Public Policy

Gof7-2013June06_DIL6202-1

14 Jan 2014

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The Group of Seven – Nation Building for the 21st Century

 

Last year, I signed up for a wonderfully ambitious initiative spearheaded by our Governor General, His Excellency David Johnston. I was invited to join a Group of Seven who will serve as catalysts to rolling out David Johnson’s vision of a Smart and Caring Nation built by a set of Smart and Caring Communities, ultimately aimed to be a major national initiative to commemorate Canada’s 150th birthday, or sesquicentennial, in 2017.

I was very much honoured to be asked and, although it is a dauntingly large not to mention a somewhat unspecified, goal, as a proud Canadian who knows first hand David Johnston’s unique ability to lead and motivate, I quickly agreed to this call. I’ll share more about this initiative in order to seek your input. Since no small group can be representative of our huge and diverse nation, it is important the we engage in much dialogue from Canadians of all ages and demographic profile, in order to achieve maximum impact and relevance.

As a way to start that conversation, I’d like to share some of my perspectives on Smart and Caring 2017.

David Johnston’s Smart and Caring Vision:

This whole project starts with a great foundation in our Governor General’s Smart and Caring vision for Canada. And here is why his singular leadership is so critical to this initiative.

David Johnston has a long track record of motivation. Back in 2006, as President of Unviersity of Waterloo, he challenged the already ambitious and successful business, community and government leaders in Waterloo Region to reach even higher. Issued in November 2006, his Ten Goals to Make Waterloo Region Canada’s Knowledge Capital are a blueprint that inspired and motivated real change and continue to have an impact today.

Similarly, on 1 October 2010 at his installation speech as Governor General in the Senate Chambers in Ottawa, David Johnston laid out his vision for nation building in Canada, challenging us to build  a Smart and Caring Nation:

“We are a Smart and Caring Nation.
A nation where all Canadians can grow their talents to the maximum.
A nation where all Canadians can succeed and contribute.
But there is much work to be done to fully achieve our vision of a Smart and Caring Nation. I believe it is essentialTo support families and children,
To reinforce learning and innovation, and
To encourage philanthropy and volunteerism.” 

To build on that vision as we near the sesquicentennial of Canada as a country in 2017, His Excellency has challenged Community Foundations of Canada and the growing network of 191 grass roots Community Foundations across our country. He wants them to lead a groundswell movement, in each and every community and nationally, for Smart and Caring 2017.

Canada – A History of Evolutionary Nation Building:

With that vision as inspiration, and as a passionately proud Canadian, here is my perspective on Canada as a nation. We were not formed by revolution, as is the case in many other countries like the USA or France. True to our character, our particular style of nation-hood opted instead for  evolution at a slow almost glacial pace. You might almost say that Canada pioneered nation building by committee. Specifically, a series of  meetings commencing with the Charlottetown Conference, 150 years ago in 1864, led  to Confederation on 1 July 1867.

I would argue that, as a nation, we were more defined by what we were not — ie. no tea parties or revolutions to overthrow a king. Instead, via peaceful change we enjoyed a tabula rasa upon which to architect a unique nation in those lands north of the growing United States of America. The process was slow. We remained essentially a colony with large parts of the country feeling more British than Canadian for many years. Consider how long it took us to have a non-British Governor General (Vincent Massey, 1952), our own flag (1965, replacing the Union Jack) or our own constitution (repatriated from Westminster in 1982).

Until the late 20th century, innumerable British colonial vestiges remained. Many people argue that Canadian heroism and sacrifices for the motherland in World War I, just 100 years ago, started the modern trend of a strengthening Canadian identity both internally and as a nation on the global stage.

Shortly after WWI, an influential group of painters, the original Group of Seven artists, created a truly Canadian vision of our country through direct contact with nature and our awe-inspiring landscape. Their work was notably distinct from the prevailing British styles of Turner, Constable and later British or European artistic styles.

Canada’s Centennial in 1967 marked a major inflection point for Canada. We had come through two world wars with a strong sense of national identity, supported by the burgeoning post war economy. Canada proudly led on the world stage with the likes UN Peacekeeping, Expo ’67 in Montréal and the uber cool federalist Prime Minister Pierre Elliot Trudeau.

Set right in the middle of the swinging 1960’s, our centennial celebrations in 1967 were a wonderful time to be alive. Besides Expo ’67 and the quaint historical “centennial” costumes people wore, today we are left with innumerable Centennial arenas, parkways, libraries, etc. These major investments in infrastructure are present with us today. I recall that time with pride and fondness.

CFC Smart and Caring Project:

Because the 21st Century seems so different than the previous, what kind of movement should honour Canada’s 150th birthday. It is a complex question, but I believe that if we can mobilize almost all communities across Canada into activities and projects inspired by the “Smart and Caring” mantra, like a national pot luck dinner we would effectively crowdsource some of national, and even, international significance.

Once again, we have a unique opportunity to make positive changes while setting a positive example for the world.

