2009 January 19 | Alec Saunders

Saturday’s Globe and Mail ran a piece titled Canadian innovation which focused, in part, on the collapse of Nortel and what that means for entrepreneurship in Canada. Without a strong research focused market leader, like Nortel, as a breeding ground for new entrepreneurs, where do they come from?

The Globe identifies taxation, training and business practices as problems, noting that they are focused primarily on creating small players. There are tax breaks for R&D, for example, but not for commercialization. The Globe also riff’s on the theme of venture capital:

There is another constant theme – the shortage of homegrown venture capital. That is particularly noticeable now, as U.S. venture capitalists pull back to concentrate on their domestic markets.

Even in good times, U.S. venture capitalists like to keep close tabs on their Canadian firms they invest in, and encourage the opening of U.S. branch offices. Eventually, the Canadian firms move more and more operations south to satisfy investors.

In fact, for some time US investor haven’t been looking to Canada as a source of innovation. Deloitte & Touche’s 2008 Global Global Trends in Venture Capital survey highlights this, as they asked venture firms which countries had the best technology in various sectors. The story isn’t pretty for Canada.

In software, Canada is a distant 8th place secondary choice – this despite having one of the top ranked universities in the world for software engineers in the University of Waterloo. What this chart says is that Canada is a distant second choice for global investors. To me it says that they’d rather their companies hired Canadian engineers than invest in Canadian companies.

The story is similar in biopharmaceuticals, where Canada has a 7th place ranking.

And in telecommunications, the country that launched the worlds first communications satellites, and built its technology sector around communications networks doesn’t rank. Investors don’t think the technology here is sufficiently innovative. They look to places like Israel and Finland – punching far above their weight – and ignore Canada.

There are rays of hope in this report. 2% of investors felt that there might interesting innovation in Clean Tech in Canada. Mostly, however, this report tells us that investors feel that Canada has lost it’s innovation edge. The result is that investors aren’t flocking here to spend their dollars, and with the decline of the Canadian Venture Capital industry, there isn’t home grown capital to support Canadian entrepreneurs.

It’s a vicious cycle.

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Today’s Ottawa Citizen carries a column by Randall Denley titled Nortel’s failure a depressing blow. Denley asks if the people of Canada are good at anything but playing hockey, noting that:

Many of Canada’s best-known companies have failed to become world-class players and have fallen prey to better managed, more entrepreneurial foreign competitors

Denley also notes that

Successful and growing Canadian companies are critical to the future of our economy, but there is certainly no national focus on the issue. One need not own a crystal ball to understand that there are tremendous opportunities in nuclear power and in green energy technologies. The federal government is about to open your wallets and spend big, but most of what we hear about is an accelerated program to fix roads, sewers and bridges. Useful stuff, but not a future economic driver unless we are inventing new and better ways to do that work.

According to the NVCA, the American National Venture Capital Association, each of 2005 through 2008 has seen an annual average of $30 billion invested in American Venture Capital firms. In the third quarter of 2008, in the midst of the banking crisis, American Venture Capital funds still raised $8.1 billion and invested $7.1 billion. Over the past 35 years, the US Venture industry has invested more than $441 billion in over 57,000 companies. And while the total number of exits are down, in the United States venture backed firms are still being launched, grown and sold.

Canada has a population of 32 million people, about 10% the size of the US. In 2007, however (the last year for which the Canadian Venture Capital Association provides data for) just $1.2 billion of new venture funding was raised.

The picture is even worse, though, if you actually consider where the concentration of US venture funding is happening – in California. California, with 38 million people, has about 20% more population than Canada. The majority of US venture backed companies and venture capital investing is located in California, with over half of US venture money flowing to the state. Last year, somewhere between $12 and $15 billion was invested in California investment funds. Ontario, traditionally the heartland of Canadian technology investment, saw just $267 million invested.

It’s not hard to see why the Canadian technology sector is suffering. What’s perhaps most surprising is that Canadian entrepreneurs stay, continuing to persevere despite dramatically poor support from government and the financial community. For most of us, the best we can hope for is a quick exit to a larger, better financed American company.