to wrestle with a very different future.
Five tax credits — including the Alberta Investor Tax Credit (AITC) and the Capital Investment Tax Credit — were axed in the budget, and are expected to save $400 million by 2022-23, according to the government.
Speaking at a Calgary Chamber of Commerce luncheon in October, Finance Minister Travis Toews said returning Alberta’s budget to balance was “job No. 1,” and that diversification of revenues was a “luxury.”
Justin Brattinga, a spokesperson for the minister of economic development, trade and tourism, wrote in a statement that the tax credits were “administratively heavy and limited in scope.”
“We are redirecting resources into an investment attraction strategy as part of budget 2020,” he wrote. “This strategy will support growing sectors such as tech, data and telecom while also supporting the pillars of Alberta’s economy such as energy and agriculture.
“We look forward to gathering input from the tech sector on the best way to attract investment across Alberta.”
It’s not all bleak — some, including ZayZoon CEO Darcy Tuer, believe that Alberta’s desirability and livability will help to continue to draw talent to the province. Saturday, some of Calgary’s biggest tech companies like Benevity and Showpass hosted a hiring fair as part of what’s being called Tech West Collective.
But the new reality also means many smaller tech companies will have to find new ways forward — which, so far, has meant many have had to lay off employees and others have had to consider whether they have a future in the province at all.
‘A shift away from innovation’
Chad Saunders, an assistant professor at the Haskayne School of Business at the University of Calgary, said the provincial budget seemed to indicate the government was looking to rely on larger companies.
“They’ve reduced the corporate tax burden, and that seems to be the current strategy. That’s certainly good, that will definitely benefit the business community,” Saunders said. “But when you look at the small companies, especially the small tech companies, often they don’t really hit that burden anyway, because they’re not making money yet. They’re still early stage.”
The Alberta budget slashes the corporate tax rate from 12 to eight per cent by 2022-23. However, that tax rate only applies to businesses making over $500,000 per year in profit.
There will certainly be some short-term financial gains in terms of cost savings, but it potentially is at the expense of long-term competitiveness.– Chad Saunders, University of Calgary professor
Saunders said the elimination of the AITC would particularly impact small tech companies, as that program provided seed money for startups.
“These small startup companies in the tech sector really rely upon [the AITC]. This is the money that the angel investors that seed these businesses, this is the kind of incentive they’re looking for,” he said. “It’s not going to probably stop these folks from investing, but it’ll give them a moment of pause, for sure.”
The AITC offered a 30 per cent tax credit to investors who provided equity capital to small businesses in Alberta working with new technology and products. An additional five per cent tax credit was added in February for investments in companies that met diversity criteria.
“So [that was] really to incentivize people to invest in companies with more gender diversity, Indigenous, visible minorities and so on,” Saunders said.
While some Albertans might feel companies should not be relying on government programs to stay afloat, Saunders said risk comes inherent within innovative sectors.
“Consequently, that’s why most jurisdictions help them get started early on, because they need that helping hand to begin with,” he said. “If the tax credits are gone, and they’ve already made their plans and this change has been imposed, then that’s definitely going to lead to negative consequences like reducing investment and layoffs … they’re going to have second thoughts.
“They’ll think about not doing it at all, or doing it in a jurisdiction where it will be more favourable.”
And while cutting the tax credits are expected to save the government $400 million by 2022-23, Saunders said innovations in the tech sector — though initially niche in their early stages — often become more broad-based and applicable years down the line, including in the energy sector.
“To me, it’s not really clear that this is not going to have long-term impacts, even on the sectors [the government] is trying to support,” Saunders said. “A lot of innovation comes from these small companies, and if you don’t have that regular infusion of these ideas in innovation, then this sort of permeates fairly quickly across the entire economy.
“There will certainly be some short-term financial gains in terms of cost savings, but it potentially is at the expense of long-term competitiveness.”
Feeling the shift
The elimination of those tax credits has had a direct impact already on many local technology companies.
Brett Colvin is the CEO of Goodlawyer, an online marketplace for micro-legal services. Colvin, a former lawyer, said the company had raised just more than $450,000 under the tax credit and received more grants from Alberta Innovates.
“When they froze the credit, that was definitely some wind out of our sails,” Colvin said. “It’s definitely going to have a huge impact for my company going forward and many other startup companies and companies in the technology space.”
Considering similar tax credits are still in place in other Canadian provinces, including Manitoba, Saskatchewan and British Columbia, Colvin said he had to give real thought to where the Goodlawyer headquarters would be located long-term.
There’s definitely a real possibility that we’ll have to leave Calgary.– Brett Colvin, CEO of Goodlawyer
“You just can’t raise capital from your own local network the same as you can in these other prairie provinces,” he said. “We were able to raise a bit more money under the credit before it was gone, so we’ve got a good amount of runway for 2020.
“But when I start thinking beyond 2020, there’s definitely a real possibility that we’ll have to leave Calgary, just because it will be easier to raise money as a Saskatchewan-based company or a Manitoba-based company.”
‘Investors are bearish’
Rena Tabata is the CEO of Think Tank Innovation, the team behind ShareSmart, a platform developed to allow secure mobile communication in health care.
She said though she recognized the need for some austerity in Alberta’s budget, she was disappointed to see a shift in support away from knowledge and tech sector jobs.
“I think every time there’s an oil and gas bust, our lack of preemptive diversification will continue to rear its ugly head,” she said.
Despite the elimination of the tax credits, Tabata said Calgary still had a pool of talented and technically-oriented workers, which could prove to be an asset given the continued downturn.
“Given the economic climate, there are a lot of people that want to jump the fence from the oil and gas sector and try their share in the tech sector,” she said.
And much as her company has had global aspirations for her platform from day one, Tabata said local tech companies may also have to look elsewhere on their finances after the budget release.
“People who have traditionally had appetites to invest in Alberta are bearish about how companies in Alberta are going to fare. There’s no longer sweetener to really favour Alberta companies over companies anywhere else in the world,” she said. “So our strategies need to be globally-oriented, and that will become more and more important until there’s clarity as to what replacement programs might look like for the tech sector.”
ZayZoon is a local financial technology company that allows employees to access their wages early by utilizing an online platform on smartphones and computers.
“I’d say there are some great things about the Calgary tech scene and there are some challenging things,” Tuer said.
Tuer cited Calgary’s livability, availability of desirable office space, and groundswell of excitement around tech startups as being reason to be optimistic about the local tech scene.
“Startup Calgary had their Launch Event a few weeks ago … they had a 100 per cent increase in attendance. I think there is a tremendous amount of excitement around Calgary and all these tech startups and the opportunity for people to start to diversify their experience and careers into industries outside, or one degree removed, from oil and gas,” Tuer said.
I think people think of diversification as, well, we’re building technology that’s totally independent of oil and gas. I think that’s wrong. – Darcy Tuer, ZayZoon CEO
Though Tuer said ZayZoon was able to raise approximately $15 million in seed financing locally, scale capital effectively “doesn’t exist” in Calgary.
“Outside of super angel investors, there’s a very, very sparse group of organizations or individuals,” he said. “So companies like ZayZoon, we have to go elsewhere … that’s a real challenge here locally that we need to address.”
Though not every company that accessed AITC would prosper, Tuer said a few of them would, and likely go on to become “$100-million-plus” companies.
“I think there’s some shortsightedness [in the provincial budget]. I think people think of diversification as, well, we’re building technology that’s totally dependent on oil and gas, and I think that’s wrong,” he said. “I think we need to recognize that we can’t solely depend on the backbone of today, because that backbone today may not be our backbone 10 years from now.
“I think we need to create opportunity for other industries to emerge.”