It is important to understand that, because each and every community is unique, communities must have the freedom to launch initiatives that directly suits their unique needs.  Nonetheless, with diverse initiatives considered collectively, I believe that, taken as a whole we can shape and inspire the Canada of the future.  We have so many advantages and the time is right to embark of nation building for the 21st century.

I would further hope that we would see collective action and partnership, both at the community level and national level, to increase the impact and effectiveness of the Smart and Caring 2017 initiatives. We must speak to and be meaningful to all Canadians:

  • young and old
  • recent immigrants or multi-generational Canadians
  • from east to west to the most northern reaches
  • Aboriginal, English, French or any other heritage

Because no group, no matter how large, can be sufficiently inclusive, that is why it is absolutely imperative that we, who have been honoured to help make this happen, hear from as many Canadians as possible.

Please weigh in here with comments or find other ways to get involved. And, I hope to provide more updates and opportunities to engage, participate, shape and drive Canada’s 150th birthday celebrations – Smart and Caring 2017.Please start by sharing your thoughts on what Smart and Caring 2017  means to you.

 

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CTV-2014-Ice-storm

1 Jan 2014

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Ice Storms Highlight Canada’s Obsolete Infrastructure

As we enter 2014, well into the 21st Century, one lesson for me from the year just past was that Canada seems to be hobbled with 19th century infrastructure. Let me explain.

During 2013, my home in Ontario was subject to not one, but two, different ice storms – in April and December. Both brought down large chunks of trees and both caused multi-day electrical power outages. In decades, this is the first time I can recall losing power for more than 1 day. To have this occur twice, with a combined 8 days of power outage, in a single year is even more striking.

After the first ice storm in April, I recall discussing this with a European colleague who was surprised by the very notion of a power outage. From a European perspective, he suggested the last power outage, of any length, that he could recall was 30 years ago. This started me thinking about why the difference.

In Canada, we have always prided ourselves on being one of the world’s richest countries, with modern infrastructure. However, much of our infrastructure was built for a different time and need. Much of it is really a testament to truly inventive Victorian design. It was indeed wonderful but no longer makes sense in the 21st Century. So, why indeed do we still have most of our electrical power lines above-ground on poles, while the rest of the (rich) world generally buries them? Why do our railways still rely on switches that freeze in winter and need to be operated by workers with propane torches? Why is a city like Toronto paralyzed by a major rainstorm?

Our homes, utilities, drainage and much more was built for a world predating our current period of rapid climate change. Surprisingly there remain in this world Luddites, who bizarrely continue to deny the fact of climate change. While we still have much to learn, on-the-ground results are here for all to see.

I gained significant insight into these issues when as a Director of Gore Mutual Insurance Company, a leading property insurer, I attended an enlightening presentation by the poignantly named Institute for Catastrophic Loss Reduction (ICLR). This industry-funded organization is a world leader, collaborating globally in research and advocacy around the causes and solutions for large scale insurance losses, known in industry jargon as a Catastrophe or even a Cat.

ICLR gathers data and works with many academic researchers to increase both understanding and awareness of what causes insurance losses. The data shows that the last ten years have seen huge increases in the number of severity of large scale losses, particularly from damaging wind, water and ice events, which are all significantly driven by climate change.

For example, with increased wind events (typically tornadoes in this area of Ontario), a call for more homes to be built with windows structurally rated to withstand 200 mph wind events makes sense.

Furthermore, climate change means that rainfall in 1 hour can equal what used to occur over 24 hours or more, with flash floods ensuing. In such an environment, instead of our historic practice of getting rid of water as quickly as possible, it is better to slow it down and buffer the potential for flash flooding.

For me, the power outages are a metaphor for how we in Canadian society need to look at our infrastructure with a sense of long term vision. We really need to invest to upgrade utilities, transportation and drainage for the needs of the 21st century. This in no way takes away from the heroic efforts of Hydro workers over the holiday season. I’m simply surprised that attention has never been focused on the root cause and long term prevention.

In an era of political infighting and embarrassing city Mayors, I’m wondering where the leadership necessary to achieve this will come from?

A GO Train is stranded on flooded tracks in Toronto on Monday, July 8, 2013. THE CANADIAN PRESS/

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Randall_Book1-1

29 Oct 2012

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Tech Terroir

In the world of wine, the concept of terroir describes a centuries long process in which the climate, soil, grape varieties and dedicated vintners, symbiotically develop a unique “sense of place” for a wine region. A favourite of mine, the garrulous  and quintessential Californian vintner, Randall Grahm, while trying to establish the old World notion of terroir in California postulates that it is a long term proposition and can take centuries to develop.

As both a wine lover and serial tech entrepreneur, I firmly believe that building a tech cluster is similarly a very long term process. Ironically, the epicentre of tech clusters is in California. The Silicon Valley, which got its start in the 1950s remains the major cluster worldwide as “… no other place as yet has the Valley’s scale and resilience.”

