Canada is an innovative and entrepreneurial country, one where start-ups are encouraged, yet are we doing enough to foster a culture of innovation?
There is no doubt that Canada is an innovative and entrepreneurial country, one where start-ups are encouraged, the cost of doing business is low and the risks are mitigated through numerous government support programs. Even with such wonderful benefits, there is a sense of insecurity among Canadian entrepreneurs and innovators: are we doing enough? Can we do more as Canadians to foster a culture of innovation, and if so, what exactly can we do?
The need to encourage Canadian innovation has long been recognized by corporations and governments at all levels. The Scientific Research and Experimental Development (SR&ED) tax credit and programs like the Canadian Media Fund, which focus on funding risky projects and technologies, together with the Stephen Harper government’s Venture Capital Action Plan: these are programs that showcase recent policy and governmental initiatives.
But Canadians are hungry for more success stories. So how do we actually encourage success in the Canadian innovation landscape? As a start-up founder and member of the global start-up community, I present here several policy proposals to start to bridge the innovation gap.
Tax credits for market access and sales talent: start-up accelerators focused on market penetration and growth. The largest government R&D program that supports research and innovation in Canada today is the SR&ED tax credit. This credit serves as an incentive for companies to take risks in developing new technologies, particularly ones that might have a risk of failure. Numerous start-ups take advantage of this program, as do established companies.
While SR&ED is used prolifically, it has a singular focus on technology-focused companies and initiatives, with the goal of ultimately de-risking those ventures. However, a similar risk challenge exists with sales and marketing growth for Canadian companies and innovators.
Expanding beyond Canada into new markets (the United States, Europe, Asia, etc.) is fraught with risk: regulatory issues, import/export controls, finding relevant customers and so on. A program that enables companies to make investments in market expansion, particularly when expansion is risky, could provide many companies with the necessary capital infusions to take advantage of larger markets.
Most start-up accelerators focus on technology and management skill, teaching participants how to manage innovation and build products. Few actually focus on expanding sales and marketing capabilities, which is often just as difficult for start-ups wanting to scale up on the basis of their innovations.
Support the supporters: encourage those who want to support start-ups and innovation. According to Brad Feld, founder of TechStars (a start-up accelerator), a key element of building successful and innovative communities is their members giving back when they are successful. This can be done in a number of ways: mentorship, introductions to customers, starting new companies and, most importantly, investing in new start-ups and ventures. A great example of this approach is the “PayPal Mafia”: the first employees of the iconic online payments firm went on to found LinkedIn, YouTube, Yelp, Tesla Motors and more.
Success breeds success, but policy can help facilitate the process. A small but important win here is the lifetime capital gains exemption, which allows Canadian citizens to claim up to $800,000 as “tax-free” capital gains if the gains are derived from a Canadian corporation.
Similar policies can be enacted to further encourage investors, particularly large investment firms and venture capitalists, to take larger risks by reinvesting funds in Canada. A common proposal in this regard is to make capital gains reinvested as angel investments (e.g., those made to companies in their earliest stages) tax-free, or to have an exemption similar to the lifetime capital gains exemption but larger, allowing reinvested gains to also be tax-free.
Encourage subject-specific innovation hubs. When people discuss start-ups and innovation they often incorrectly assume that means digital start-ups—companies that work in the online or mobile app spaces. However, there are numerous other types of industries that represent opportunities for innovation. These include health care, virtual currencies, electrical storage, wearable technologies and more. Canada’s unique economy and landscape offer particular strengths in this regard: (1) world-class health care research institutions in Toronto, (2) vast energy resources in Alberta and (3) huge tracts of farmland in southern Ontario and the prairies.
Specialization in problem areas or technologies facilitates the process of innovation by encouraging companies to focus on a core set of valuable problems and challenges. The endowment that led to the Perimeter Institute in Waterloo is a wonderful example of how an effective use of funds could be used to further Canadian innovation. To ensure the funds are successfully used, however, we offer three tips:
- Ensure a clear focus. Whether it’s cosmology, cardiac health or transistors (arguably one of the main areas of focus that led to Silicon Valley), pick a topic that is a regional strength to build on existing successes and skill sets. Make use of existing research centres or universities, as well as preexisting industry clusters.
- Search for talent early and systematically. International science fairs, summer entrepreneurship programs (e.g., Shad Valley) and scholarship programs that provide funding for projects (such as Loran) all encourage young people to explore their interests and learn how to commercialize discoveries. More programs could be coordinated to find and vet talent—standardized testing, more competitions or even summer programs and grants—to encourage young people to innovate in the area of focus. Encouraging young innovators to involve themselves in these focused clusters or innovation hubs would ensure a long-term, generational focus on the problems those programs are trying to solve.
- Invest, invest and reinvest. Invest in the people, technologies and businesses that make up the sector. Do so not through grants, but rather through investment funds that are required to generate a long-term profit through successful investments and eventual divestitures. Such a focus on profit ensures scalable business models and entities.
By following the steps above, Canadian communities will encourage people of all ages to focus early on their commercial, innovative and exploratory activity. The proper funding programs and investment opportunities will exist, and in the long run, these will become positive feedback loops. Of course, it is also important to note that such community building is a long-term process—it takes years, if not decades, to generate this kind of positive feedback loop of innovation, investment, success and iteration.