Michael and Eric take a look at a very topical issue: the tariffs just introduced by the U.S. government. How might this affect Canadian startups? What's the difference between selling physical versus digital goods? And is there an advantage for startups to enter the U.S. market early?
English subtitles are available on the video.
Transcription
Michael Anthony-Clement
Hello everyone. Mike here with another episode of Axeome, the podcast from Axeo, a startup incubator and accelerator. Hi again Eric!
Eric Chocron
Hi everyone, hi Mike!
Michael-Anthony Clement
Welcome. We're going to have a good discussion today on a subject that is quite relevant. It's in relation to tariffs and then to Canada versus USA trade for a startup. With that, let’s get into it.
The first thing that probably many founders are asking themselves is the 25% tariffs imposed on Canada, will they affect me? So Eric and I, we're going to quickly distinguish between companies that run a risk of being affected versus those that don't really need to worry. So it's good like that, Eric?
Eric Chocron
Yes, it's perfect for me. We're going with that.
Michael-Anthony Clement
Okay, let’s go. Eric, what type of company do you think will have to worry more about rates?
Eric Chocron
Yes, so in general, and that's a broad rule, I’d say, it would be startups that are in the hardware business. By hardware, we mean a physical product, whether it is technological or biophysical or pharmaceutical, or other related industries. All the products you can touch, those will be impacted. The tariffs will have an impact on the startups that are in these industries.
I'm thinking of some startups that I followed myself, as a father, that make toys for babies, children, that import materials or that sell in the United States. This kind of startup is going to be affected. But I'll let you add on with other types of startups that you have in mind, Mike, that you follow as well.
Michael-Anthony Clement
I'm going to do that, but just before that, I think it's good to clarify: how do tariffs work? They happen on U.S. side. If we have a product that we sell to Americans, let’s say a car part, it is on the American side where they will add a 25% premium. This amount will go to the government, it will be a source of revenue for them.
But what it does from the perspective of the American consumer is that the product that used to cost $100 now costs $125. So, it becomes a slightly less attractive product for someone who wants to use it in their supply chain or privately. It can have negative effects, repercussions, such as less desirability due to this price. On the other hand, the government wants to generate other types of...
Eric Chocron
Mike, just to clarify, you're talking about the consumer, but in fact for startups too, it's not just for consumer products, it's also the raw materials that will be affected. So we, Canada, sell a lot of wood to the United States. This means that the United States, which used Canadian wood to make tables or to make any equipment, including skis for example, if we have a ski company in the United States, they will be affected by the tariffs. In fact, all raw products will increase in price at the U.S. level.
And you only mention one side. But Canada's response is to put the tariffs on the American side as well. So the same thing is happening on our side. So if an American product was interesting in terms of raw materials for Canadians, that will increase the price. You know, I can think maybe of plastics, organic derivatives that come from the United States that could be affected if you're a startup in this field.
Michael-Anthony Clement
That's what tariff wars are all about, and it often ends up that both sides impose tariffs. So that comes down to the same thing, everything is more expensive. And yes, indeed, it's not just the consumers, it’s those who use what we export in their supply chain. It’s what I said earlier, it makes all their production costs higher.
That said, the question was which companies don't really need to care? And you said hardware, everything that is a physical product...
Eric Chocron
Will need to be concerned. In fact, the question was who will be affected. Hardware startups will be affected 100%, well at 25%. And the software, go ahead, I'll leave it to you...
Michael-Anthony Clement
I was going to say, that part is if you sell a service, especially digital software, if your service is all online, you don't really need to worry about the tariffs, because it's not going to be applied to those products. So for our startups at Axeo, we mainly have Software as a Service, B2B most of the time. Yes, we have hardware here and there, but you know, the vast majority don't need to worry about tariffs.
Eric Chocron
We can worry about the tariffs from the angle that it will affect the price of what will sell or what they will be able to put to use in the hands of customers, American customers. But also in terms of the culture, there is a movement that is happening right now, as you know, to buy local or buy Canadian. A movement that you yourself were aware was happening in 2020 during COVID, for another reason, not because of tariffs necessarily. More because of the microbes and in fact COVID itself.
This movement is in fact a movement that is appreciated by some startups. And that’s where we’re going to start a little bit of a debate between you and me, Michael, where maybe I can represent Team Canada, Team Quebec and you, you'll be able to be Team USA in saying if we should close the doors to our American customers or to potential American customers, if we don't have a U.S. market yet. Or am I sticking to my guts and getting into the buy Canadian, buy local movement as a SaaS startup that's incubated in Quebec or Canada in general? I’m opening the debate.