Although I started my tech startup career in the US, it was in the Canada’s leading tech cluster of Waterloo where I built major companies and was one person who got that cluster started. Like Silicon Valley’s origins in Stanford University, the Waterloo cluster was initially fuelled by University of Waterloo. Over time, a combination of executive and programming talent, capital and professional services capabilites led to the current state of almost 1000 technology companies. By contrast to Silicon Valley, Waterloo is a must younger cluster, having started just over 25 years ago compared to the 60 years of Silicon Valley. It continues to mature around some key ingredients such as global strategic marketing capabilities and sufficient capital to fund on a globally competitive basis.  Experienced people may well be the most important ingredient in a cluster’s maturation.

Further, I feel that all who have been fortunate to build wealth and experience in business, owe an obligation to “pay it forward” to the next generation. My own contributions include significant startup mentoring, Board and strategic roles in organizations like Communitech and Innovation Guelph, and for the last 3 years a Board role and chairing Selection Committee for the Golden Triangle AngelNet (GTAN). In just 3 years, GTAN has grown to about 150 paid accredited investor members who bring a wealth of experience to the 25 funding transactions to date. And, it goes without saying, that many of those financings might not have happened without GTAN having emerged to fill a significant funding gap as VC’s became largely extinct. Acting as a superangel to syndicate angel network deals is a tremendously labour intensive exercise, but one that I and others believe will pay off in the long term economic prosperity of our region.

I firmly believe knowledge-based companies to be the key ingredient of our future economic prosperity, so such company-building competence is mission critical for our region, province, country and globally. As globalization occurs, we see more and more regions clambering to reap the riches of the innovative, tech startup world.

To that end, at Verdexus, we have always taken a transatlantic perspective, primarily to have a more global window on building companies that can achieve world leadership in their chosen businesses. Over the years, I’ve worked with startups across the United States and Europe in the dominant clusters such as Boston, Chicago, Silicon Valley, London, Munich, Berlin, Stockholm and more. To round out my experience, over the last few years, I’ve sampled some key emerging regions by volunteering as an expert judge in places as diverse as Brussels area, Warsaw and Torino. A week ago, I had the opportunity to judge startups associated with the European Space Agency in Toulouse France as well as in Istanbul, Turkey. The latter Istanbul venue, EU Venture Forum was jointly sponsored by EUREKA (the pan-European research and development funding and coordination organization) and Europe Unlimited from Brussels. Collectively, these more than a dozen regional events ultimately feed into a pan-European venture prize in Berlin in December.

It has been very instructive to visit various clusters. This grassroots view, from the perspective of startups, reveals much in common globally but also a few surprises. Based solely on interacting with local startups, on a global perspective, it is clear that culture and experience vary greatly across various Euroopean regions. For example, I was pleasantly surprised that Warsaw had some of the smartest and most sophisticated business startups I’d seen anywhere. And, remember, they are pitching in English which is not their native language. Conversely, the cluster around Torino appeared to have a long way to go before its startups would begin to measure up globally.

Pitching in Istanbul

Similarly, the startups I saw in Istanbul were impressive. Some companies, following a model also common to the emerging markets of Central and Eastern Europe, were essentially cloning an existing business model into the 80 million strong Turkish market. More significantly  others were clearly building globally strong technology startups. One pleasant surprise was that, of the eight companies that I coached the day before the forum, three had women CEOs. This was a surprise for Turkey,  but sadly women-led companies remain all to rare in Canada

The calibre of engineering and basic technology talent was very impressive. That said, it was also clear that the level of support ecosystem around these startups is very limited – at least compared to what we see here in North America. One direct challenge was that in Europe companies appear to receive generous R&D funding which seems to encourage more of an engineering mentality than a market-driven one. In essence, projects stay too long as “science projects” and the culture and skills to get projects to market seem to suffer as a result. Although this is a generalization, there are many exceptions.

In the area of capital, the meltdown in Venture Capital A Round investments is about 3-4 years behind what already occurred in Canada. One particularly European challenge is that more and more of the VC funds have moved their offices and focus from regional markets to London, meaning that companies in the regions often have less direct access to capital. Conversely, the growing role of Angel Networks and Superangels to fill the gap is still in its infancy in Europe. I suspect that will change over the next two or three years. Venture funders like to either be close (1 hour travel) to their portfolio companies or, at the very least, to have a local investor who can “provide adult supervision”. Increasingly, experienced serial entrepreneurs will be called on to fill that key local role as Angels and Superangels. It is clear that the notion of Tim Draper going to Estonia and finding Skype is definitely the exception rather than the rule.

And that takes me right back to the notion of “tech terroir”. As global innovation increases, and people around the world vie to build ever stronger tech startup ecosystems, it is the dedicates entrepreneurs in the sector who magically nurture these maturing ecosystems. As one of the entrepreneurs that I coached mentioned, she wants to:

“make innovation easier in Turkey and to make life easier for entrepreneurs”

So, in addition to building a great global business, she also takes time to help move the needle of her local ecosystem forward. It’s a very encouraging sign that continues to inspire me as I engage with the new globalized world of tech startups.

 

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3 Aug 2012

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[Book Review]: The Idea Factory

The idea factory by Jon Gernter

Published by Penguin Press
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A marvellous exploration of a research and innovation powerhouse that, even viewed from this age of innovation, surprisingly anticipated many approaches we think of as modern breakthroughs.
I’ve long admired Bell Labs and feel that many of its researchers and innovations interacted with an impacting my own career. While in University, the notion of working with or at Bell Labs was the highest aspiration for top thinkers in many fields. The Idea Factory is an engaging read and showed me how limited my understanding of that institution really was.

