Canada needs better ways to transform early stage companies into future global champions

TORONTO—Writing in the Global Innovation Index 2020 report, Yaron Daniely of Israel’s aMoon Venture Fund, worries that his country—highlighted in the best-selling book, Start-Up Nation—may be suffering from the same problem that I see in Canada. While excellent at starting really smart new companies, Israel, like Canada, has much less success in turning these into locally owned multinationals with the potential to create thousands of domestic jobs. Instead, many of them are sold, while still small, to foreign multinationals who acquire the intellectual property and use it to strengthen operations and create jobs elsewhere. Israel, as Daniely points out, has more start-ups per capita than any other country, the highest number of engineers per capita (engineers typically turn inventions into innovations), and has the world’s second-largest research and development spending rate. “Yet, often overlooked, given this glowing data, is a less fortunate fact,” Daniely writes. “While we have excelled at launching game-changing start-ups and life-changing technologies, we have struggled to produce well-known multinational corporations.” Can Israel—and Canada—move beyond early stage innovation? Part of Israel’s problem is that it has developed an “exit culture," Daniely argues, with both early stage investors and start-up founders seeking to cash out early rather than building world-scale companies. This makes early investors and start-up founders wealthy, but doesn’t do much for the rest of society. Moreover, there is a downside to this approach. “In the long-run, a private sector consisting entirely of small technologically advanced companies chasing an exit strategy” is damaging because “it exports the country’s most valuable know-how and hinders the development of large local companies.” This, in effect, suppresses the number of jobs available within Israel—or Canada—and reduces the long-term tax payments needed to meet health, education, and other needs. Another challenge that Israel—and Canada—face comes from the growing number of innovation centres that foreign multinationals are establishing. I call these R&D branch plants, which tap the local talent pool and the publicly funded research base of local universities to develop intellectual property for foreign corporations. These multinationals, as Daniely points out, can offer higher pay and benefits than smaller local companies and so are well-positioned to win the battle for local talent. In Canada’s case, companies like Alphabet/Google, Facebook, Microsoft, Uber and others are—in addition to establishing R&D branch plants—hiring away our top professors and implanting themselves in our top research universities. This puts them in a strong position to learn of the best new researchers and early stage start-ups. With their deep pockets they are also buying up promising tech companies. Yet selling out to foreign multinationals seems to be encouraged by one of Canada’s leading incubator/accelerator centers for high-tech companies, MaRS, in Toronto. In its start-up toolkit, it extols the benefits of linking up with U.S. venture funds since these are a quick pathway to eventual sale. In fact, it boasts, of 183 Canadian tech start-ups sold over a five-year period, nearly 70 per cent were acquitted by U.S. corporations, including six by Google and three by Twitter. “U.S. companies are driving the majority of Canadian company exits,” the MaRS toolkit notes. It quotes Stephen Hurwitz of the Boston-based law firm Choate, Hill & Stewart, as stating that American venture capital firms love doing deals in Canada. “What they see is a combination of fabulous technology, high-quality and lower-priced talent, less competition for deals, and better pricing,” he says. One of the big challenges in Israel, says Daniely, is the lack of multi-billion-dollar funds that can provide the patient capital to grow a company into a large corporation with thousands of employees. Israeli pension funds, for example, “are more likely to invest in overseas real estate markets than they are to invest in a growth-stage Israeli company.” Much the same could be said of Canadian pension funds. Both countries need to do a much better job in growing their best tech companies into international champions. In Canada’s case, companies like Alphabet/Google, Facebook, Microsoft, Uber and others are—in addition to establishing R&D branch plants—hiring away our top professors and implanting themselves in our top research universities. Image courtesy of Pexels.com Corporate venture funds, known as “strategic investors," are playing a major role in helping to fund Israeli start-ups, and foreign multinationals are doing something similar in Canada. “While it is exciting and theoretically beneficial for young start-ups to evolve with strategic support, it also limits their independence and the likelihood of growing to become strong market players before they are absorbed by the strategic investor—which often happens too soon and at a significant valuation discount.” So what to do? How do we create an environment where entrepreneurs are less inclined to sell their start-ups and more energized by the possibility of building a successful Canadian tech multinational, such as Shopify, CAE, OpenText, Kinaxis or Constellation Software? Examples of success can encourage others. “Public-private partnerships can and should lead efforts to provide financial security and support to enable budding entrepreneurs to take big risks and stick with them,” Daniely argues, adding “additional measures could include models for encouraging young companies to collaborate more closely with each other and even merge to create more stable and scalable businesses.” While some may object to government involvement, the venture capital industry in Israel was launched by government and, in Canada, federal and provincial governments have accounted for much of the growth in venture capital. Public-private partnerships could generate more funds to provide long-term and patient growth capital. Canadian taxpayers invest billions of dollars to train tech talent, fund university-based scientific research and provide grants and tax incentives for early stage tech companies. But if much of this effort ends up simply expanding jobs, intellectual property and, consequently, tax revenues in other countries, what’s the benefit for Canada? If Canadians are to get a better return on their investment, then instead of simply providing seed corn for other countries, we need to find better ways to transform more of our early stage companies into future global champions. David Crane can be reached at crane@interlog.com. The Hill Times

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Canada needs better ways to transform early stage companies into future global champions

While excellent at starting really smart new companies, Israel, like Canada, has much less success in turning these into locally owned multinationals with the potential to create thousands of domestic jobs.

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