Will Canada Start Me Up Ever Get on Track?

n the constant quest to unlock the mysteries of innovation, it is inevitable thatI some eyes fall on Canada’s venture capital industry as a potential key to cracking the code. Canada’s venture capital industry has struggled for the last decade, delivering underwhelming returns to investors and failing to develop the kinds of new industries and world-beating companies that regularly come roaring out of Silicon Valley. So Ottawa’s decision earlier this year to inject $400 million of taxpayers’ money into the industry has been welcomed by some innovation observers. They see it as a good first step toward reversing that woeful record, a steroid shot to help Canadian start-ups join what new economy writer Chris Anderson calls the “industrializing of the do-it-yourself spirit.”

But Ottawa must take into account the evolving ministration’s American Jobs Act earlier this year, turn- nature of the global venture capital industry. Its cash ing “donors” into legal investors, though the regulatory will be chasing Canadian entrepreneurs who have details remain to be worked out. (A popular movement options. There are also new players and models for is afoot to bring crowd-funding to Canada, but for the financing start-ups. has entered the venture moment provincial regulations restrict it.) And despite capital game with Google Ventures, and in 2009 a track record of carnage in some places, other coun- super-angel investors and Ben tries continue to throw money at the start-up game, Horowitz built on their record of spotting leviathans trying to replicate Silicon Valley. like , Skype and to form Andreessen Ottawa’s money is part of its response to the federal Horowitz, raising $2.7 billion in three years. Both Expert Panel on Support to R&D, chaired by Tom Jen- these firms offer a deeper expertise in design, engi- kins, but the Conservative government has yet to fill neering, political connections and, in Google’s case, in details of how it will operate. The articles here tackle access to big data analytics, than the industry has some of the issues that must be addressed. What should been able to muster in the past. be the mix of public and private funds? Is $400 million Other investors are tapping the potential of enough to make a difference? Is public money doomed “crowd-funding,” a Web-based fundraising practice to pursue political goals, pumping up particular regions that allows start-ups to raise up to $1 million collec- or industries the market ignores? And above all, will tively from hundreds or thousands of small-investor more and better venture capital funding truly be that donations. Crowd-funding was part of the Obama ad- ticket to innovation?

34 OPTIONS POLITIQUES Illustration: iStock POLICY OPTIONS 35 OCTOBRE 2012 NOVEMBER 2012 POLICY venture capital The view from silicon valley: Winning big Chris Albinson OPTIONS Canadian start-ups can emerge from venture capitalism’s lost decade by adopting POLITIQUES an ethos aimed at building billion-dollar companies, says a Canadian venture capitalist based in Silicon Valley. Chris Albinson argues that Canadian entrepreneurs seeking investors should take advantage of the high number of Canadian expats working in the Valley, combining that Canadian expertise abroad with the skilled and educated talent at home into a formula for building big companies.

En adoptant une philosophie axée sur la création de sociétés multimilliardaires, de jeunes entreprises canadiennes pourraient naître d’une décennie perdue de capitalisme de risque, explique Chris Albinson, investisseur canadien en capital- risque établi dans la Silicon Valley. Il croit que les entrepreneurs canadiens en quête d’investisseurs devraient miser sur leurs nombreux compatriotes travaillant dans la Silicon Valley, qui conjuguent l’expertise canadienne à l’étranger et un talent fondé sur une formation et des compétences acquises au pays. Soit la combinaison idéale pour bâtir de très grandes entreprises.

t the 2010 Winter Olympic Games in Vancouver, Cana- lessly on quality. The result has been some incredible successes dian athletes achieved what most people thought im- that may lead to an “own the podium” approach to building a Apossible: Canada won more gold medals than any other world-class innovation cluster in Canada. country. This was no accident. Investment in our athletes to raise them to world-class levels began in the wake of the much anada has lagged behind in private-sector research and in- less successful medal count at the 1988 Calgary Games and ac- Cnovation for over a decade. Since 2001, the Canadian ven- celerated as the Vancouver Games approached so we could ex- ture capital industry has been in a downward spiral. Too much cel at a “home” Olympics. Setting out to “own the podium” in capital was invested too quickly at the top of the tech bubble, Vancouver was a distinct break from the traditional Canadian returning disastrously poor results. The result was an end to the approach. It was no longer enough to participate. What mat- conditions needed to seed and nurture start-ups. Angel invest- tered was having the ambition and commitment to win. ing and private-sector capital vanished for the better part of 10 This mentality touched a chord in the 300,000 Canadian years, a lost decade that produced few global successes and put expats living in Silicon Valley, where the ethos in the start-up Canada’s innovation ecosystem behind in innovation, learn- business community is all about cultivating winners. Since De- ing, access to markets and breadth of experienced executives. cember 2009, we have run an organization called the C100, For 50 years, Bell Canada Enterprises (BCE) had been a aimed at exploiting the advantage of having a large expat com- cornerstone of Canadian innovation. Now BCE has come un- munity in Silicon Valley. Mimicking successful Indian and Is- done as a result of the Nortel bankruptcy. Canadian flagship raeli organizations, every year the C100 has brought the 100 innovation companies such as Nortel and RIM have failed or most talented Canadian entrepreneurs together with the 100 wilted under a combination of the brutal 2008 recession, poor most successful Canadians in Silicon Valley, turning this dias- management, low-cost Chinese competition and superior in- pora of talent from a Canadian problem into an advantage. The novation from companies like Cisco and Apple. premise is simply to remove all the barriers that exist to building It is hard to get over the rise and fall of industry leaders, world-class companies at home — capital, market access, talent because the innovation ecosystem, which requires risk capital access and support of global ambition — and to focus relent- to support entrepreneurs, is very weak. We know that private- sector investment in research is highly correlated with innova- tion, GDP growth and the creation of high-skill jobs. An in- Chris Albinson is managing director of Founders Circle Capital novative private sector is what every OECD and BRIC country and is originally from Kingston, Ontario. He is a six-time aspires to, and countries like Israel, Sweden, Korea, the United entrepreneur based in Silicon Valley who has invested in 52 States, India, China, Brazil, Russia and Germany have made it a companies, 22 of them Canadian. cornerstone of their industrial policy for over 20 years.