First of all, from the 1920s to the 1980s, it was way ahead of its time as an agent of innovation. The approaches were brilliant and could be applied today, including the notion of building architecture and organization structures to encourage interdisciplinary collaboration. Breaking down “knowledge silos” was definitely countercultural in a century known for specialization.

Secondly, the sheer number of transformational inventions, including the laser, transistor, fibre optics, satellite communications, the cellular mobile network, integrated circuits and the notion of information as digital that came from a single institution is both surprising and would be impossible in today’s world. Sadly, in the modern competitive marketplace, there is likely no room for a monolithic regulated monopoly, as was AT&T, to support such a single engine of innovation and basic research.

My primary connection with Bell Labs was through computer science with innovations such as UNIX and C Programming Language. The historical context this book outlines shows how surprising this is because AT&T was, by regulatory decree, precluded from entering the computer industry. That said, it is ironic that most of the inventions of Bell Labs, collectively contrived to make telecommunications as a separate industry obsolete. Instead, as predicted as early as 1948 by the remarkable information age seer, Claude Shannon, much of the modern economy has by transformed by our current digital age of networked and pervasive computing.

Lastly, Gertner explores the culture of those who drove innovation. Often eccentric, and to outsiders perhaps impossible or unemployable individuals, had the sheer force of will and brainpower to achieve breakthroughs that others either hadn’t even considered or thought impossible. Given my own small town origins, the deliberate strategy of finding these small town prodigies to populate the largest research-oriented brain trust in the world resonated.

All too often, societies believe that they are the first to master innovation. Sometimes we should stop and consider successful strategies from the past. Far from being solely a modern preoccupation, innovation has always been a hallmark of human advancement. Yet, with no clear place for a lucrative and regulated monopoly to fund pure research, where will the fundamental research of the future originate?

The book cites John Mayo, a former Bell Labs chief,

“Bell Labs substantial innovations, account for a large fraction of the jobs in this country and around the world”

In a world driven by global markets and the quarterly thinking of Wall Street, we really do need to consider how our next leap of fundamental research will be unleashed. John Pierce, another Bell Labs chief summarized the “Bell Labs formula” in four main points:

“A technically competent management all the way to the top.
Researchers who didn’t have to raise funds.
Research on a topic or system could be, and was, supported for years.
Research could be terminated without damning the researcher.”

Beyond learning from the wisdom of the leading research institution, where will we find the vision and resources to enable innovation on such a transformational scale? Beyond the Venture Capital and now Angel funded technology startup ecosystem, perhaps exemplars like Mike Lazaridis‘s pioneering Perimeter Institute of Theoretical Physics will chart a course for the 21st century.

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momoto-mars

2 Oct 2009

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MobileMondayToronto – Striving for Canadian Leadership in Global Mobile

Through the 1960’s, 1970’s and into the early 1980’s, Canada leveraged many of its best minds to develop technology solutions that span the great distances and empty spaces in our vast country to position Canada as a world leader in Telecommunications. Today, numerous examples from world leading companies like Blackberry to startups like Viigo or Iotum continue to show world leadership.

Notwithstanding these points of strength,  in the early 21st Century, there are surprising gaps in our global ability to compete, given our early leadership. The causes are many from regulation, standards, finance and even investment decisions of major carrier players. While there are individual success stories, like the Blackberry, there are also numerous structural issues that dampen our natural competitive position in this all important industry.

We’ve assembled a diverse team of some of the top players shaping our mobile futureo help us understand Canada’s position in the global mobile industry, where the opportunities lie and changes in policy and investment that might allow us to maximize our footprint in the future mobile industry:

  • Bob FerchatBob Ferchat – a Canadian mobile pioneer at the epicentre of the aforementioned world class Canadian telecom and mobile industry. Bob was  CEO of Nortel Networks and later of Bell Mobility. Now retired, he has maintained a passion to continue Canadian mobile leadership. Most notably, a few months ago, he led a group of investors that tried to buy back Nortel to keep that treasure trove of technology intellectual property in Canadian hands Ottawa Citizen – Fight for Nortel Wireless in Full Swing.
  • Karna GuptaKarna Gupta – From an early career in various senior executive positions at Bell Canada, Karna has held numerous and diverse C-level positions in global mobile and enterprise software companies, including Comverse, Sitraka Mobile and OSS Solutions. Most recently, he was CEO of Certicom through their recent acquisition by RIM, that also included fighting a hostile takeover bid. Karna brings a great international perspective from a diverse set of predominantly software-based initiatives.
  • Steven WoodsSteven Woods – Currently heading up Google’s Waterloo site, which has a significant mobile product mandate including search and GMail, Steve recently returned to Canada from a decade in the Silicon Valley. He was founder of NeoEdge Networks and co-founder of Quack.com (acquired by AOL), both Silicon Valley-Ontario operations. It would appear that Steve and his team are in the centre of the new web-based mobile world that Google is helping to shape.

