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Exorbitant growth in tech wages could be the factor that bursts the tech bubble

Wages at some of Canada’s fastest growing technology companies have increased 20 per cent over the past year

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Wages at some of Canada’s fastest growing technology companies have increased 20 per cent over the past year, adding to the evidence that the industry is headed for a new, more challenging phase that some might not survive.

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The Canadian Council of Innovators, a trade association that represents companies such as Lightspeed Commerce Inc. and SkipTheDishes Restaurant Services Inc., surveyed its members at the beginning of the year and found that businesses are seeing wage expectations for skilled talent ring in 20 per cent above 2021 levels.

“It’s hard to quantify but I would say that this is probably the biggest concern that is keeping CEOs up at night,” said CCI president Ben Bergen. “Having a product or a service delayed by months because you weren’t able to find engineers or salespeople that are required to get it to commercialization, it’s really challenging for companies.”

This is probably the biggest concern that is keeping CEOs up at night

Ben Bergen

Salaries are taking up additional space on the balance sheets just as technology companies are about to find it more difficult to raise money to finance their rapid — and often unprofitable — growth strategies. The industry has seen a great run, as private and public capital threw cash at companies built for the digital economy. But that boom of enthusiasm could soon crash, as the central banks in the United States, Canada and elsewhere have made clear they intend to raise interest rates.

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As borrowing costs rise, the “risk-on” attitude to investing that favoured technology companies will change. The tech-heavy NASDAQ so far this year has dropped more than 14 per cent, while the S&P/TSX, heavy with banks and energy companies, has dropped only about one per cent.

“The point at which we are in the business cycle is certainly a high point. It might well be a peak,” said Ambrus Kecskés, a finance professor at York University’s Schulich School of Business. “How long this can continue is a matter of debate but it’s probably not going to go on at this rate without interruption for another decade.”

Still, growth strategies require lots of hiring to keep up with orders. Even though companies are spending more on wages, appetites to hire remain strong. The CCI survey found that tech firms are planning to expand their workforce by more than 20 per cent in 2022. The trade organization set out to see what challenges its members are facing with economic and industry conditions and received 50 responses back from 150 companies.

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You have Series As that are being done now at $50 to $80 million. Financings like that never happened five years ago

Damien Steel

“I sit on boards of companies where our estimate is that engineers salaries have gone up 30 to 40 per cent in the last year,” said Damien Steel, global managing partner at OMERS Ventures, the venture capital arm of the Canadian pension fund.

The reasons salaries have risen for software developers or product specialists vary. Some founders and CEOs pin it on U.S. tech giants setting up shop in Canada and luring talent away. Others say it’s because the work-from-anywhere trend is forcing Canadian firms to compete with wages offered by some of the most profitable companies in the world

But, a long-time issue has been a chronic undersupply of software developers and engineers. The number of companies seeking such talent surged during the pandemic, and firms with long capital runways simply opted to pay top dollar rather than disappoint investors who expected aggressive growth, Steel said.

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“You have Series As that are being done now at $50 to $80 million. Financings like that never happened five years ago,” he said. “You know, $20 million used to be a massive Series A three or four years ago.”

Charles Boulanger, CEO of LeddarTech Inc. Photo by Leddartech

Charles Boulanger, CEO of LeddarTech Inc., which makes sensors used in vehicles, raised US$140-million in a Series D round in February. The Quebec-City-based company wants to grow its staff of 240 to 300 within 12 months, and it’s proving a difficult target.

To help it ensure its keeping pace with market rates, LeddarTech hired a third-party company to research and benchmark salaries for all of its employees. Typically, the company does this for senior management every three years, but with fierce competition for talent, it felt compelled to do it for the entire staff, Boulanger said. LeddarTech decided to craft pay packages where salaries were slightly below the average but instead beefed up options packages to incentivize workers.

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But the economic road ahead looks bumpy with inflation at 30-year highs and central banks around the world set to raise key rates. “It certainly becomes more expensive to do all sorts of development and the competition becomes international as well with people working remote more,” Boulanger said.

At Coveo Solutions Inc., which makes software for use in the cloud, CEO Louis Têtu has seen wages climb 20 per cent over the last year. Têtu had to readjust the budget every few months because wages kept accelerating.

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“When your R&D line, your talent expenses, increases by 20 per cent, frankly, your headcount plans diminish by a number as well because you can’t just spend 20 per cent more unless you back it up with 20 per cent more revenue, and that doesn’t happen as quickly,” Têtu said.

To compensate for rising pay, subscription prices at the company have gone up five to 10 per cent in the last few years, he said.

In November, the company closed a $215-million initial public offering, one of the largest in Canadian tech last year. The money it raised through public markets was designated to help it grow and hire more talent, however current market volatility makes it unclear investors will pour more money into stocks. On Tuesday, Coveo shares closed at $9.58, more than 40 per cent below it’s initial offer price of $15.

As with other markets, venture capital is cyclical, said Steel, and it’s been on an abnormally long tear for the last eight years which has meant an abnormal amount of companies received cash to burn.

“I would argue in three to four years, you’re going to have an unusual amount of companies that are shutting down. And so that (talent) shortage right now is going to lead to an abundance later, at a time when all the wages have been marked up. You can see how you get into this really, really difficult position down the line,” he said.

• Email: bbharti@postmedia.com | Twitter:

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