Wal van Lierop is President and CEO at Chrysalix Venture Capital.
Despite a decade of policies meant to foster entrepreneurship, Canada’s technology industry remains frail. The Conference Board gives Canada a “D” on innovation, ranking us 13th among 16 peer countries. They are surpassing Canada in income per capita, productivity and quality of social programs.
Canada is weak in innovation by choice. I’d like to discuss the reasons why and propose a solution.
Our federal and provincial governments ritually pledge funding for STEM education, startup tax credits and similar initiatives. These are nice gestures, but they alone cannot improve Canadian innovation. The disconnect is in our execution. Those funds have no clear aims.
Canada is still very much a resource-based economy. The predominance of traditional industries on the TSX testifies to that. If taxpayers want a return on investment, then innovation funding should maximize the value of our national assets.
Toward that end, I propose a strategic aim: Let’s become the No. 1 developer and exporter of sustainable industrial innovations. Let’s transform mining, hydrocarbons and forestry rather than abandon these sources of prosperity.
Government funds that stimulate industrial innovation achieve a double payout by increasing the value of our resources and by creating high-paying tech jobs. Let me put this in perspective: The revenue per employee in the B.C. mining sector was, according to a PwC study, more than $885,000 in 2015. Compare that with B.C.’s digital-media industry, which had less than $150,000 in revenue per employee.
Industrial technology could strengthen our largest resource-based companies and protect them from foreign takeovers. Yet only a tiny amount of government funding reaches technology companies focused on natural resources. It’s a disappointing mismatch – a result of unclear strategy and poor incentives.
Today, fund-of-fund managers oversee the government’s capital (i.e. your tax money). Many earn exceptional returns. Frequently, they finance the newest mobile apps in syndication with Silicon Valley firms. These capital-light innovations can turn a quick profit. However, fund-of-fund managers often shy away from capital-intensive innovations that take longer to commercialize and scale, let alone IPO. Thus, our tax money tends to stimulate innovation abroad rather than in Canada.
I don’t blame our government or fund-of-fund managers for investing outside Canada. The financial markets have little appetite for heavy-duty innovation in traditional industries. They don’t yet reward companies that embrace sustainability.
Look at NRG Energy from the United States, as an example. Their attempt to fill their portfolio with renewable energy sources ended with the ousting of the chief executive officer and tumbling stocks.
The dissonance between our strategic interests and use of capital has created a big-city “bubble” in Canada’s tech sector. While we have winners from time to time, we struggle to sustain Nortels and BlackBerries for the long haul. The few “successes” we do have are small and sold to U.S. owners.
Along that path to a U.S. buyout, we subsidize thousands of small companies with SR&ED tax deductions and similar programs. In the Vancouver area alone, these allow 9,000 startups to survive for 12 years or more. At least 8,000 of them would be cut off if a commercial venture capital firm were in charge. Some people call this practice “occupational therapy” or dub us the “too nice Canadian tech industry.” Others call it “political currency.”
Wouldn’t it make sense to prune actively and only strengthen startups that have good odds and the highest potential value for Canada?
One company scaled up can produce far more jobs and opportunities than dozens of small startups combined. Canada needs to produce Googles and Facebooks in the industrial sector. We’re unlikely to beat out Silicon Valley in search, advertising and social technology, but we can win in industries that accentuate our competitive advantages. We have resources that Northern California doesn’t have. The surest way to keep Canadian innovation at a “D” is to copy and fund the Silicon Valley model.
So, let’s be deliberate not just in our ideas but also in our execution. Let’s support innovations that maximize our inherent strengths and offer the greatest returns to our society. It’s time to pop the Canadian tech bubble and develop the right strategy for our future.