There is a huge opportunity for Canadian companies, and our entire economy, but to seize that opportunity good policy and well informed decision makers is important. To  that end, we’ll answer questions about the mobile tech company ecosystem like:

  • How did we get where we we are today?
  • How do we compare with the world?
  • What policies and initiatives might improve our competitive position?
  • What are some of the major gaps that Canada might be well positioned to fill?

Although, with the generous assistance of sponsors, this is a free event, you’ll need to register and it may well sell out. More information and the registration can be found here: Mobile Monday Toronto @ MaRS – Cnadian Leadership in Mobile and Communications.

I’d be very interested if people would comment on any topics or issues you wish to have raised. Even better, come out and ask those questions yourself. It promises to be an insightful evening.

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berlin-wall

21 Mar 2009

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Meeting Productivity: Central Planning Versus the Market

The 20th Century was defined by an ill-fated search for a better world, inspired by late 19th Century, Victorian thinking. The irony, then, is that the 20th Century turned out to be probably the most destructive in human history, based on often misguided applications of powerful new technologies.

If you define a utopian society as one where governments plan to have zero unemployment, stable economic growth and high personal well being, how have we done in planning for this world? Up to now, in a word, wretchedly.

A personal defining moment was when I journeyed behind the Berlin Wall to East Berlin in 1989. This was just before the Soviet Bloc, along with its vassal state the German Democratic Republic, spectacularly imploded on 9 November, 1989. While I had previously sympathized with the notion that a socialist government could plan to make the world a better place, the dismal comparison of the East and West that I saw then graphically disabused me, forever, of that notion. East Berlin was a drab, grey, unpainted city in which even the prominent public buildings still had 45 year old bullet holes from World War II.

Communism, coupled with its less extreme relation socialism, and fascism were the defining, centrally planned ideologies of the 20th Century. Then, everything was planned and and organized from the top down, from prime time television, to the Stalinist 5 year plan to the Nazi Thousand Year Reich. With that hopeless track record, will we ever figure out how to move closer to a utopian reality?

Today I will explore some of the innovations in our understanding that might lead to that end.The book Infotopia, by Cass R. Sunstein is a truly outstanding study of the power of democracy in decision making for our internet age. Rather counterintuitively, this insightful book presents a well-researched argument that in group decision making, Deliberation (or central planning) almost always produces inferior results to Democracy (the wisdom of many people, driven by markets, to reach the truth).

Some key insights are:

  • The Condorcet Jury Theorem, which says “that the probability of a correct answer by a majority of the group increases toward 100 per cent as the size of the group increases.”
  • Two key sources of failure by Deliberating groups are informational influences and social pressures, which might be paraphrased as browbeating and peer pressure, which among other things, tend to amplify, rather than remove, errors.
  • Polarization is a particular risk of digital media in which political (or other) views tend to be reinforced by people filtering out any information which contradicts their existing world view. Thus, rather than reaching consensus, digital technologies can make the right wingers more right wing and left wingers more left wing, leaving little middle ground.
  • Prediction Markets are a new paradigm which harness price signals of the market to help in decision making, based on the insight that people tend to make better decisions when price signals are involved.
  • The Web 2.0 trends of Wikis, Blog, and Open Source Software all provide great evidence for this new paradigm of the wisdom of the crowd which Sunstein has so ably analyzed.

This book should be mandatory reading for politicians, business leaders and anyone wanting to shape the world of the 21st Century. From how to conduct better meetings to how to make the world a better place, Infotopia provides a solid foundation of how to harness better decision making for the future.

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canadian-businessvc

15 Mar 2009

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Who Killed Canadian Venture Capital? A Peculiarly Canadian Implosion

“Fortes fortuna adiuvat” – “Fortune favours the bold” – Latin proverb

Where's the Venture Capital: Canadian Business

The current economic meltdown has unleashed brutal forces acting on all aspects of the business world, but certainly innovative startups in fields like software, web, wireless, green technologies and life sciences are at grave risk. In Canada, our startups have generally been world class innovators, but severely underfunded when benchmarked against US and leading European countries.

Not only has the credit crunch forced most Angel Investors to the sidelines, but the supply of Venture Capital (VC) in Canada has contracted almost to the vanishing point.

Tomorrow’s Canadian Business documents this very well in VC Financing: Cold Realities.

Having started my first software company in the mid-1980’s, I am well aware that although VC money was available and well established in the Silicon Valley, VC money for knowledge-based startups such as mine was then nonexistent in Canada. Through the 1990’s, however, Canada started to build a cadre of new funds that showed early promise of replicating a US style VC funding ecosystem

In the early millennium when Verdexus investigated raising a institutional fund to fill a gap in the Canadian market with our “hands on” model and accessing global capital sources. It gave our partners a chance to look to VC best practices on a global basis and figure out how to apply to the Canadian context. While we didn’t proceed at that time, I’ve had the good fortune to work on projects with top VCs from the US and several European countries, giving me a global perspective on how Canadian Venture Capital measures up.

