May 2009

In It’s time to venture ahead on technology, Barry Reiter makes the distinction between research and development spending and venture spending,  venture spending being the money spent to actually commercialize the fruits of research and development.  Canada tends to fund research spending well but when it comes time to commercialize that research, we come up short.

Reiter says that promising Canadian companies are increasingly looking to US venture firms to capitalize their companies.  In fact, Reiter is dramatically understating the facts.  I am not aware of any new Canadian venture in the last five years that hasn’t had securing US financing as a goal.  The information technology industry has been consolidating around major players like Microsoft, Oracle, IBM, and Google for the last decade.  As that has happened, the local technology industry has become progressively “hollowed out”.  The most realistic exit for any Canadian venture is to a US firm, and most are structuring themselves for that eventuality, beginning with seeking funding from US financial sources. With our lower dollar, lower cost of living and generous tax incentives, Canadians start-ups are becoming innovation “sweat shops” for US buyers. 

Yesterday’s announcement of the creation of the new $300 million Tandem Expansion venture fund, backed by the Business Development Bank of Canada, is welcome.  However, when placed in the context of the $30 billion that the American government is to spend on technology projects, it’s clearly not enough.  Our venture industry is already sick.  $300 million funds the ventilator to keep the patient alive, but not a cure.  Moreover, government created funds do little to incent the private sector, where the bulk of the capital to finance new ventures should be found, to invest.

A much more ambitious approach is required.  Under the Innovation Nation banner, the Canadian Advanced Technology Association has proposed six steps. 

• Support companies requiring commercial financial and insurance services through loans, letters of credit, and loan guarantees. 
• Modernize the SRED program, which is the lifeblood that so many companies depend upon.
• Increase availability of venture funding through the creation of a venture capital investment tax credit.
• Increasing government investment in and support for technology commercialization through the IRAP and SADI programs.
• Incent government procurement processes to buy from Canadian tech companies.
• Provide stimulus for the development of green technologies in Canada. 

There have been signs of movement.

• Recent changes to the IRAP program have made more funding available more quickly.  Nevertheless, these changes fall far short of CATA’s calls to increase the annual maximum contribution agreement to $2 million.
• The SRED program has been radically streamlined.  New procedures will apparently result in claims being processed far more quickly than they have in the past.  However, the eligibility of many projects is now in question.

As oil prices rocketed up in recent years, Canadian prosperity seemed assured.  Demand for our natural resources drove a booming economy, and nobody paid much attention the beleaguered technology sector. It’s time to change that. Our future is in the creation of new industries – not in the continued depletion of our environment, or handouts to large scale 20th century manufacturing enterprises like the auto sector.

As welcome as a $300 million injection will be to struggling Canadian entrepreneurs, yesterday’s announcement was little more than emergency first aid.  We still have to get the patient to the hospital and operate. 

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