Canadian start-ups can emerge from venture capitalism’s lost decade by adopting an ethos aimed at building billion-dollar companies, says a Canadian venture capitalist based in Silicon Valley.
At the 2010 Winter Olympic Games in Vancouver, Canadian athletes achieved what most people thought impossible: Canada won more gold medals than any other country. This was no accident. Investment in our athletes to raise them to world-class levels began in the wake of the much less successful medal count at the 1988 Calgary Games and accelerated as the Vancouver Games approached so we could excel at a “home” Olympics. Setting out to “own the podium” in Vancouver was a distinct break from the traditional Canadian approach. It was no longer enough to participate. What mattered was having the ambition and commitment to win.
This mentality touched a chord in the 300,000 Canadian expats living in Silicon Valley, where the ethos in the start-up business community is all about cultivating winners. Since December 2009, we have run an organization called the C100, aimed at exploiting the advantage of having a large expat community in Silicon Valley. Mimicking successful Indian and Israeli organizations, every year the C100 has brought the 100 most talented Canadian entrepreneurs together with the 100 most successful Canadians in Silicon Valley, turning this diaspora of talent from a Canadian problem into an advantage. The premise is simply to remove all the barriers that exist to building world-class companies at home — capital, market access, talent access and support of global ambition — and to focus relentlessly on quality. The result has been some incredible successes that may lead to an “own the podium” approach to building a world-class innovation cluster in Canada.
Canada has lagged behind in private-sector research and innovation for over a decade. Since 2001, the Canadian venture capital industry has been in a downward spiral. Too much capital was invested too quickly at the top of the tech bubble, returning disastrously poor results. The result was an end to the conditions needed to seed and nurture start-ups. Angel investing and private-sector capital vanished for the better part of 10 years, a lost decade that produced few global successes and put Canada’s innovation ecosystem behind in innovation, learning, access to markets and breadth of experienced executives.
For 50 years, Bell Canada Enterprises (BCE) had been a cornerstone of Canadian innovation. Now BCE has come undone as a result of the Nortel bankruptcy. Canadian flagship innovation companies such as Nortel and RIM have failed or wilted under a combination of the brutal 2008 recession, poor management, low-cost Chinese competition and superior innovation from companies like Cisco and Apple.
It is hard to get over the rise and fall of industry leaders, because the innovation ecosystem, which requires risk capital to support entrepreneurs, is very weak. We know that private-sector investment in research is highly correlated with innovation, GDP growth and the creation of high-skill jobs. An innovative private sector is what every OECD and BRIC country aspires to, and countries like Israel, Sweden, Korea, the United States, India, China, Brazil, Russia and Germany have made it a cornerstone of their industrial policy for over 20 years.
Venture capital is part of that innovation mix, which is understood by Ottawa and the provinces. Currently, the domestic venture capital industry is heavily dependent on taxpayer contributions. This capital helps, but it also comes with numerous political constraints that, while they may be well-intended politically, have a different effect than would a relentless focus on producing winners. These political constraints drive an investment policy prone to focusing on the wrong factors, such as favouring a geographic region or picking the wrong managers, sectors and companies.
Venture capital is a very risky business, even when it is unencumbered by these adverse selection requirements. The US venture industry has had some spectacular successes, but as a whole it has not returned the capital it was entrusted with. The Canadian track record is far worse. It is not surprising that private capital is gun-shy. This is a business that has many losers and a very few big winners. Imposing political conditions on investment will only increase the probability of it being a business of losers and a few small winners. The returns from the taxpayer-backed investments of this decade, given the adverse selection bias, are unlikely to inspire the return of private capital.
So should Canada give up hope for domestic innovation in new industries and focus instead on our traditional dependencies of natural resources and automotive manufacturing?
We don’t believe so.
The telecom boom of the 1990s created a world-class innovation ecosystem in Canada that was the foundation for over 100,000 high-tech jobs located in Halifax, St. John, Quebec City, Montreal, Ottawa, Toronto, Waterloo, Calgary and Vancouver. This innovation cluster formed the basis for companies like Nortel, RIM, Newbridge Networks, CAE, CGI, Corel, Business Objects, Open Text, Mitel, PMC-Sierra and thousands of smaller companies. The collapse of the telecom boom, while traumatic, acted like a forest fire that left fertile ground for new growth.
Thanks to the C100 and changes the Canadian government made to the Income Tax Act, venture capital investment has recently been coming into Canada at an accelerated rate. In the last 18 months, KPMG has measured more than $500 million being invested into Canadian start-ups by all the top-tier US venture capitalists.
In the same period, there has been over $2.25 billion in acquisitions of Canadian companies by Salesforce, IBM, Ericson, Google and Zynga, including over $1 billion in acquisitions for high-tech companies Radian6 Technologies and Q1 Labs in Fredericton, New Brunswick, alone. These sales are promising in terms of the quality of the companies and the returns on invested capital. Canada needs billion-dollar-plus companies to anchor a healthy innovation ecosystem.
Canada has world-class assets, such as the University of Waterloo co-op engineering program, which is a top recruiting school for Microsoft, Google, Facebook and others. The feedback loop of the University of Waterloo has continued to accelerate over the last decade. The top entrepreneurs of Canada are talented, have world-class ambition and are beginning to build these businesses.
Canada has 4 of the top 150 companies in North America, according to Silicon Valley Bank. Although that number should be higher, it does show that Canada is capable of building leading companies. Here are some key elements that are needed for the Canadian innovation ecosystem:
- Replication of the University of Waterloo’s engineering co-op model;
- A scientific research and experimental development tax incentive program;
- Deeper integration of the Silicon Valley Canadian expat community into the innovation system;
- Commercial incubators like Founder Fuel, Grow Labs and Extreme Labs;
- Diligent concentration of capital on world-class managers and entrepreneurs to encourage the return of private capital;
- Celebration and promotion of our successes — go for gold!
The country needs billion-dollar-plus companies to anchor a healthy innovation ecosystem, and we need to create a “think big” culture to create them. In my 14 years in Silicon Valley, there has never been a better opportunity for Canadian companies to get on the global digital tech map. Canada has many advantages: its big expat community in Silicon Valley, its good immigration policies and the willingness of American venture capital firms to invest in Canada. Silicon Valley is scouting harder than ever for talent. Couple that with the “own the podium” mentality that worked so well in Vancouver in 2010, and the future of the Canadian innovation ecosystem will be far better than its recent past.