Federal government must improve innovation funding practices: study

The federal government needs to improve assessment of “innovation intermediaries” it funds and better target future funding for business accelerators and incubators, says a study done for the Munk School of Global Affairs & Public Policy at the University of Toronto.

“The most significant issue affecting Canada’s supports for innovation intermediaries is its fractured nature, distributed decision-making and overwhelming emphasis on responding to the incentives and needs of the political level,” says the study Accelerating Growth: Canadian Funding Policy for Innovation, co-authored by Mark Robbins and Jeffrey Crelinsten.

Given current reporting standards and metrics that emphasize “politically salient outcomes at the expense of more meaningful indicators and rigors in program evaluation, it is an open possibility that the success metrics (used to measure performance of innovation intermediaries and their client companies) . . . have been unintentionally over-reported,” their study says. “Future rounds of funding will require much more concerted attention on success metrics and uniform standards.”

Ottawa should require federally funded accelerators and incubators to track the longer-term survival and growth of their client companies, says Robbins, a researcher at the Munk School during the study and a senior researcher at the Institute of Governance in Ottawa. “If you’re able to actually track the result of what you do over several years, it provides more opportunity to get appropriate and meaningful information.”

“Ultimately, the output metrics are revenue, growth, profit and exports . . . tracking the business success of client companies that are improving the economy and quality of life,” says Jeffrey Crelinsten, senior research associate with the Munk School and president of Toronto-based The Impact Group (and publisher of RE$EARCH MONEY).

Canada Accelerator and Incubator Program examined

The study included 32 interviews conducted last year with participants in the Canada Accelerator and Incubator Program (CAIP). CAIP was launched by the National Research Council of Canada and the Industrial Research Assistance Program in fiscal year 2014/2015. In 2013, the government allocated $60 million (rising to a total of $100 million in 2014) to CAIP, as part of Canada’s Venture Capital Action Plan.

From roughly 100 applications, CAIP selected 15 organizations, representing a total of 16 accelerators and incubators, to receive funding in the form of non-repayable loans. Total allocations to date have amounted to just over $86 million.

A majority of the interviewees in the study “bemoaned the amount of time and energy spent on red-tape and bureaucratic reporting requirements that were built into the CAIP program.” This could be effectively disqualifying smaller innovation intermediaries from accessing CAIP, because these smaller players lack sufficient administrative capacity to do so, according to the study.

“The government should be much more focused on impactful outputs,” Crelinsten says. “Once it’s picked an organization, it should let them manage and don’t put too many handcuffs on them through onerous reporting requirements.”

Proliferation of innovation intermediaries distorting market

Many of the hundreds of accelerators and incubators across the country “make invaluable contributions to Canada’s capacity to innovate . . .,” the study says. However, it adds, there has been “a clear over-expansion in the number of innovation intermediaries, conflicting and competing organizational mandates often lumped together, and the often distortive effect of innovation intermediaries on market signals.”

Some innovation intermediaries are functioning as publicly funded co-working or training spaces rather than as “unicorn factories” actually engaged in innovation, Robbins notes.

Several venture capitalists interviewed suggested the proliferation of intermediaries resulting from increases in public funding ultimately disrupts normal market signals. For example, exponential increases in the availability of training in investment pitches for entrepreneurs “makes it more difficult for many less savvy investors to determine which companies are inherently good or worthwhile as prospective investments,” the study says.

The study also found issues with using job creation as a main metric for assessing CAIP, especially since some firms may have innovative “platform technologies” that generate substantial productivity and revenue without requiring a large workforce. Job creation “cannot be equated with innovation, productivity or improvement in competitiveness,” the study says.

Moreover, if most of the startups and scale-ups going through accelerators and incubators aren’t achieving commercial success, it may indicate that some innovation intermediaries and their clients “could be reaping benefits of public support for innovation without making a commensurate contribution to Canada’s innovation economy.”

Canada’s Triple Helix model of innovation (involving academia, industry and government) may be misaligned and no longer flexible enough – especially in today’s “open innovation” environment – and needs careful assessment, the study found. “There’s no standard way that innovation happens,” Crelinsten says. “It depends on conversations with customers who aren’t the same for every firm. So to apply one model rigidly to all situations, it’s like trying to use a hammer as a tool for everything.”

Robbins adds that a finding which surprised him was “how roundly and almost universally” the interviewees said that academic research had “little real-world utility” and could rarely be commercialized.

The overwhelming majority of interviewees that received funding from CAIP felt that the program, despite its flaws, has been a success and should be continued in some form. The 2018 federal budget suggested that CAIP as a stand-alone program will cease to exist, because the individual portions of it will be administered by the federal government’s six regional economic development agencies.

The 43-page study, part of the Munk School of Global Affairs & Public Policy’s five-year Creating Digital Opportunity project, is publicly available on the project website here.