David Crane

Building global firms needs effective strategy

By David Crane

Federal and provincial governments are focusing growing attention on the challenge of commercialization — how to reap the economic benefits from the increased flow of research dollars they have channeled into universities, teaching hospitals and other research institutes since the mid-1990s. Canada’s future prosperity is increasingly seen to depend on its ability to generate new products or services for global markets.

The Martin government, for example, has put forward an agenda that includes a $270 million allocation to the Business Development Bank for venture investments, creation of a network of commercialization centres by the National Research Council, increased support for technology transfer activities at universities and hospitals, and other initiatives to promote the supply of venture capital and angel investing.

At the Ontario level, Economic Development minister Joseph Cordiano has announced a new commercialization strategy. This includes, over five years, $27 million to help universities, colleges and hospitals identify promising research results and make them investment-ready, and $36 million to help these same institutions establish pools of seed capital to advance commercialization of the best ideas, presumably by funding the proof-of-principle or prototype phase. Cordiano also announced the establishment of an Ontario Advisory Committee on Commercialization, to be chaired by John Evans.

Anything that helps turn new inventions into business opportunities is clearly important. One of the most important gaps in commercialization is the so-called Valley of Death, the gap between the patenting of an invention and the demonstration of proof-of-principle or protoyping. This process is badly underfunded in Canada. Likewise, initiatives to strengthen university and hospital technology transfer offices and to promote angel investing are also important.

But a commercialization strategy that simply focuses on increasing licensing revenues from new knowledge generated by universities, hospitals or other institutions or on the creation of start-up companies will not be a successful commercialization strategy. A successful strategy is one that results in the creation of new Canadian-based companies that develop the scale and scope for sustained and profitable growth in the global economy, or adding to the business base of existing Canadian companies with growth potential. This would also contribute to solving another Canadian problem — the lack of receptor capacity. Launching large numbers of start-up companies that are then taken over by multinational corporations that shift development and production to another country makes little sense.

This means we need a financing system that provides long-term patient capital that allows the most promising Canadian companies to grow, rather than forcing their owners to sell out as the only option. Venture capital is clearly an important part of this financing process, but is far from sufficient. Indeed, venture capital can be a problem since the goal of venture capital firms is to buy cheap and sell high, and to do this within a relatively short time frame. Venture investors may realize their goals by quickly selling the firm to a foreign owner rather than building a large Canadian-based company.

TIME IS RIPE FOR REGULATORY REVIEW

How to mobilize longer-term capital is one of the major challenges we face in building an innovative future economy that can capitalize on the flow of new research coming out of our universities, hospitals and other institutions. In a speech last year at the launch of the Medical and Related Sciences (MaRS) Discovery District in Toronto, Gordon Nixon, CEO of RBC Financial Group, spoke of the need to deepen the pool of investment capital so that Canada could grow Canadian-based companies into globally competitive enterprises. “Perhaps the time has come for the world of finance and government to review the regulatory, institutional and tax systems and consider changes that could be made to ensure that Canada has a financing system that meets the needs of the future economy,” Nixon said, adding RBC Financial was “willing to participate fully in any such review.” So far, Nixon has not been taken up on this offer.

There’s also a need to recognize that different sectors face different commercialization challenges. This means sector strategies. In biotechnology and the life sciences, successful commercialization means providing a financial system to provide patient capital to bring companies through the uniquely high-risk and long-term process required to bring a product to market. This is an especially acute challenge today with roughly half of Canada’s publicly-traded biotechnology companies lacking the necessary cash to last them for more than a year, according to an Ernst & Young survey. One immediate action government could take would be to permit the sale of unused R&D tax credits by these companies through flow-through shares.

For biotechnology and the life sciences, successful commercialization also means providing the infrastructure necessary to test and develop new products. For example, Canada lacks the clinical trials infrastructure to support young companies seeking to bring new products to market. Clearly, a successful commercialization strategy has to include a major initiative on clinical testing. Likewise, a successful commercialization strategy would include the proposed Centre for Biopharmaceutical Manufacturing for the production of therapeutic proteins. This initiative would provide small and midsize biotechnology companies with the opportunity to have their needs met for pre-clinical and clinical trials.

A successful commercialization strategy is essential if Canada is to benefit from the growing level of public investment in advancing the frontiers of knowledge in the natural, life and social sciences. This is not just an issue of gaining a return from these investments rather than seeing the commercial gains flow out of the country. It is vital for a broader reason. In achieving success in the new global economy, Canada has to find niches where it can profitably compete. Otherwise we will not be able to sustain the quality of life we seek. So it is vital that we see the process of commercialization as a process of building future companies that can compete successfully, rather than simply fostering the creation of start-ups with no thought to their eventual fate.

David Crane (crane@interlog.com) is a writer and adviser on innovation strategy. His column appears on Wednesdays and Fridays in The Toronto Star.