Sadly, I believe that the 2000/2001 tech bubble, or dot com meltdown, stopped the maturation of our VC industry in its tracks, a body blow from which the industry has never recovered. It is to this time that the root causes of our current VC meltdown can be traced. A few of the main reasons holding the VC industry back can be summarized as follows:

  1. Impact of the Labour Sponsored Investment Fund model on our VC ecosystem.
  2. Lack of balance between financial and operational skills: The Banker Effect.
  3. Lack of International Funding discipline in our VC industry.

I will explore each of these causes in turn.

1. Labour Sponsored Investment Funds

Labour Sponsored Investment Funds (LSIFs, also known as Retail Venture Capital Funds), have been a particular sore spot, as a 2005 Globe and Mail Report on Business article “Labour-sponsored Love Lost” points out. Considered good public policy when launched in the late 1980’s, both Federal and Provincial governments gave individual (retail) investors a significant tax incentive (up to 35%)  to invest up to $5 000 with a minimum 8 year hold period. In essence, many funds totalling  hundreds of millions of dollars were raised by firms like VenGrowth, Covington and Growthworks as were numerous very small funds.

Lacking the inherent financial discipline imposed by typical venture capital structures, in which several “funds of funds” (legally dsignated as Limited Partners, or LPs) invest in a fund managed by a General Partner (or GP). The LPs in this sense have much leverage, not just in choosing their GPs, but also in ongoing oversight, not to mention the choice to re-invest in the next fund raised by the GPs. This LP/GP structure is the model employed world wide and has generally stood the test of time.

The thousands and thousands of retail investors in a typical LSIF exert no such control and hence we’ve seen Management Expense Ratios (MERs) as high as 4-6% versus the 2% private equity industry norm and Carried Interest (the portion of the investment gains shared by the fund) as high as 30% versus the 20% norm.

More importantly, although at its peak, more than half of Canadian VC money was in LSIF funds, returns were, as Doug Steiner says, “lousy.” How lousy? Studies show that average fund returns, also called Internal Rate of Return (IRR), are negative. The best fund appears to have produced a measly 1% IRR. In the US, funds aim for 30% and there is a long term track record of many funds in the 18-20% range.

Undoubtedly, individual investors didn’t have a lot at stake with those huge tax credits and it can be argued that LSIFs encouraged loads of job creation in the all important knowledge economy. All of that is true. My main concern is that the attraction of the LSIF model impaired the formation of a more mature VC ecosystem based on the normal LP/GP model mentioned above.

2. The Banker Effect

Credit: AIAlex.comCredit: AIAlex.com

In the US, both in California’s Silicon Valley and in the Route 128 area around Boston, the VC industry has always been populated by a healthy mix of the financially oriented fund managers coupled with serial entrepreneurs who have founded and build technology startups. The composition of the partners at Canadian VC funds has always been different than this international norm, having many more banker types than operators. The experiences Jonathan Geist relates in the Canadian Business article are symptomatic of this difference. Too much focus on the numbers is like looking in the rear view mirror when startups need to be focused on the future – building market share, refining partnerships and developing strong go-to-market execution.

Again, I believe that this gap can be attributed to us being a less mature VC and startup ecosystem. In the late 1980’s and 1990’s finding seasoned technology startup operators would have been almost impossible. Most were still building their first startup. However, had things unfolded as they should have, many of the startup founders from the 1980’s and 1990’s should now be partners at Canadian VC firms. That didn’t happen because the dot com meltdown appeared to remove the ability to the industry to make changes or take risks. Ironically, this exacerbated an already more conservative VC culture here in Canada, and this more risk averse approach actually contributed to the lower IRRs seen when Canadian VCs are compared to their US or European peers.

3. Lack of International Money

The fledgling LP/GP VC industry of the 1990’s was funded by a relatively small ecosystem of LPs, such as OMERs, Caisse de Depot, Teachers, CPP, BDC, etc. Thus every VC fund was essentially not differentiated by its LP composition. In essence, a closed group of Canadian fund of funds all were chasing this same relatively small asset class. Furthermore, the relaxation of Canadian content rules coupled with these aforementioned low IRRs, sent the Canadian LPs looking elsewhere (mostly abroad).

What is the right recipe to change this situation? Quite simply, access to more global sources of money. The thousands of US, European and Gulf institutional fund of funds investors have largely ignored investments in Canadian VC funds. This is partially because of the chicken and egg of lower IRR returns. But, more fundamentally, it is primarily because the Canadian startup and VC ecosystem had low visibility to these international funds. Several years ago, I spoke to a large €6 billion LP fund at EVCA in Barcelona, that had investments in 40 tier 1 VC firms in each of the US and Europe. Ironically, that LP’s sense of the Canadian technology scene was limted to Nortel. Since Nortel hasn’t really been a star for many years. Clearly we have a long way to go market our great technology stories to the world.

The Way Forward

Going Out of BusinessUnlike this sign, I don’t want to end this piece on a note of doom and gloom. Nor do I want to leave the impression that there aren’t very talented people in the Canadian VC industry. Nothing could be further from the truth – our long term VC gap arises from long term structural challenges, such as a lack of discipline as imposed by global LPs and not having reached the proper banker/operator mix. There are other factors, including the small population and large geography unique to Canada, but all can be and should be overcome with the proper model.

