Here’s why high-performing small companies stand out: BDC report

I’ve interviewed plenty of dreamers over the years, but none had a mission like that of Chanakya Ramdev, a recently minted engineer from the University of Waterloo.

“I want to eradicate sweat stains from this planet,” Ramdev told me on a WhatsApp call from Ludhiana, a city of about two million people in Punjab, India last month.

Ramdev introduced himself to me a few years ago at one of Waterloo’s many tech jamborees.

He stood out because his business plan had nothing to do with a smartphone. Ramdev, who is Indian, was working on an an undershirt that would allow armpit sweat to escape into the air, rather than simply absorb into the material.

After graduation last year, he returned home to scout textile mills that he could trust with his innovation and help him expand beyond t-shirts to a full range of men’s office wear. He also kept costs down by advertising on social media instead of launching a pricey print or television campaign. He’s currently raising money and hopes to start exporting to equatorial countries within a year. Any revenue will flow back to Canada, where Ramdev’s company is incorporated and the place where he plans to continue research and development.

Most startups fail, so those profits may never come.

Or Ramdev’s Sweat Free Apparel could become the next Gildan Activewear Inc., the Montreal-based t-shirt maker that reported sales of almost $3 billion in 2017. It wouldn’t be the riskiest bet, as his approach to business aligns with what a new study by Business Development Canada suggests is the difference between leading entrepreneurs and mediocre ones.

BDC economists analyzed data from more than 900,000 Canadian companies with annual revenue of less than $100 million to separate “high-performing” smaller companies from the pack. To make the cut, a firm’s sales and profit margins needed to be growing faster than the median in its industry and it had to rank in the top 25 per cent in either variable.

Only four per cent of the firms satisfied those criteria, a little low by international standards, but not terribly so, according to Pierre Cleroux, the Crown lender’s chief economist.

The objective of the study is to inspire executives to try harder, rather than get bogged down in excuses, such as elevated tax rates, the most common lament of the small-business lobby.

High performers are considerably more productive than their peers, generating about $133,000 in sales per employee compared with about $65,000 in the weaker cohort. But productivity pays: The median profit margin among leading companies is 20 per cent, compared with a mere three per cent in the weaker group.

In a perfect world, business taxes would be lower, Cleroux said in an interview. However, we Canadians are living in a politically divided world in which at least as many voters favour higher business taxes as oppose them, so the country’s tax structure isn’t going to change that much.

Policy matters, but so does entrepreneurial wherewithal. Remember that the next time the Canadian Federation of Independent Business suggests some politician is wrecking the economy. The CFIB could be right. But Canada’s smaller companies invest half as much per worker as their counterparts in the United States. Differences in tax rates could explain some of the difference, but so could a gulf in ambition.

So all those laggards should be asking themselves what it takes to join the high-performing group. BDC’s analysis shows those companies are more efficient and work hard to keep costs down. That leaves them with less debt and more cash with which to invest, increase their employees’ salaries and seek new export markets.

“That’s the recipe, rather than complaining about taxes,” said Cleroux.

The most surprising aspect of BDC’s work for many will be how little Canada’s smaller companies actually export.

Thanks to the national obsession over what U.S. President Donald Trump might do to the North American Free Trade Agreement, you probably will have heard Foreign Affairs Minister Chrystia Freeland describe Canada as a “trading nation.”

However, few smaller companies would even notice if Trump blew up NAFTA, as only about 10 per cent of them sell their products abroad. And that’s a big reason so many of them muddle along. Overall, about 20 per cent of high-performing enterprises export, but 100 per cent of companies in that group with sales between $10 million and $100 million export. Leading companies also tend to earn sales from more than one international market, and many make more money abroad than they do at home.

Ramdev said he hoped his company could ultimately be something of a “Canadian brand ambassador.”

He has an advantage in India because it’s his country. But he was surprised to discover that investors care at least as much about where Sweat Free Apparel is based. They aren’t used to seeing North American and European companies seeking backing, and they are keen to do deals with them, Ramdev said.

“Western companies in general have a high value proposition,” he said. “What I see is a lot of startups focused on the U.S. What I would love to see is for them to be a little more risky.”

• Email: kcarmichael@nationalpost.com | Twitter: @CarmichaelKevin