From the Publisher: Financialization follies continue to threaten Canadian innovators

Jeffrey Crelinsten
August 17, 2022

The news that Sierra Wireless, a Richmond, B.C. IoT solutions firm, has been sold to Semtech in California, highlights a serious Canadian problem: we can’t grow and keep our companies. Sierra Wireless was founded in 1993 and went public in 1997. As a public company, it was vulnerable to a movement that Dan Breznitz calls “financialization” in his recent book, Innovation in Real Places. He says the movement redefines the purpose of companies, how they’re managed and how investors, analysts and courts judge their performance.

“The idea is that all elements of the economy, companies and workers included, should be viewed, managed, and valued as financial assets….We should judge them purely and simply by analyzing how good they are at creating financial gains from each dollar employed, no more and no less. Further, the main goal of this wealth creation should be to maximize shareholder value (which might not be aligned with maximizing profits, in case you were under the illusion that profit maximization was what companies should do). How should we judge shareholder value? By management’s ability to increase the price at which its shares are bought and sold on the stock exchange.”

That it took more than 20 years for Sierra Wireless to succumb to the rule of its stock price is due only to the untiring efforts of a few of its board members, who stayed on for the sole purpose of keeping the company Canadian. Unfortunately for Canada and Canadians, an activist shareholder got control a few years ago and took the company onto a different path. The single-minded drive for increased shareholder value took over.

Sierra Wireless provides a cautionary tale to Canada’s scaling firms and to policy makers who want to support them. Mature Canadian companies that are past the start-up stage, have significant export revenue and market share, and that have the potential and the ambition to scale into multinational corporations (MNCs) face severe headwinds if they want to stay in Canada.

First of all, very few of these firms have grown exclusively from customer revenue and acquisitions. Most of them have received external financing — either from VCs or by going public — in order to grow to their current scale. Both financing approaches have their dangers if the firms want to still be in Canada when they eventually reach MNC status.

Going public early, as was the case with Sierra Wireless, exposes a firm to the tyranny of the stock price. The financialization virus has taken hold big time in Canada. Valuation is the metric of choice by investors, entrepreneurs and policy makers alike. Their holy grail is for our companies to achieve “unicorn” status, which means having a valuation of a billion dollars or more. Valuation, of course, is entirely based on stock price, which dictates how much an acquirer is willing to pay for the company. It has little to do with how profitable the company is, how much revenue it generates, what share of the global market it serves, or how much value it creates for its customers. The company becomes the product and the goal is ultimately to sell it at the highest price.

The VC financing model is just as problematic for Canadian firms that want to scale to MNC status and stay in Canada. Breznitz is refreshingly blunt on this topic. His primary audience is communities that aspire to grow their local economies via innovation-based growth. He warns them to be wary of trying to emulate the Silicon Valley model of venture capital-backed tech start-ups. He presents a cautionary tale from Israel, which put all its chips on the VC model and was very successful. However, the VC model is very uneven in distributing the wealth it creates. While a few people become immensely rich, the larger community is left out. Tech jobs abound, but not as much for other types of jobs, including HR, sales, marketing, communications, management, etc. In Israel, Breznitz notes, 20% of the population lives below the poverty line despite the country’s admirable status as an innovation nation. Companies and investors thrive with little or no benefit for communities.

From the standpoint of innovation policy aimed at supporting Canadian firms to become MNCs based in Canada, the VC model is tricky as well. Venture capital firms’ business model is to exit their portfolio firms at a profit - either by selling them or taking them public. An exit via sale most often ends up with the firm going to a non-Canadian acquirer. While such exits are wonderful for the founders and investors, Canada loses another successful company. The public route opens the firm up to the financialization threat.

Canada needs an innovation policy that supports the growth and retention of successful Canadian companies and entrepreneurs. We need a public fund that targets these firms exclusively and provides them with non-dilutive financing so they can continue to grow into globally dominant players in their chosen sector. Banks, private equity and pension funds in Canada that cannot risk investing in such firms alone would be able to partner with government to lend to, invest in or acquire mature Canadian firms to help them grow to multinational status and stay in Canada.

Breznitz even points out how such an approach can be a bargain for all concerned, if financial assurance from governments can provide maturing companies and investors with the security they need to move forward. “Determining which financing approach to take requires a careful analysis of local companies’ needs and funders’ resources and objectives. For example, loan guarantees provide substantial leverage in comparison with direct grants—the $30 million that could stimulate $1 billion in loans via guarantees would generate only $60 million if it were provided in the form of a direct grant at the rate of one-to-one private-public.”

US President Joe Biden enacted this kind of strategy last week, when he signed the CHIPS and Science Act of 2022 into law, thereby providing an eye-popping $76 billion to spur U.S. semiconductor competitiveness. The legislation is designed to strengthen U.S. industries of the future, bolster U.S. supply chains, and protect U.S. vital national and economic security.

In its 2022 Budget, our federal government announced plans to create a new innovation and investment agency with a budget of $1 billion over five years. While huge dollars like our American neighbours invest may not be available, it will be more important for government to give the new agency a clear focus, just as the Americans have done in their new Act. In Canada’s case, let’s give the new agency a narrow mandate to target mature, successful Canadian firms that have already demonstrated global leadership in areas of Canadian strength and avoid the trap of trying to help everyone. Let’s also give the new agency autonomy from the central machinery of government, so that it can experiment with different approaches and pivot when necessary, without being encumbered by rigid KPIs laid out in advance by government.

After all, as Breznitz notes pointedly: “Innovation is not invention, nor is it research. Indeed, it is not even R&D. Innovation is, pure and simple, any activity along the process of taking new ideas and devising new or improved products and services and putting them in the market.”

My hope is that the government avoids trying to cram a raft of policy objectives into this new agency, thus diluting its proposed mandate. To quote Breznitz again: “If you want success in innovation, focus on its agents [companies and individuals]. Having a higher-education policy is a wonderful thing; having S&T and research policy should also be celebrated; having intellectual-property policy is a true blessing. Nevertheless, these elements are not to be confused with innovation policy. Further, a ‘strategic’ industrial policy that focuses on ‘high-tech sectors’ is also not an innovation policy.”

If the new agency invests in “innovation in real places”, as Breznitz describes it, Canada may finally break out of its innovation doldrums.

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