We already have a few outliers in our funding ecosystem. Being optimistic and entrepreneurial, I’m convinced that many talented individuals will find ways to, little by little, to invent and rebuild a healthy network of startup financing alternatives. As I’ve argued in other blog posts, there is a role for governments. However, that role isn’t to pick winners or to enter the VC business directly, rather it is to be a catalyst to the process by streamlining (securities) regulation and taxation.

As a stakeholder in the success of knowledge-based startups, what do you think?

Please share your comments.

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ontariocreativeage

15 Feb 2009

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Getting Creative – “Yes We Can” or “Mind the Gap”?

In today’s challenging economic times, it is extra important for governments, academics and individuals to plan our future economic prosperity. Thus, it is timely that Richard Florida and Roger Martin from the Martin Prosperity Institute, Rotman School of Management, University of Toronto this month published Ontario in the Creative Age, which provides a detailed future-oriented policy blueprint.

It sets a policy agenda to help us unleash our full potential in the Twenty-first Century where economic success is increasingly coming from creatively-oriented enterprise versus our traditional strength in routine physical and routine service occupations. The report is backed by research which highlights both our existing strengths and weaknesses including those in education, income and even the gap in our creative/routine job mix compared to our peers. Starting from the base of today, the agenda suggests four main focus areas to drive future prosperity:

  • “Harness the creative potential of Ontarians”, including businesses’ role in changing job mix, education and even marketing of our capabilities,
  • “Broaden our talent  base”, focused on  significant increases to our post secondary educational levels and broadening managerial capabilities,
  • “Establish new social safety nets”, including early childhood development, better utilization our key immigrant resource and retraining of older workers from declining occupational groups, and
  • “Build province-wide geographic advantage” which strengthens connections (physical and otherwise) within and beyond the mega-region spanning Waterloo-Toronto-Ottawa-Hamilton-Niagara-Rochester.

Having read this paper, it is encouraging to see such a forward thinking analysis that will certainly drive future governmental, business and economic decision and policy making. With that in mind, and being of an optimistic “yes we can” mentality, I was, however, struck by how very little attention was paid to the biggest gap of all — Funding this agenda.

Without proper funding, our ability to transform our economy in these wise and necessary ways, will go unfulfilled. I’ve written about this “funding gap” numerous times and from different perspectives:

I’m certainly not alone in this concern. Many others in positions of thought leadership have raised the issue of funding of investment, some with very specific policy proposals and others just highlighting the gap:

  • communitech-logoAvvey Peters from Waterloo’s Communitech blogged about Magic Words:  Economic Stimulus right before the Canada’s Januaray federal budget, and her post contains some very specific policy measures.
  • MaRS Discovery District - Where Great Minds MeetDr. Ilse Treurnicht, CEO of MaRS Discovery District, a leading Ontario driver of research and commercialization, provided a well-researched analysis of the major institutional and venture funding gaps of Canada compared to other jurisdictions in their latest newsletter.
  • Calliflower - A fresh approach to business conversationsAlec Saunders, CEO of one of Canada’s most promising web/mobile startups, Iotum, addressed the tech startup funding gap in the context of the proposed federal stimulus in his blog post Tech in Canada: Can We Do More Than Play Hockey? Also, a number of international discussions of technology competitiveness have been hosted on their innovative Calliflower service.
  • Peter Childs of BarCamp Ottawa & StartupOttawaPeter Childs, an Ottawa social media strategist and tech luminary, has laid out a framework Tech in Canada: Peter Child’s Framework  for Stimulus

Make no mistake, having surveyed funding sources for startups and social enterprise, Ontario (and Canada) significantly lags most regions in the US and Western Europe — our primary OECD comparables. The reasons for this are numerous and will be discussed in a separate posting, but this funding gap is our extra hurdle before we can be successful in driving the Florida/Martin challenge to transform Ontario to a creative economy.

And to be clear, this transition to the creative economy needs to be driven by the competitive, market economy. That implies that it will not the primary role of governments to provide the major funding for our transformation. Fundamentally, governments should not be picking winners and losers, but simply equiping market forces to go to work. And, given our long history and culture of relying on governments for answers, it is important to clarify that point. With the right framework in place, businesses and individuals will compete to drive the path to our future.

Thus, as their primary task, it is imperative that our federal and provincial governments develop a strong and co-ordinated policy framework, dealing with taxation, security regulation, and the like, to encourage the private sector to make such investments. And, in our current times of economic stimulus, the extra icing on the cake should be to channel some of those near term stimulus dollars toward growing the creative sector that is so essential to our future economic prosperity.

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bright-green-led

25 Jan 2009

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A Bright Green Federal Budgetary Stimulus Opportunity

“Efficiency is doing better what is already being done.” – Peter F. Drucker

 

Is there a green lining in the inevitable mountains of cash being channelled into economic stimulus?

