Panelists urge Canada to try new measures to stimulate financing for tech sector

Innovation 2010 Conference

The financing dilemma facing innovative Canadian companies must be confronted and solved to reverse the flight of global capital to emerging nations, says a panel of entrepreneurs and investors at the recent Innovation 2010 conference in Ottawa. With venture capital at a 10-year low and a persistent lack of follow-on financing for promising start-ups, governments, industry and academic institutions are being urged to stop studying the issue and implement strategies and initiatives that stimulate the growth of a knowledge-based economy.

Among their recommendations, panelists pointed to the need for governments to do a far better job to attract sovereign funds from other nations, extend flow through shares used in the oil and gas sector to the high-tech sector and reorient post-secondary education to produce talent with the mix of skills required for growing and sustaining Canadian-based companies.

Part of the problem, according to high tech executive and entrepreneur Dr Adam Chowaniec, is the relatively small size of Canada's technology sector. Natural resources account for a far larger portion of the national economy, making it difficult to get governments to address the tech sector's unique challenges.

"The knowledge-based sector is sub-critical. It needs a concerted focus but it lacks the lobbying power to get proper attention," says Chowaniec. "Canada generates a lot of new companies and entrepreneurship is actually growing. But Canada also loses a lot of companies, many to acquisition, before they contribute to the economy."

chronic financing shortage

Chowaniec estimates that the tech sector is short about $250 million in financing annually and asserts that pension funds control too much stock, resulting in an environment where hostile takeovers of Canadian firms by foreign buyers is all too easy. He recommends the adoption of flow through shares to ease the money crunch.

"We need to implement flow through shares to put company money to work," he says. "They've been very successful in the resource sector and we could tie them to the SRED (scientific research and experimental development tax credits) filter. Companies could get flow through credits if it applies to SRED."

Chowaniec wasn't the only person at the Innovation 2010 conference to advocate the use of flow through shares. Keynote speaker Preston Manning, CEO of the Manning Centre for Building Democracy, noted the recent report from the Coalition for Action on Innovation in Canada (CAIC), which urged the federal government to consider extending the tax mechanism "to research-based companies outside the energy sector".

Manning said the coalition — co-chaired by John Manley and Paul Lucas — needs to be strategic when approaching government with its recommendations, adding that "the ball is in the private sector court" to boost its anemic R&D performance.

Nowhere is the challenge of building innovative companies more apparent than health care, which relies on patient capital more than other knowledge-based sectors. Cedric Bisson, managing partner, life sciences with iNovia Capital, says an outdated business model and a dysfunctional regulatory regime has resulted in the withdrawal of capital and the movement of many corporate research centres to emerging nations such as India and China. Adding to Canada's woes is the crippling debt in the US, which Bisson says should prompt Canada to "lessen our dependence" on its largest trading partner.

In addition to endorsing the use of flow through shares to entice the retail investment market, Bisson said VC funds must be larger to compete at a global scale. Otherwise, Canada's share of global trade will continue to shrink from 3% to 2%.

"The environment for investing remains fertile," said Bisson. "We need new business models and we need to replace the technology push model from universities. It creates small companies who get bought out by foreign firms. Universities need to push technologies that are the world's best."

Chowaniec says the pressing financing challenges of Canada's high-tech sectors could be partially addressed by successfully attracting sovereign funds from other nations. He says the largest sovereign fund from the United Arab Emirates is worth more than $80 billion, making it difficult for Canadian firms to get any attention.

"We need to bring those funds to Canada but we need connectivity," says Chowaniec. "BDC (Business Development Bank of Canada) and DFAIT (Department of Foreign Affairs and International Trade) can do something to leverage sovereign funds with domestic funds."

Bisson says a key barrier to establishing a better financing environment for tech firms is Canada's relative prosperity, which tends to breed complacence both in industry and government. He is particularly critical of governments which he says are "losing their brain power".

"We need them to development smart regulations which drive key markets and their development," says Bisson. "Canada has a preference for political over rational, strategic behaviour."

Israeli model

In contrast to Canada, Israel has a highly successful innovation system that generates significant economic benefit from its high-tech sector, not to mention multinational firms that account for 44% of the nation's R&D employment.

Dr Henri Rothschild, president and CEO of International Science and Technology Partnerships Canada, says Israel's no-nonsense attitude towards technology commercialization and company financing are particularly effective in leveraging its investments in S&T.

Rothschild, who also heads the bilateral Canada-Israel Industrial R&D Foundation, says Israel has no government science policy or strategy unit and even lacks policies to discuss projects. But it does have the highly effective Office of the Chief Scientist (OCS), which Rothschild describes as the "Swiss army knife of S&T", with an integrated response team and the ability to move funds from program to program.

Armed with a suite of programs with a heavy emphasis on bilateral collaboration that links domestic with foreign programs, Israel's OCS is highly connected to the rest of the world, overseeing five bilateral foundations, 18 bi-national support agreements, technology incubators and an industry-led research networking program (Magnet).

"It's purely practical. There's no theoretical approach," says Rothschild. "If the OCS was Canadian it would have a discretionary budget of $2.5 billion."

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