Canada Glaringly Absent From World’s 10 Most Innovative Countries

The following infographic provides an excellent overview of the World’s Most Innovative Countries and the weighted criteria used to rank the top 10.  Glaringly, Canada is completely absent from this list.  It is worth noting that eight of the ten countries listed have much smaller populations than Canada.  Published by The Times of London, the list is not a perfect. I find it a bit busy, and it does not include consideration of the OECD data on investment in research & development in the leading industrialized countries. That said, I have little essential disagreement with this list.  I also believe that Dan Muzyka and the Conference Board of Canada would not disagree with this assessment. Investment in research & development, leading to commercial technology innovation is crucial to a country’s economic growth and competitiveness in productivity. Canada lags in every category.

READ MORE: World’s Most Innovative Countries: The Times of London

Why The Biggest Tech Companies Are Not In Canada

Mayo0615 Reblog from July 22, 2013

It dawned on me that my blog post from July 2013, still has particular relevance to the current situation in Canada. I discuss the longer term structural issues confronting Canadian entrepreneurs and Canadian venture capital. When I first arrived in Canada, I learned quickly that the Vancouver startup ecosystem was nothing like what I knew from Silicon Valley. My personal case study was Mobile Data International, a pioneering company in wireless data, well before WiFi and Bluetooth, that could have led the market and the technology. Instead, the company was taken public much too early.  MDI was bought by Motorola Canada for $39 Million,  in a hostile takeover, and was essentially moved out of Canada and shut down.  Later, in 2012, I had another opportunity to be up close and personal with Canadian innovation, as a participant in the Canada Foundation for Innovation deliberations in Ottawa. These two experiences have played a major role in the development of my views on this topic.

The following reblog raises the tough questions that are holding Canada back.

From July 2013:

In 2013, ContentDJ founder Jerry Tian published a blog post addressing the issue of “Why Canada Has No Big Tech Companies” – Nortel is dead and RIM is quite obviously dying, he points out. Tian, who was himself responding to an interview with Boris Wertz, founder of Vancouver’s Version One Ventures, offers a thought provoking theory and one that applies to a large degree to all up-and-coming startup ecosystems.

The founder questions the commitment and willingness of Canadian investors and entrepreneurs to devote the ten years or more that it may take to build an independent multi-billion dollar company with staying power, rather than flipping that company for an eight, nine, or even ten figure exit – typically to Silicon Valley acquirers – and exporting that future innovation and wealth building. It’s a charge that could be applied equally well to New York, Los Angeles, Chicago, Austin, Boulder, and dozens of would be international startup hubs.

“’Silicon Valley is not a place but a state of mind,” Tian writes, quoting KPCB General Partner John Doerr. “Some of these insights are collaboration, competition, openness to innovation, failures and experimentation. Probably the most important one is the long term commitment behind technology companies.”

Of course, Tian and Doerr are spot on. What emerging startup hubs often miss when trying to “become the next Silicon Valley” – a flawed mission in and of itself – is that the grandaddy startup ecosystem is more than its physical infrastructure of entrepreneurs, engineers, designers, investors, service providers, universities, and the like. Equally important are the systematic irrationality and a feedback loop around the willingness to turn down the quick buck and go for the massive once-in-a-generation success story.

This isn’t the case with every company, founder, or investor, but it exists in enough density in the San Francisco Bay Area, and based on results to a lesser extent in Seattle, that these are the only two areas areas in the country that have led to multiple ten billion dollar plus technology and internet companies – the true giants that transcend their local ecosystems and seep into the lives of average consumers.

It is these companies, with their ability to attract talent, make acquisitions, invest in long-term R&D, and create systemic wealth that make ecosystems. And with very rare exception, getting to this scale requires a decade or longer commitment and a willingness on the part of founders and investors to turn down near and mid-term paydays. Similarly, it requires a vision and an ambition  to build something that will be around forever.

Tian writes:

So, why is nobody talking about these acquisitions? I think it’s simply because investors are getting filthy rich off these deals.

And that’s exactly what not to do if you want to create the next Silicon Valley. You cannot sell the hen that lays the golden eggs for a few quick buck [sic]. Technology companies take 10 years to really manifest the value. To really build a billion dollar company, it takes tremendous multi-decade commitment. And that’s the biggest missing piece in Canada.

Like or hate Zynga founder and former CEO Mark Pincus, one has to respect him for saying that he wants to build a “digital skyscraper,” a company that would be around for 100 years. Pincus went further to say that he views serial entrepreneurship as failure and that he wants to run Zynga for the rest of his career. Ironically, he recently replaced himself as CEO, personally recruiting Don Mattrick for the role. But Pincus made the ego-busting move in an effort to return Zynga to its former glory and to get it back on that century-long track.

