Fresh approach required to help mid-sized tech firms scale and go global

RE$EARCH MONEY Conference

Tax credits designed to incent business R&D and company growth are shaping up as the main obstacle facing mid-sized tech firms. Combined with the relentless competition for talent from Silicon Valley, the Canadian tech sector is at a comparative disadvantage when firms attempt to scale up and go global once they've grown beyond the start-up phase.

To examine the issues of scale and building global brands, RE$EARCH MONEY assembled a panel of C-suite executives from four mid-sized tech firms. David Ross, CEO of Ross Video, said there are few mechanisms – direct or indirect – to support mid-sized firms such as his producer of high-end video production and exhibition equipment.

The federal Science Research and Experimental Development (SR&ED) tax credit program is the largest business support system in Canada but Ross says its benefit declines as the revenues for Canadian-controlled private corporations (CCPCs) grow beyond $3 million. That makes even more difficult to secure financing from banks, venture capital companies and even the Business Development Bank of Canada, all of which Ross says are far too risk averse.

"There's nothing (the government) can do to make it harder for mid-sized companies to grow. When you look at the SR&ED program, for example, they start to grind down the (the credit) at $3 million in profit," said Ross, adding that the threshold hasn't changed since 1995. "Now they think you're a big company at half the size they used to think you were a big company 20 years ago."

For Carl Rodrigues, president and CEO of SOTI, a mid-sized, Mississauga-based developer of mobility management software, government support mechanisms need to take into account the competitive environment of firms seeking to expand globally. Compounding the problem is the difficulty in explaining the R&D merits of software to the gatekeepers of SR&ED.

"There's nobody else in Canada that does what we do. The compression algorithms we use in our products are the fastest in the world and it's hard to explain to people," says Rodrigues. "As soon as you get to a certain scale you're competing with multi-billion-dollar companies …The good news is the federal Budget actually reacted to some of the things the community was asking for so I'm hopeful things are going to change."

Minor SR&ED modification

Ross said a small modification to the SR&ED program would go a long way to improving the competitiveness of Canadian firms (See Ross's Opinion Leader column on page 8).

"If you are actively involved in R&D and you are exporting, slow down the grind down, even a little bit. Right now if you have net taxable capital of more than $50 million you get zero back from the government," said Ross. "But these companies are winners, they are exporters. It's not a cost, it's a revenue generator for Canada. Why not move out the grind down to $70 million or $100 million. If SR&ED works, why do we cap them."

"Working with SR&ED is very painful ... Software and systems engineers never want to look backward, they want to look forward," says Amer Matar, CEO of Toronto-based Moneris Solutions, Canada's largest processor and acquirer of debit and credit card payments. "We need a program of change to allow innovation to happen, rather than look back— investment versus recouping investment."

The new Liberal government appears willing to consider the kinds of changes tech firms are seeking. At an April 14 hearing before the House Committee on Industry on Science and Technology, Bardish Chagger, minister of Small Business and Tourism, said the government is keen on providing the policies and programs necessary for helping firms to scale and penetrate global markets.

"With entrepreneurs and small businesses at the centre of this approach, firms will be able to access coordinated services tailored to their needs at each of the crucial steps of research, development, production and expansion," said Chagger.

That spirit of cooperation is considered critical to forging the kinds of policies that will enhance the current innovation ecosystem. US tech firms have a long, often successful history of lobbying government whereas Canadian firms — particularly those seeking to grow and expand — have until very recently been conspicuous in Ottawa and provincial capitals by their absence.

"There's an opportunity for the private sector to step up and come together with policy makers," said Andrew Dixon, COO of Kitchener-based Igloo Software. "The Canadian Council of Innovators ... had meetings with the federal government and had the opportunity to talk about stock options and capital gains treatment which was recently reversed (in the Budget) that we were very happy to see."

Growing firms and staying in Canada

Growing firms in Canada is also a critical issue for mid- sized firms. Rodrique added that the dearth of large, Canadian-based multinational tech firms means the market for Canadian technology is now primarily south of the border.

"There's always US VC funding or a Google or a Microsoft out there that is dying to buy your technology," said Rodrigues. "Canadian tech is alive and well, it's just living in a US company."

The lure of Silicon Valley also has a negative impact on attempts to attract and retain talent. With the demise of firms like Nortel Networks and Blackberry, talent flowing from post-secondary institutions is leaving the country to work for large, highly visible US tech companies in Silicon Valley.

"We spent a lot of time and money educating our kids (and) American companies are parked outside (our universities) grabbing our kids," said Rodrigues. He added that offering to pay off their student loans if they stay in Canada is the kind of solution that should be examined to avoid further brain drain.

Matar noted that the Canadian talent leaking south to the US is typically between 30 and 45 years of age — the most productive stage of their careers

Governments can assist growing firms in other ways than crafting programs and tweaking the tax system. Domestic subsidiaries of multinationals like Pratt & Whitney Canada and IBM Canada have been effective in growing firms either along their supply chains or stimulating company growth through the use of their technology.

In a keynote address at the RE$EARCH MONEY Conference, Patrick Horgan, IBM Canada's VP manufacturing, development and operations, pointed to its collaboration and incubation efforts in Ontario as an example of how large firms can enhance the innovation ecosystem (R$, March 4/16).

Through its leadership of the Southern Ontario Smart Computing Innovation Platform and its Collaboration Innovation Centre, IBM has launched 50 research projects and helped 38 small firms scale up by embracing data analytics and cloud computing (see page 4).

"It's our answer to what we can do for the digital economy, developing ‘Made in Canada' solutions so that we can lead, not follow," said Horgan.

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