High-tech titan offers solutions to "dire" situation for Canadian high-tech sector

An interview with Terry Matthew's

RE$EARCH MONEY sat down with Terry Matthew's, Canada's foremost serial entrepreneur and chairman of Mitel Corp, a company he founded in 1972 and re-acquired in 2001. Over a 40-year career, Matthew's has created more than 80 high-tech companies including Newbridge Networks Corp, which was sold to Alcatel in 2000 for US$7.1 billion. In discussing challenges facing Canada's high-technology industries, Matthew's explains what the various players need to do more to improve the environment for growing and keeping new companies in Canada. The following is an edited transcript of that conversation.

R$: Many people are talking about the disaggregation of Ottawa's telecom sector. How bad is it and is there anything at this stage in the game to turn it around and if so, who has to do what?

TM: It's really a long series of negative issues. People don't realize that legislation has not been passed yet about VC (venture capital) funds and how they repatriate funds. There are some specific laws in Canada that make it very difficult for VC funds to be repatriated. It's under review but why doesn't it get passed?

R$: Is there something that can be done to turn the Ottawa situation around?

TM: Let's start with government. There's almost no government procurement which is of the order of $15 billion a year. There's very little of it that goes to Canadian technology. There's something wrong. The government spends more and more with (US) systems integrators but they by and large don't like new technology products. It's not just the government. Systems integrators take large purchases from the largest companies, the banks for example. What Canadian technology do they buy? Almost none. Somebody should be asking them, what sort of a corporate citizen are they?

The other thing is lack of R&D money from the government. There used to be but it's gone.

R$: So policy developments have really been counterproductive.

TM: It's awful. No VC money, no local procurement by the biggest buyers – governments. No government R&D funding. Good God. Where does a start-up go?

We push programs to fund research and science at the universities. What we're doing is educating people and making them very knowledgeable. And if they‘re any good, they go work in the US. Unless you've got some flag bearing companies that are strong, the research has nowhere to go. The employees under those programs — science and engineering — don't have anywhere to go either. So they go where the excitement is. This is not a good scene.

In Ottawa in particular there's been a really good tech cluster around networking, computing and telecommunications. That particular industry is now in a difficult situation worldwide because of the transition from narrowband to broadband, and because of new solutions around the planet. All of this terrific upside. And yet the industry is not doing well. Why is that? That's because some of the flag bearers sold to the telephone operators who've lost their monopoly.

It would be inconceivable 20 years ago that AT&T would be bought by a Bell company. It would be inconceivable that Bell Canada would be acquired by private equity. The truth is, the telephone operators lost their monopoly, new technologies are much lower cost in terms of the transmission. The upshot is that those telephone operators with 100 years of practices and protection under monopoly — all those ground foundations have been removed. They're all in trouble.

R$: If you were a Cabinet minister sitting around with your colleagues and had just spoken with Terry Matthew's, what would you put on the table in terms of urgent priority actions?

TM: There are things that they could do but they probably don't have the belly to do it. Today, if you get (SR&ED tax credits), there is a profile that says you're an R&D spender, you're a technology company and we're going to prefer you. First, filtering to establish what are you as a company and we'll give you preferential treatment on taxes. Give you tax credits. We could — if we wanted — take those same filters and say, you are the kind of company we want to grow in this country. You are research intensive. If anyone invests in your company because of the profile, we'll give you some kind of tax-free benefit. No capital gains tax. This is a way of completely correcting the lack of venture capital funds. It will suddenly turn what is otherwise a fallow field into a highly fertilized field and everybody will want to come here and invest in technology.

And guess where that investment goes? It isn't actually in much more than R&D. So if you can get that money going into these research-intensive companies because of tax rules, you can turn what is otherwise a desert into a very fertilized field. They will certainly spark up all over the place. And for every 10 start-up companies, one will make it and one of those will become a global brand. You have to generate the spending of R&D somehow and the biggest source used to be venture capital, used to be government funding. Both are gone.

R$: Would you recommend similar programs to TPC (Technology Partnerships Canada) or boost IRAP (Industrial Research Assistance Program)?

TM: Definitely. If I was king, I'd probably ramp up IRAP to a couple of million dollars at least. I would find a new way of getting government to procure Canadian technology. I would get some kind of tax benefit for venture capitalists and certainly make it a highly lucrative area for VCs. It desperately needs to change. Otherwise the consequences are dire. It'll just keep going down. It's not good right now.

A local company deep rooted like Nortel saying they're moving out. It's down from 100,000 people to 30,000 and now it's moving R&D offshore because it's cheaper. The offshore R&D is not poor quality anymore. It's well documented and it's half the cost. Can you compete with that globally? If on the other hand you get a foreign company also saying we're moving out, there's not much left. What's left?

R$: You've joined STIC (Science, Technology and Innovation Council). Do you think this one is different and has a chance of having an impact?

TM: Government moves slowly.

R$: You said the (Industry) minister (Jim Prentice) seems to be willing to listen.

TM: We have a good minister, make no mistake about that. He's good. He knows. Whether the other ministerial colleagues understand … Everybody has their own agenda. I'm not telling you anything that you wouldn't know. It's just that the industry is in bad shape right now.

R$: Canada has been losing companies like ATI and Cognos to foreign owners and recently the minister stopped the sale of MDA's space systems division. Do you see that as a viable mechanism for government?

TM: The best scheme of the lot is to find a way of encouraging venture capital funds. Venture capital funds want to turn on the capital but if there isn't any VC funds, then there's nothing to tax. Just accept the fact that, if we have a highly productive innovative society that's being funded, those people get taxed and they tend to be the high earners. If there isn't anyone, one you don't get the taxes and two, you definitely don't get the capital gains tax because there's no one funding it. Right now it's a desert.

R$: You described your own eco system that is working in spite of this dissolution of the technology industry around you. Is your model replicable?

TM: Sure it's replicable but I'm small scale. I do my own thing. When you talk Canada-wide people might try it on. But you have to first of all be wealthy enough to do it and you have to have knowledge of the industry in order to know where the white space is to go for it. On a general basis across the country it wouldn't work.

R$: You would need people with specific skills sets and a large asset base.

TM: Right. I'm different because I stick to what I know and I'm wealthy enough to do my own thing irrespective of what the government does. And I don't have to do it in Canada, I can do it anywhere. And I do. Every year I create about four or five new companies — about half of them are based in Canada. We've only got to the point of completing the development sketch.

Research is conducted best when you're working for the client. It's less speculative. How do you get the client to work with you if you're unknown? Now you're back to credibility. I've been around long enough that it doesn't matter what the name of the company is. If I go in and talk about a new development it's probably going to be alright. Because I've been around a long time. I'm a bit different. I don't like comparing what I do with the Canada-general scene. I'm not here to complain today about what I'm doing. I'm here to say that we've got to do something Canada-wide because it's pretty serious.

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