In his somewhat controversial on-the-ground reporting on the Chicago ecosystem last summer, Trevor Gilbert delved into “the Midwest Mentality” and the impact it has on the types of companies that are built there. Gilbert called Chicagoans “pragmatic.” Lightbank partner Paul Lee offered an example of this pragmatism, saying that Chicago startups typically focus on generating revenue from day one, rather than building a massive, but unprofitable user base, a la Facebook and Twitter pre-monetization. Profit is all well and good, and should be the ultimate goal of any business that wants to be around for the long term, but focus on it too intently early on and it can be impossible to invest in growth. It takes a special kind of vision and fortitude to look past the short term and make the big bets required to create massive companies.

This is not to pick on Chicago. A similar phenomenon seems to exist in LA where companies race out to a low nine-figure valuation and then either stall out in that vicinity or sell for sub-one billion dollars to a larger out of town acquirer. Call it the curse of the big-little deal – maybe everyone here just wants to see their name in lights. In a market that is desperate for success stories and validation, these medium-sized exits are hailed as “wins” – and they are, given the difficulty of building a hundred-million dollar company – but they often rob the ecosystem of potential multi-generational tentpole companies. This is a mentality that appears to have changed in recent years, but that change has not yet bore fruit in the form of LA’s answer to Google, Amazon, or Facebook.

New York has seen its own version of this phenomenon, with the ecosystem’s biggest success stories, DoubleClick and Tumblr, being exits to Google and Yahoo respectively. Local darling MakerBot followed suit, selling for $600 million in June. New York does have Fab, Gilt, and Foursquare all shooting for the moon but these companies and the ecosystem as a whole still must prove that they can sustain this ambition and parlay it into a giant company.

As Tian points out, part of the blame for these exits falls on investors. It’s not that investors aren’t interested in massive outcomes – they most certainly are. But not all non-Silicon Valley investors are equipped for the financial and time commitment it takes to create them. These investors, many of which operate out of first- or second-generation funds, often have smaller pools of capital to invest out of.

Write a $2 million check at a $10 million valuation out of a $100 million fund, and a 50x return looks pretty good, returning 98 percent of your fund. Make that same investment out of a $1 billion fund and the impact on fund economics is decidedly less interesting. This is one of the few arguments in favor of mega-VC funds. But it also benefits firms that are on their fourth, fifth or sixth fund and have less to gain reputation-wise with solid base hits.

Returning to Tian’s piece, he closes by writing, “If you are wondering why Canada doesn’t have the [sic] billion dollar company, it cannot be more obvious than this. Too many people are in it trying to get rich quickly off entrepreneurs. Not enough people have the gut [sic] and commitment to create or help create something truly meaningful.”

Tian paints with a broad brush, yes, which ignores many of the subtle nuances and external factors that contribute toward building massive technology companies. But there’s little arguing that people in Silicon Valley think differently. Armed by decades of case studies and social proof, the ecosystem has developed a healthy disregard for rationality.

Mark Zuckerberg famously did just that when Yahoo came calling. He was just 20 years old and Facebook, at less than two years old, was unprofitable with just $30 million in revenue. Yet Zuckerberg and Facebook’s board, which included Peter Thiel and Jim Breyer, turned down Yahoo’s $1 billion offer. When the elder advisors tried to convince the young founder that his 25 percent of that offer would be a big number he said, “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Israeli social mapping company Waze just made the opposite decision, selling to Google for slightly more than that mythical $1 billion. Sarah Lacy cautioned Israel-bulls to “reconsider too much high-fiving over Waze.” While legendary local angel investor Yossi Vardi likes to compare Israeli startups to tomato seeds which need more experienced farmers to grow properly, Lacy believes that the country has the potential to build and sustain globally dominant Web companies without selling, offering MyHeritage as an example.

None of this is to say Silicon Valley is immune from this syndrome. There are thousands of entrepreneurs in the Bay Area who would rather flip their company than do the long, hard work of building something sustainable. But the sheer density of the ecosystem means that a dozen or so each year choose the road less traveled. Also, given the scale of the Valley ecosystem, building a big company is the only way to move the needle and attract talent and capital. Everyone in line at Philz coffee is working on the next “billion dollar business.”

Finally, Silicon Valley is a magnet for those entrepreneurs around the globe who want to build great technology companies, and the ecosystem surely benefits from this imported talent. This was actually Wertz’s central point in the original interview and is one that Tian touches on briefly. It’s a difficult problem to solve, given the power of knowing someone (or several someones) who has summited the mountain before and who can show you that it can be done. In each of these other markets, someone will have to be the first.