POLICY OPTIONS 45 NOVEMBER 2012 Chris Albinson

Venture capital is part of that in- novation mix, which is understood by Ottawa and the provinces. Currently, the domestic venture capital industry is heavily dependent on taxpayer contribu- tions. This capital helps, but it also comes with numerous political constraints that, while they may be well-intended politi- cally, have a different effect than would a relentless focus on producing winners. These political constraints drive an in- vestment 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 busi- ness, even when it is unencumbered by Google Android statues on the Silicon Valley campus: these adverse selection requirements. The Canada needs billion dollar companies US venture industry has had some spec- Photo: shutterstock tacular successes, but as a whole it has not returned the capital it was entrusted with. cently been coming into Canada at an ac- • Replication of the University of Wa- The Canadian track record is far worse. celerated rate. In the last 18 months, KPMG terloo’s engineering co-op model; It is not surprising that private capital is has measured more than $500 million be- • A scientific research and experi- gun-shy. This is a business that has many ing invested into Canadian start-ups by all mental development tax incentive losers and a very few big winners. Impos- the top-tier US venture capitalists. program; ing political conditions on investment In the same period, there has been • Deeper integration of the Silicon will only increase the probability of it be- over $2.25 billion in acquisitions of Ca- Valley Canadian expat community ing a business of losers and a few small nadian companies by Salesforce, IBM, Er- into the innovation system; winners. The returns from the taxpayer- icson, Google and Zynga, including over • Commercial incubators like Founder backed investments of this decade, given $1 billion in acquisitions for high-tech Fuel, Grow Labs and Extreme Labs; the adverse selection bias, are unlikely to companies Radian6 Technologies and • Diligent concentration of capital inspire the return of private capital. Q1 Labs in Fredericton, New Brunswick, on world-class managers and en- So should Canada give up hope for alone. These sales are promising in terms trepreneurs to encourage the re- domestic innovation in new industries of the quality of the companies and turn of private capital; and focus instead on our traditional the returns on invested capital. Canada • Celebration and promotion of our dependencies of natural resources and needs billion-dollar-plus companies to successes — go for gold! automotive manufacturing? anchor a healthy innovation ecosystem. The country needs billion-dollar- We don’t believe so. Canada has world-class assets, such plus companies to anchor a healthy The telecom boom of the 1990s creat- as the University of Waterloo co-op en- innovation ecosystem, and we need to ed a world-class innovation ecosystem in gineering program, which is a top re- create a “think big” culture to create Canada that was the foundation for over cruiting school for Microsoft, Google, them. In my 14 years in Silicon Valley, 100,000 high-tech jobs located in Halifax, Facebook and others. The feedback loop there has never been a better opportu- St. John, Quebec City, Montreal, Ottawa, of the University of Waterloo has contin- nity for Canadian companies to get on Toronto, Waterloo, Calgary and Vancou- ued to accelerate over the last decade. The the global digital tech map. Canada has ver. This innovation cluster formed the top entrepreneurs of Canada are talented, many advantages: its big expat com- basis for companies like Nortel, RIM, New- have world-class ambition and are begin- munity in Silicon Valley, its good im- bridge Networks, CAE, CGI, Corel, Busi- ning to build these businesses. migration policies and the willingness ness Objects, Open Text, Mitel, PMC-Si- Canada has 4 of the top 150 com- of American venture capital firms to erra and thousands of smaller companies. panies in North America, according invest in Canada. Silicon Valley is scout- The collapse of the telecom boom, while to Silicon Valley Bank. Although that ing harder than ever for talent. Couple traumatic, acted like a forest fire that left number should be higher, it does show that with the “own the podium” men- fertile ground for new growth. that Canada is capable of building lead- tality that worked so well in Vancouver Thanks to the C100 and changes the ing companies. Here are some key el- in 2010, and the future of the Canadian Canadian government made to the Income ements that are needed for the Cana- innovation ecosystem will be far better Tax Act, venture capital investment has re- dian innovation ecosystem: than its recent past. n

46 OPTIONS POLITIQUES NOVEMBRE 2012