What should Canadian entrepreneurs expect for 2024?

A soft landing for the Canadian economy

Pierre Cléroux, Vice President, Research and Chief Economist, BDC

Despite persistently high inflation and related interest rate hikes to the current level of 5.0%, the news was generally better than expected for the Canadian economy in 2023.

We now estimate Canadian economic growth of 1.3% in 2023, higher than the initial forecasts of Canadian economists. Population growth is largely responsible for this growth, driving vigorous demand. The economy's performance will also have helped maintain the strength of the labour market, despite a rise in the unemployment rate in the second half of the year.

However, economic expansion was not spread evenly and some sectors experienced marked slowdowns. Domestically, the housing market has stabilized but remains below the peaks reached during the pandemic. Canadian households are increasingly cautious in their spending, and the slowdown in the global economy will have led to a deceleration in business investment and exports in the second half of the year.

Unfortunately, inflation will remain in the 2%-3% range, which still implies a rise in prices. However, it will be slower than what we've experienced over the past two years. On the other hand, inflation on certain budget items will remain stubbornly higher.

Food inflation will remain high at around 4%-5% in the coming months. Otherwise, housing-related expenses, notably rent and mortgage interest costs, will also continue to rise faster than the 2% target, particularly in the first half of the year.

After two years of rate hikes, Canadians should expect interest rates to remain flat for most of the year. Past rate hikes will continue to weigh on economic growth, but the bulk of this slowdown has most likely already taken place.

The key rate will remain at 5.0% for the first half of 2024, but we anticipate a first downward revision as early as this summer. However, the Bank of Canada will not bring its key rate back close to 2.5%, the neutral rate, before 2025.

Remember, a soft landing is still a landing, and there are risks lurking over the economy's performance all the time. The outlook for 2024 depends heavily on the trajectory of interest rates and inflation, among other things.

The Bank of Canada's monetary policy will be the most important factor for the Canadian economy in 2024. A soft landing should leave the country in a good position for growth when interest rates pick up, or to react in the event of another external shock or recession.

How to start 2024 on the right foot?

• Focus on maintaining sound management of your human resources. While wage growth can be expected to return to a more sustainable pace in 2024, the long-term aging of the Canadian population will keep labour markets tight for years to come.
• As interest rates remain high and demand slows, you should increasingly be looking at technology to boost productivity and improve competitiveness.
• Prepare your business for the eventual growth that will pick up once interest rates start to come down again.

Sustainability will remain top of mind for Canadian consumers

Sandra Odendahl, Senior Vice President and Head, Sustainability, Diversity and Partnerships, BDC

Sustainability has become increasingly important for business owners, and 2024 will not be different.

Climate change, in particular, is among the top concerns for consumers and businesses when it comes to sustainability, and rightly so. As of the time of writing this, 2023 was on track to be the world’s hottest year on record. The record-breaking forest fires that broke out across Canada this summer also highlighted the risks we all face if we do not act now.

Canadian entrepreneurs shouldn’t think they won’t be affected.

For example, the federal government announced in its fall economic statement that it will be exploring options for mandating climate disclosure in the private sector. Climate disclosure is the practice of reporting on the risks and opportunities related to climate change that affect a company’s operations, strategy, and financial performance. Mandatory climate disclosure would likely start with the most carbon-intensive sectors and larger businesses but would eventually cover every part of the economy. Some small and medium-sized companies have already started receiving questions from their larger customers about how they are managing climate change and other sustainability issues.

But the biggest risk to entrepreneurs is that they’ll lose their customers if they don’t take action. Three out of five consumers (61%) believe that companies should put more emphasis on the environment and sustainability, 49% believe that companies must reduce their environmental impact, even if it means charging higher prices, and 56% have stopped buying from companies whose business practices they don’t agree with.

Diversity, equity and inclusion (DEI) is another factor that consumers are increasingly paying attention to when it comes time to make a purchase—especially younger generations. More than half (53%) of Gen Z consumers want proof of how companies are acting on DEI.

Pay equity is one aspect of DEI that’s impacting an increasing number of Canadian businesses. Several provinces including British Columbia, Ontario and Prince Edward Island, as well as the federal government, have recently passed pay transparency legislation that aims to promote pay equity by making salary information more visible to employees and job applicants.