In many cases, it is highly irrational to turn down a nine- or ten-figure acquisition offer. There are real benefits to gaining access to the financial and personnel resources of a larger acquirer, ones that can often make or break the success of a still fledgling company. But, if there’s anything in Silicon Valley that Canada, LA, New York, and other startup ecosystems should aspire to it’s this willingness to roll the dice. Sometimes the shooter rolls a “7.”

Canada’s Entrepreneurship Dilemma: Decades Of Anemic Research Investment

UPDATE: May 21, 2015.  As if to drive home the Canadian economic crisis, Goldman Sachs has just released an oil price forecast suggesting that North Sea Brent crude will still be $55 in 2020, five years from now.  As Alberta Western Canadian Select (WCS) bitumen is valued lower on commodity markets this is extremely bad news for Canada. Further, the well-known Canadian economic forecasting firm, Enform is predicting that job losses across all of western Canada, not only Alberta, could reach 180,000. 

---

This issue has driven me absolutely nuts since I first arrived in Canada from Silicon Valley.  It did not take me long to figure out that things did not work they way they did in California, and that there wasn’t much of a true entrepreneurial economy here.  Since then, I have also been appointed to the Canada Foundation for Innovation grant process, providing me with insight into how R&D funding works in Canada. I have seen many issues in Canada that have impaired the nation’s ability to develop an entrepreneurial culture,  among them is the inherent Canadian conservatism and short term horizon of investors unfamiliar with technology venture investment.  But none has been worse than Canada’s decades-long neglect of adequate funding for research and development nationwide.  A review of the OECD data on Canada’s investment in R&D compared to other industrialized nations paints a sorry picture.  This has led directly to a poor showing in industrial innovation and productivity. This is further compounded by the current government’s myopic focus on natural resource extraction, Canada’s so-called “natural resource curse.” The result now is an economic train wreck for Canada.  The fossil fuel based economy has collapsed and is not forecast to recover anytime in the near future.  During the boom time for fossil fuel extraction, there has been essentially no rational strategy to increase spending on R&D and innovation, and hence no increase in economic diversification.  Now the problem is nearly intractable, and may take decades to reverse.

 ASLEEP AT THE WHEEL, by Bruce Smardon, McGill-Queens University Press

ASLEEP AT THE WHEEL explains that since 1960, Canadian industry has lagged behind other advanced capitalist economies in its level of commitment to research and development. Asleep at the Switch explains the reasons for this underperformance, despite a series of federal measures to spur technological innovation in Canada. It is worth noting that Arvind Gupta, President of The University of British Columbia, and former head of MITACS, the organization at UBC tasked to promote R&D, has also been an outspoken proponent for increased R&D, at one point editorializing in the Vancouver Sun, that Canada needed an innovation czar, to promote innovation in the same manner as the 2010 Seize the Podium program to enhance gold medal performance for Canada.

Also, as a member of the 2012 Canada Foundation for Innovation Multidisciplinary Assessment process, and the University of British Columbia 2015 CFI grant preparation process, I can say without reservation that the Canada suffers from inadequate R&D funding and its consequences.

ANALYSIS From CBC News

Canada’s research dilemma is that companies don’t do it here

Ten-year study says repairs needed for rebound will be costly and difficult

REBLOGGED: By Don Pittis, CBC News Posted: May 15, 2015 5:00 AM ET Last Updated: May 15, 2015 6:31 AM ET

Northern Electric was a domestic Canadian technology success story that became the telecom equipment giant Nortel Networks. But when Nortel failed, the lack of an R&D hub meant there were no startups to replace it. (The Canadian Press)

As Stephen Harper handed out more tax breaks for Canadian manufacturers in Windsor, Ont., yesterday, you might ask, “With that kind of support, why is Canada’s industrial economy in such bad shape?” Political economist Bruce Smardon thinks he has the answer.

Smardon says companies operating in Canada just aren’t spending enough on domestic research and development, and the Harper government is only the latest in a long line of governments, stretching back to that of John A. Macdonald, that have contributed to the problem.

As China’s resource-hungry economy goes off the boil, taking Canada’s resource producers with it, everyone including Bank of Canada governor Stephen Poloz, has been waiting for a rebound in Canada’s industrial economy.

But there are growing fears such a Canadian rebound is not on the cards. As the Globe and Mail’s Scott Barlow reported last week (paywall), despite having the top university for generating new tech startups, Canada has repeatedly failed to become a hub for industrial innovation.

Best in North America

Interviewed by the New York Times, the president of the startup generator Y Combinator, Sam Altman, called the University of Waterloo the school that stood out in North America for creating new ideas that turned into companies.

But as Barlow reported, there is statistical evidence that Waterloo’s success has not translated into R&D success, as Canadian industrial innovation continues to decline.

After 10 years of research, Smardon thinks his recent book, Asleep at the Switch — short-listed this year for one of Canada’s most prestigious academic book awards — provides the answer.

