Lack of commerce culture behind why early-stage tech firms are disappearing

Different report, similar conclusions. The authors of a new study probing the distressingly high number of Canadian R&D-performing firms that disappear despite adequate financing say Canada's lack of a culture of commerce is largely to blame. The study by Drs Doug Barber and Jeffrey Crelinsten discovered that, of the 18 firms they examined and 28 entrepreneurs or investors they interviewed, eight firms had no customers and seven had no sales.

Whether it was the entrepreneur heading the firm or the investing venture capitalist, the absence of a culture of commerce inevitably led to a disconnect between products and customers that resulted in insolvency or sale to a foreign entity.

The findings cut to the heart of a dilemma Barber and Crelinsten have highlighted in previous reports on R&D-performing companies. A preoccupation with technology and dysfunctional governance (including boards of directors) were also cited as reasons behind the disappearance of the firms examined.

"Customer focus is a very human thing. It's not objective- or evidence-based. Marriage doesn't work that way and neither does commerce," says Barber, co-founder and former president and CEO of Gennum Corp. "Customer focus is at the societal level which means the educational level. Universities influence everything. You can't be a professional without going through university. And boards of directors are professionals that make a lot of the decisions. Half the companies we talked to could not identify a potential customer they are doing this work for."

Entitled Understanding the Disappearance of Early-stage and Start-up R&D-Performing Firms, the study is the latest in a series of reports by Barber and Crelinsten that began in 2003 with the report, Can Canada's Private Sector Do Its Part to Move Canada into the Five Most Innovative Economies of the World?

Crelinsten — a partner with The Impact Group and co-publisher of RE$EARCH MONEY — says one of the new findings in the latest study is the general incompetence among the investor community. Nearly all of the 12 investors interviewed for the report came from the banking and corporate finance sectors and had negligible experience running start-ups. Lack of investor experience was exacerbated in the case of labour-sponsored venture funds (LSVF) which were burdened by investment quotas and often lacked the resources to make follow-on investments.

"They had no interest in the companies successfully doing business. They were just protecting their interests," he says. "Many spread their investments too thin and they were only expecting a 10% success rate. There was no sense of customers or the need to find them."

"Canada's inability to grow successful firms and retain growing firms in the country translates into less corporate tax revenue for the federal government. In addition, firms like the ones we studied employ highly skilled people who have above average salaries that generate significant personal income tax to governments. A high rate of firm disappearance means these jobs are lost along with the accompanying income tax revenue. — Barber-Crelinsten report

To address the problem of firm disappearance, the report makes three sets of recommendations gleaned from interviews:

* enhanced cultural and entrepreneurial learning;

* greater awareness among Canadians of the appropriate enterprise sources of financing; and,

* modification to government programs that includes more direct support to business and streamlined tax credits (see chart). The latter includes a number of points including the need to reconsider more direct support to companies.

"Governments need to get off this resistance to direct support programs … Policy people can be ideologically against directly supporting business," says Crelinsten. "Right now there's only IRAP (Industrial Research Assistance Program), SADI (Strategic Aerospace and Defence Initiative) and the AIF (Atlantic Innovation Fund)."

Crelinsten says a good model for Canada to examine is the US Small Business Innovation Research (SBIR) program, which ensures that small, high-tech, innovative businesses are a significant part of the federal government's R&D efforts.

The report also makes three recommendations of its own (see chart) that clearly indicate the primacy of commerce to increase the chances of company success in a globally competitive environment.

"If there's too much focus on R&D, firms will disappear," says Barber. "The idea of ideas-to-market is one of the pieces of our craziness. We need to get ideas from the market and the customer to know where to add the value."

Barber contends that the onus is on Canada's universities to immediately inject the concepts of commerce and the customer into its teaching so that graduates are prepared for the challenges of commerce when they enter the workforce.

"We are integrated into these beautiful silos and we don't worry about the other silos. If we get scared, we might actually do something right. But we have so many resources. The thing is, the US and the Chinese will soon own most of them."

Crelinsten agrees that an over-reliance on raw materials has allowed Canada to prosper. Canadians aren't hungry enough, he asserts, adding that technology and financing are mistakenly seen as adequate to support start-up firms.

"It's all about the customer and commerce and growing global companies through the creation of value," he says. "We are going to have to go down the tank or the deceleration of prosperity must be so swift that we get scared."

The report was financed by Statistics Canada, Atlantic Canada Opportunities Agency, Western Economic Diversification, Information Technology Association of Canada and Industry Canada and supported by the National Angel Capital Organization.

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