How to start 2024 on the right foot?

• The first step on your journey is to understand your company’s economic, social and environmental impact. You can do this by completing the B Impact Assessment. Then decide which issues make the most sense for your business to focus on, based on what matters most to your customers, employees, community and bottom line.
• Visit BDC’s climate action centre for a variety of information on reducing your carbon footprint. The action centre can help you find the right climate actions for your business based on your sector, size, location, and goals.
• Download our free DEI toolkit for entrepreneurs to better understand principles related to DEI and to implement them in your business.
• Examine your compensation and benefits offering and define your total rewards strategy. Being proactive will help you prepare for mandatory reporting in the near future. It will also help you compete against larger companies who can afford to pay more by highlighting the unique advantages of working for your smaller business.

AI is going to be used in more and more aspects of the business world

Jonathan Pastrikos, Director of Business Innovation and Technology at BDC and Samuel Easto-Lefebvre, Senior Business Advisor, BDC Advisory Services

For many Canadian businesses, 2023 was marked by rising costs and difficulty finding labour.

Our research shows the best way to offset these challenges is by investing in technology and automation. While some technology replaces people, it can also help reduce repetitive or administrative tasks that take time so your employees can focus on tasks that add value for clients. It can also augment the capabilities, creativity and productivity of your employees.

Artificial intelligence (AI) is an example of this. As these technologies mature, become more affordable and as more solutions enter the market, a growing number of businesses will be impacted.

AI can save you time and money by automating and optimizing various tasks and processes, such as:

• customer service
• order capture and processing
• document analysis
• copywriting
• marketing
• quality control
• scheduling and routing
• programming

AI can also be used to gather and analyze structured and unstructured data that can help you identify new trends and generate insights to support better decisions, such as understanding your customers and markets, improving your products and services and using your staff more productively.

How will companies adopt AI in the coming year?

1. AI embedded in their existing systems

AI will naturally be introduced into your business as AI technology becomes more widespread and embedded in core business systems. You can expect it to pop up in your existing software and tools. This includes your office productivity tools (e.g. spreadsheets, word processors), accounting software, CRM, ERP and e-commerce systems. The technology has already started to appear in some of the most popular software systems and there will be increasing enhancements in the months to come.

2. Through commercially available, specialized generative AI tools

Many AI applications that are designed for specific purposes or functions are now commercially available. These can be acquired and implemented in a specific area of your business.

In addition, many individuals and companies are experimenting with popular generative AI tools such as ChatGPT and Google’s Bard. Development of these remarkable tools is ongoing, and with their enhancement of new features and capabilities, their utility will become even greater.

3. Through custom-built, proprietary applications

Some businesses will choose to design and build AI tools and models to address a specific or unique need in their business, to support innovation or to develop a new business model. This will often entail more effort and cost. While the rewards can be great, it should be approached with purpose and planning.

Many companies are already experimenting with AI in their business. To do this they identify some practical-use cases, and assign people to pilot and assess the benefits. All companies should be thinking about how they can use AI in their business and start taking the first steps.

However, you also need to be aware of many potential pitfalls, limitations and risk considerations involved. And you need to be proactive in managing when and how it will be used in your business. Some of the concerns that come with AI include:

• data privacy and security
• intellectual property leaks and infringement
• reliability, inaccuracy and misinformation
• fairness, bias and other ethical considerations
• legal, regulatory and compliance requirements

Ensuring you have strong and clear policies and that your employees understand the risk involved will go a long way to protect your company. So will training your employees to work effectively with the technology, while also managing the risks. These safeguards are just as important as discovering everything the technology can do.

How to start 2024 on the right foot?