Political science professor Bruce Smardon’s book, Asleep at the Switch, examining Canada’s R&D failure, has been short-listed for one of Canada’s most prestigious academic prizes. (McGill-Queen’s University Press)

And, believe it or not, Smardon traces the chain of events back to Canada’s first prime minister and his tariff policy of 1879. Paradoxically, those rules were put in place to protect Canadian manufacturers from cheap U.S. goods, that were in turn protected by U.S. tariff walls.

Central Canadian boom

For the industries of central Canada, the tariff barriers worked. In the years before the First World War, says Smardon, Canada was second only to the United States in creating an economy of mass production and mass consumption, where workers could afford to buy the products they produced.

However, prevented by tariffs from exporting U.S. goods to Canada, American companies did the next best thing. They started, or bought, branch plants north of the border, wholly- or partly-owned subsidiaries that used U.S. technology in Canadian factories.

Smardon says that started a trend that continues today. The majority of R&D was being done in the home country of the industrial parent, not in the Canadian subsidiaries. And in the Mulroney and Chrétien era of free trade, he says, relatively high-tech branch plants, such as Inglis and Westinghouse, started to close as products were supplied more efficiently by the U.S. parent factories.

There were Canadian R&D stars such as Nortel and Blackberry, says Smardon. But they were exceptions. And when those stars began to set, the lack of a traditional R&D hub in Canada meant there were few young research-based companies ready to come up and replace them.

Tax credit paradox

The paradox, he says, is that Canadian taxpayers have spent a fortune on R&D tax credits. The 2011 Jenkins report showed that as a percentage of GDP, Canadian R&D tax incentives were higher than anyplace else. But as Barlow showed, Canadian R&D still lags behind.

The reason, Smardon concludes, is that while taxpayers fork out for R&D, industrial R&D doesn’t happen here but in traditional R&D hubs abroad. He says that free trade agreements and a longstanding view by Canadian governments that business knows best mean it’s very difficult to put conditions on how that money is spent.

“If we are concerned with developing a manufacturing base in the more advanced research intensive sectors, we’re going to have to have incentive programs at the very minimum, that are clear in insuring that any incentives are used to develop products and processes in Canada,” says Smardon. “They’ve got to think through how that can be done.”

But Smardon is not optimistic. He says that free trade and the free market philosophy has become so entrenched in Canadian thinking that it’s impossible to change.

Market rules

He says that is why the Harper government became so enamoured with the business of pumping and exporting unprocessed oil and gas while the Canadian industrial economy crumbled. It was exactly what the global free market wanted.

It may indeed be that global market forces decide Canada is an icy wasteland that is best at producing raw materials. It may decide that the best way to use our brilliant young people is to send them to California to develop their business ideas there.

But if we want more than that, perhaps handing out ineffective tax incentives is not going to be enough.

Budget 2014 may represent a paradigm shift for Canada’s research and innovation: time will tell

I am both encouraged by and skeptical of these subtle changes to research funding, and glaring problems remain. As the writer, UBC Mathematics Professor, Nassif Ghoussoub, himself points out,  the largest portion of government research & innovation funding is “business as usual.”  The $500 Million earmarked as an Automotive Innovation Fund, is a laughable attempt to disguise a government subsidy as “funding for innovation.”  Distinct changes in policy and procedure are reported, as recommended by UBC President Stephen Toope, and MITACS CEO, Arvind Gupta. But with this federal government, only time will tell what will actually emerge. It will take at least 10 years of this new direction and funding to reverse Canada’s poor OECD standing in innovation and productivity. Some are skeptical of the lack of detail and with good reason, as recent government announcements of venture capital funding and new government backed loans for entrepreneurial ventures have yet to materialize, as has been reported in the Globe & Mail.

Piece of Mind

The substantial investment in university research that the Canadian government announced today is not the only story in Budget 2014. A bigger story may be the pivotal moment and the policy shift that it represents for this government on a research and innovation front, where it had been on the defensive. The $500 million to enhance the Automotive Innovation Fund may eventually end up being a subsidy for the Chrysler plant in Windsor, and the $222 million over 5 years for TRIUMF may be business as usual. The $37-million annual increase to the three research councils (NSERC, SSHERC and CIHR) could be seen as a positive change, even if in real dollars, CIHR’s budget has fallen 6.4% since 2009, NSERC’s has dropped by 5.7%, and SSHRC’s by 6.8%. However, the clear hint in the budget document that these new funds should be directed towards basic research, is already a big shift. But…

View original post 962 more words

CFI Informational Meeting, UBC Vancouver 11/15/13

A brief general overview of the Canada Foundation for Innovation grant review and evaluation process. Recommendations for researchers preparing grant applications for the 2015 CFI Innovation Fund.