Michael-Anthony Clement
And that's a debate that, like... You linked it a little towards the tariffs, but I think it's broader than that. It's strategic. Do we want to target an international market from day one, particularly the United States, or do we want to launch a company with... you know, for Quebecers first of all, to test the market? My perspective, and then the side of the debate that I'm going to take, is we should think very, very big from day one. I think that targeting the American market gives several benefits.
And then I can speak from personal experience because I’m managing a startup in the United States entirely. No sales in Canada, 100% in the United States. It's a market that is at least ten times bigger. But more than that, buyers are willing to take risks on startups. You know, we don't ask ourselves as many questions about it, oh, what is it... you know, we're going to do a small-scale test like we often get in Canada. The budgets are bigger, I've already mentioned risk-taking, speed, we find that... I've tried on both sides of the river-- uh, the border and it's night and day. So my perspective is if you want to grow a startup from day one, first, you have to think very big.
The execution is going to be easier if you sell in the United States in some cases. There is more money, there is more commercial activity, risk-taking and all that. And the same goes for investment, but we're not necessarily talking about that. It's just a more developed, more dynamic market. So I'm advising a lot of founders these days: go to the United States on day one. Try to position yourself in this. Then you know, shoot for the fences.
Eric Chocron
I appreciate your argument. It's an argument that's been made all the time, in fact. It's not a new argument in the sense that it's a reality that Americans have a greater... I would say greater risk management at which they adopt new products, new innovations, new platforms. In my case, what I see at Axeo, what I see from the startups that we incubate, those from Quebec, is that there is a... And here, I use an English term, but there is a double down for the local market in the way they promote themselves and it gives positive responses.
And what does that mean? It's a message once again today, for the startups that are listening to us and the entrepreneurs who are listening to us, it means that indicating that you are a platform made in Quebec or in Canada, when in the Quebec or the Canadian market, that opens doors today. You get a more positive response to your product because of the tariffs. I would say because of the tariffs and because of the U.S. policy that is imposed on Canada. But something you mentioned in a separate discussion yesterday: is this a trend, is it a temporary movement possibly, Michael?
Michael-Anthony Clement
We saw it during COVID. That's my main argument, is that we saw this story play out the first time. That was in 2020. I know this because I've tried to... We tried with a group to create a solution to address local purchasing. Then we saw that it was really a trend caused by external pressures, and then it wasn't like a secular or intrinsic trend of the economy from the bottom up. It was more top-down, more imposed by the government. Then look, we saw that all the initiatives...
Eric Chocron
Well, the Panier bleu went bankrupt. In that reality, last year or the year before. The Quebec government's initiative went bankrupt.
Michael-Anthony Clement
There have been tons of them.
Eric Chocron
Exactly.
Michael-Anthony Clement
At the provincial, federal, municipal level. Then the intention is good, the intention is there. It encourages buying local, yes, but at the end of the day, what matters for the market... And what determines what will stay in the long term is good quality products, good prices. That's what makes the difference for consumers and integrators of these products.
Eric Chocron
I'm going to add another aspect that you forget in good quality, good price. Good value, actually. You're saying good value in general and I agree with you. On the other hand, good customer service... And that's where the message of being a local platform can come into play. Let me explain. Startups that have adopted the tagline made in Quebec or made in Canada are now able to say: I’ll answer you in French when you have a question, I answer you in your initial language.
They are able to say: I will answer you in your time zone, I will answer you within the next hour or the next few days. Versus someone in the United States... I talk about the United States in general. Because it's certain that if we look at India or China, other countries that have external conditions, but they don't fit into the tariffs, so just to compare it to the United States, someone who is in the United States, who has a platform, yes, maybe they will have a better quality-price ratio regarding a SaaS platform. But can he answer you in French? Not necessarily, depending on the size.
Michael-Anthony Clement
That's a good point. And I mean, that's a differentiator that is rather unique, especially if we're talking about service in the French language.
Eric Chocron
After sales or... Yes.
Michael-Anthony Clement
That's right. But in the end, I think you agree with me that after everything, all considered, all inclusive, it's really the value that will determine in the long term which product will be bought and the potential. So I don't really have anything else to add. I mean, it's something to think about. I think that both strategies have merits, that is to say that they start with a local approach, perhaps Quebec only or Canada only versus America.
And obviously, it depends a lot on the regulations, it depends on what sector you play in. But I maintain that if you do B2B SaaS, there are ten times more “B” in the United States.