• Think about your business goals and objectives for the coming year.
• Consider what are your most pressing needs and where you see the greatest opportunities to benefit from AI. Consider the potential applications in your business. Make sure to engage your people and get their opinions on the opportunities.
• Identify some small pilot projects with which to experiment. Assess the results and roll it out to take full advantage when the results are positive.
• Strengthen your digital foundations; to work properly, AI must be fed with high-quality data. Proper foundational digital systems are critical as these are often the point of data collection and storage that will feed AI technologies.
• When upgrading your current tech solutions, make sure they are compatible and interoperable with AI tools and platforms. If investing in new technologies, consider their current AI capabilities and roadmap. Older technology will simply not be able to offer these capabilities.
• Pay close attention to what others in your industry are doing in terms of using AI to improve their products, services, processes and customer experience. You don’t want to be left behind.
• Update your security and privacy policies to protect your data and comply with regulations.
• Prioritize flexibility and agility. Be ready to adapt and change as AI evolves and creates new opportunities and challenges. Experiment with different AI applications and learn from your failures and successes. Encourage a culture of curiosity, innovation, and collaboration among your team and partners.

The VC ecosystem will continue to face headwinds

Jérôme Nycz, Executive Vice President, BDC Capital

2023 was a tough year for Canadian start-ups that had to tighten their belt as rising interest rates made it harder for them to raise money from VC investors. Yet, despite these headwinds, Canada’s VC ecosystem showed resilience.

Early-stage investments, at the pre-seed and seed stages in particular, have remained strong since peaking in 2022.

In contrast, the later stages of financing—typically Series A and onwards—have returned closer to pre-pandemic activity levels, while the dry spell for growth stage deals (pre-IPO) has persisted throughout the year. 

The “growth with profits” approach that replaced the “growth at all costs” mindset in 2023 will persist into 2024.

As later-stage start-ups seek to raise capital in 2024, we anticipate that they will face further fundraising challenges. It is common for both foreign and non-traditional investors—who are important suppliers of late-stage capital for Canadian companies—to retreat partially from the space in tougher economic times. For this reason, we believe that mature VC-backed companies will need to continue to be resourceful and carefully manage their burn.

Unlike other sectors, cleantech had a record-setting year in 2022 and has maintained comparable activity levels in 2023. With many new government initiatives and policies that incentivize innovation in sustainable technologies, the cleantech sector will likely have another strong year in 2024.

How to start 2024 on the right foot?

• Be thoughtful when considering the trade-offs between growth and efficiency and continue to manage your burn rate to extend company runway.
• Continue to be transparent with your investors through frequent and candid dialogue. Consider increasing collaborative efforts with investment partners and help them understand where support can be best received.

A slower acquisition market is creating opportunities for mergers and acquisitions

Pat Latour, Senior Vice President, Growth & Transition Capital, BDC

Soaring interest rates, slower economic activity and heightened uncertainty made entrepreneurs cautious about business acquisitions in 2023.

Yet an aging population will create a flow of businesses to hit the market for sale. About 10% of SMEs (135,000 companies) planned to sell to external parties by 2025, according to Innovation, Science and Economic Development Canada.

This has created a growing gap between the number of entrepreneurs trying to sell their company and those looking to purchase.

Buying a business is one of the fastest ways to grow a business, adapt to changing customer needs or technological advances. A 2021 BDC study showed that businesses that grew through acquisition were twice as likely to experience sales growth above their sector average compared to firms that grew organically.

We believe that 2024 will present entrepreneurs looking for acquisitions with a number of opportunities.

How to start 2024 on the right foot

• The relative stability of interest rates in 2024 should facilitate forecasting when trying to create an optimal capital structure for your acquisition.
• In the current economic context, relying exclusively on senior debt to carry out an acquisition may be risky. Looking for alternative financing options to mitigate the impact of high interest rates is probably a good idea. Potential options can include:
  • Seller financing—where the seller can help maximize the value of the sale of their business by helping finance the transaction and adding flexibility. Earn-outs, seller “rolled” equity and vendor financing are all options that should be explored to ensure an optimal capital structure.
  • Mezzanine financing—which is often used to cover any gap left between the purchase price and financing from other sources. Its repayment terms are highly flexible and can be tailored to a company’s needs.
  • Minority equity partner—which involves a minority investor and becomes an effective way to increase your capital reach while staying in strategic control of your business. 
  • Unitranche financing—where different types of secured and unsecured debt are combined into one loan.
• Your capital structure needs to build in flexibility to ensure your business remains healthy in case of external disruption or underperformance following the acquisition. Working with flexible partners can help you weather these unforeseen events and come out of them stronger.
• Our Growth & Transition Capital team can help you find the best option for your needs.