The sequence of September’s ho hum election followed by the almost incongruous state of denial about both environmental issues and the state of our economy by Canada’s Stephen Harper Government, renders the proroguing of Parliament and his rapid policy about face almost exciting to watch. As a result, Tuesday’s budget should prove a lot more interesting than the six months that preceded it.

My post from last year, Finding Negawatts Right on your Doorstep, gave background to show how the EcoEnergy program could significantly reduce our collective residential Greenhouse Gas (GHG) emissions, while simultaneously improving our housing stock and lowering operating costs. As noted, even with the current modest levels of uptake, this is an area where relatively small investments by our Federal and Provincial governments are starting to pay off.

Canadian Economic StimulusProper Economic Stimulus Can Lead To …

In the context of Canada’s 2009 Federal Budget, there will certainly be significant funds allocated to economic stimulus, almost certainly with the traditional focus on infrastructure projects. As I discussed in my recent post, Playing the Lottery after the Meltdown, I generally favour a laissez faire approach to government. But, considering our current economic situation, signficant stimulus will be essential.

I strongly urge the government to consider channelling some of these fund to two areas:

  • bright green investments such as reducing the collective  carbon footprint of our homes, as I discuss below.
  • in addition, some package of stimulus focused on our future competitiveness by jump starting the knowledge economy, especially startups.

In the Negawatts posting, I didn’t elaborate enough on the relative merits of different approaches to offsetting our carbon consumption (or indeed all Greenhouse Gases). I would draw a parallel to the 3 Green R’s of Reduce, Reuse & Recycle which form a hierarchy in dealing with the solid waste issue, with Reduce (ie. not creating the waste in the first place) being much preferred to Recycle (reducing the impact of waste already consumed). Similarly to this, there are also choices around offsetting our carbon footprint.

Most carbon offsets involve tree planting in some distant, usually tropical, country. While this gives maximum impact, it does nothing for our local output of carbon (GHGs). While planting trees locally is useful, typically the ROI is lower than in warmer climes, if only because trees grow more slowly in Canada. The best approaches would involve a direct reduction of our local carbon use, instead of a mere offset. And that is exactly what residential programs like EcoEnergy home labelling and retrofit achieve.

Therefore, the timing is right to channel the relatively small amount, as compared to the enormous size of the entire stimulus package, needed to transform our residential housing stock. And, the resulting Negawatts we will generate in return, will be a lasting efficiency we can enjoys for decades to come.

Significant Carbon ReductionSignificant Carbon Reduction

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balsillie-speaks-to-laurier

23 Jan 2009

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Attacking a Canadian Icon

While I’m hardly a shrinking violet, I generally shy away from newspaper coverage. That being said, after saying no several times to Gordon Pitts at the Globe and Mail, I finally agreed to be quoted. Here’s why.

Yesterday, Jim Balsillie won the Laurier Outstanding Business Leader of the Year Award. With his business, economic and philanthropic contributions to our area and Canada as a whole, I can’t imagine a more deserving recipient. It is truly inspirational to have people like Jim making a real difference to all of us.

In an unfortunate coincidence, on the same day, both Jim Balsillie and Mike Lazaridis were the subject of media coverage regarding a possible (and staggering) $100 million penalty regarding a stock options pricing case dating back to 1996.

In the current financial meltdown, many might believe that ever more zealous regulation is the answer, but this really isn’t the root issue here. And, bearing in mind that I don’t have all the facts that the OSC and SEC possess,  I present some key  points in questioning the motives of the timing and magnitude of this regulatory action:

  • from my reading of this case, the company, when made aware of the concerns, proactively launched a board-level investigation and, upon the release of the report, about $1.6 million was repaid, this being the estimated amount of gain based on the differential of pricing and dates of the option strike prices.
  • further, that committee, found that the mis-pricing was inadvertent and not done for the purposes of financial gain.
  • when compared to other securities regulation actions, this case seems minor, especially given the wealth most people have generated with RIM. In other words, there don’t seem to be any real victims here.
  • And yet, over the last 10 to 15 years, the OSC has been colossally impotent when it comes to prosecuting real shareholder frauds, such as:
    • the many cases of equity monetization that allowed senior management of many companies pocket tens or hundreds of millions while ordinary investors ended up suffering staggering losses.
    • real abuses and frauds around income trusts, such as is the case of the many people in my home town of Listowel who lost life savings on the fiasco in which a long term business,  SpinRite, was hollowed out in the process of becoming an income trust.
    • Diane Urquhart, an ex Bay Street investment banker and now expert shareholder crusader, is a great source to provide anyone who is interested the documented evidence of how much of a wussy our own OSC has been in stock market regulation.
  • Jim, and his partner Mike, have each given countless hours and hundreds and hundreds of millions of dollars to major philanthropic initiatives that, in addition to helping to transform Waterloo Region, have national and international stature.

It’s this background that left me feeling compelled to comment to Gordon at the Globe & Mail. Clearly, this feels like a desperate OSC acting on the basest political motives.

I’m not sure why Canadians feel that we have to attack our winners. At a time of economic meltdown and too few national champions left standing, why can’t we celebrate the great heroes we do have?

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