Eric Chocron
No, it's true. The opportunity is always going to be bigger in the United States, no matter the movement, no matter what tariffs may or may not be imposed. That said, having a background in marketing and communication even before I was in the world of entrepreneurship or innovation, I feel charged with saying, look, I see three or four scenarios of startups we incubate that use this tagline of made in Quebec, made in Canada and that see doors opening for them more than ever.
So, is this an opportunity to take those next six months to four years, depending on when the rates dissipate and use that as a campaign, a marketing campaign to push yourself and open doors and open... and a Canadian market that was a little more, I would say, shattered or split with the Americans selling their platform to Canadians without any problem.
Michael-Anthony Clement
Indifferent.
Eric Chocron
Indifferent, exactly. So you agree with me too.
Michael-Anthony Clement
Yes, yes, yes. There is an opportunity to be seized. And you know, there are a couple of startups that we coach that come to mind but it would be to push that for the next few months. But don't base your entire business strategy on that necessarily, because it may just be a trend.
Eric Chocron
Exactly, it can be a hindrance, yes.
Michael-Anthony Clement
And Eric, that would be a good time, and then I could conclude on that... We spoke with a founder yesterday, who shared a little bit of his experience. So just for context, and I'm not going to share his name or his company, but we were doing a coaching session with him, the two of us, me and Eric. And it's been like four, five months of meeting with him every month.
And before the holidays, he had a hard time getting traction in Canada, he tried with lots of... He tried in a lot of ways. And we came back from the holidays, it was the first time we met him since. Beginning of March. Then he said: I started to take steps in the United States, I contacted a factory. Already, I'm also talking to the CFO. You know, I've gone through two rounds of signing NDAs and they're very interested, and it looks very positive. Wow! And this founder, he hadn't just been trying in Canada for only three or four months.
Eric Chocron
And it's in hardware, just to contextualize it. Not necessarily to say the industry he's in, but it's in the physical, the physical product.
Michael-Anthony Clement
Physical. But he was trying in Canada, he was trying... Even we opened a lot of doors in Canada. It comes down to the this. I think the founder summed it up for us a bit. He said: The culture is not as favourable in Canada to do business. Because even with our connections, we have opened doors, some leads have gone nowhere, even if it was promoted to help founders in certain channels.
There he goes to the United States, and within two months he is almost at a final signing to manufacture and potentially market his product. Wow! It's night and day. And in any case, it made us think. And that's kind of the reason why we chose this subject for the podcast. But think carefully about where you want to invest your marketing efforts. There are trade-offs on both sides, but think about it.
Eric Chocron
Then just, in relation to this example, and this is a great example. In hardware, how they get around the tariffs is that if they manufacture in the U.S. and sell in the U.S., the tariffs don’t affect them. So it's a way to get around them, technically. As a... You're still a Canadian company, but you've managed to find a partner in the United States who will manufacture or produce your solution or your product and you say to yourself: why am I... Why would I import this product now if it is not the most open market or environment for this new product? Might as well stay in the environment where I produce it and don't get affected by tariffs. Actually...
Michael-Anthony Clement
It's smart.
Eric Chocron
It's smart. He uses this lever a bit as... Now we could go into a political debate that you won't... and that could ruffle some people, but it’s like using the United States or the... It's a bit like he’s positioned as already being in the United States, as if he were in the 51st state while staying in Canada.
Michael-Anthony Clement
Don't go there. [Laughter]
Eric Chocron
No, I'm not going to go there, but in fact it's just... It's weird to say, but it's a way for him to get around and bring money back to Canada.
Michael-Anthony Clement
For him, for his business, it makes total sense. In any case, manufacturing and sales, the bigger market, easier to... So it makes a lot of sense.
Listen, we're not going to go any further today, there's a lot going on right now. We have shown you some facets of this equation. If you're a software business, that's fine. If you have hardware, try to bet on the buy local trend, and then sell in Canada because you're going to get a boost in the next few months. But don't count on it forever, because we've already seen that it's a trend that comes and goes just as quickly.
And should you launch your business with a U.S. market in mind or a Canadian market? That depends. Obviously, there are pros and cons to both. I tend to say: go for the big market, swing for the fences. The Americans are very easy to do business with, from personal experience, very very very very very easy. So, thank you all.
Eric Chocron
Perfect. That was the last word. Thank you very much.
Michael-Anthony Clement
Yes, we're going to do this every week, and let us know if there's a topic that we should cover that you have in mind.
Eric Chocron
See you. Thank you, Michael.
Michael-Anthony Clement
Goodbye. Thank you, Eric.
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