The Way I See It… by Michael C. Volker
Bridging the Innovation Gap Starts with Startups
Innovation is a hot topic these days. At the recent Conference Board of Canada's Innovation 2001 conference in Montreal, Canada's there was a great deal of talk about our country’s "innovation gap" and the government’s so-called “Innovation Agenda”.
Indeed, in June of this year, the Standing Committee on Industry, Science and Technology produced its fifth report titled, “A Canadian Innovation Agenda for the Twenty-First Century”. The report notes that “Innovation, as founded on Science and Technology, has thus become the principal means for achieving economic success in the twenty-first century.” Based on this premise, it follows that an increase in research and development activities is necessary for innovation.
Industry observers know only too well that our GERD-to-GDP ratio, or gross expenditure on R&D per unit of gross domestic product, has averaged 1.5% compared to the Organization for Economic Co-operation and development (OECD) average of 2.2%.
I recall Finance Minister Paul Martin declaring just over a year ago that Canada must triple its annual commitment to R&D to $ 47.5 billion by 2010. Accordingly, new initiatives such as the Canadian Foundation for Innovation were launched and increased support for existing government programs was announced.
Last year our Universities spent almost $3 billion on R&D. That accounts for 15% of all R&D expenditures. This was an increase of almost 25% over the previous year. Hence, the pool of intellectual property with commercial potential is bound to grow over time.
Bridging the gap between this new wealth of raw intellectual capital and the marketplace is both a challenge and an opportunity for our high technology industry. So, how will this additional creative output migrate from ideas and concepts into the market place? There’s only one way: through technology entrepreneurs.
Entrepreneurs are the champions of innovation. They are the ones who build the bridges, i.e. the new ventures that turn inventions into viable commercial products. Doing so requires talent and capital.
The capital flows to support innovation increase as ideas move from concept to products and customers. Attracting investors in the later stages is not difficult. After all, it’s less risky to bet on a technology venture when it has real products and sales. But, accessing capital to take inventions from the labs to the prototype stage is a different story. Fewer investors are available to entrepreneurs in the startup or pre-startup phases.
Organizations such as NRC’s IRAP or regional institutes such as the B.C. Advanced Systems Institute (ASI) play a key role in bridging this gap. They will invest in projects long before venture capitalists and even many angels are interested. More of these are needed and as ASI has demonstrated, the cycle can be repeated by sharing in the spoils of successful ventures.
The Standing Committee’s report offers a list of recommendations for the Innovation Agenda. Way down at the end of the list, the eighteenth point speaks to the financing of startup firms but falls short of presenting any particularly novel suggestions other than to suggest that more private investment should be encouraged.
This should not be all that difficult. There are practically no programs, incentives, or mechanisms which in any way encourage investment at the formative stages. Investors are rewarded with low capital gains taxes when they exit an investment, but what is really needed is a going-in incentive to provide patient risk capital. The smaller, retail investor is almost entirely excluded from the innovation equation. Yet, these retail investors are growing in numbers and there are many that would risk modest amounts. A vibrant, junior equity market with up-front tax breaks, swapped for downstream benefits, may be just what’s needed.
The way I see it, we need to take a much bolder step at mobilizing capital for start-up entrepreneurs. Having been involved in the tech startup game for three decades, there's no doubt that we could be doing more of, as well as doing better in, that which we do fairly well in this country - launching superb technology ventures!
Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at firstname.lastname@example.org.