The Way I See It… by Michael C. Volker
Bridging
the Innovation Gap Starts with Startups
Innovation is
a hot topic these days. At the recent
Conference Board of Canada's Innovation 2001 conference in Montreal, Canada's
there was a great deal of talk about our country’s "innovation gap"
and the government’s so-called “Innovation Agenda”.
Indeed, in
June of this year, the Standing
Committee on Industry, Science and Technology produced its fifth report titled,
“A Canadian Innovation Agenda for the Twenty-First Century”. The
report notes that “Innovation,
as founded on Science and Technology, has thus become the principal means for
achieving economic success in the twenty-first century.” Based on this premise,
it follows that an increase in research and development activities is necessary
for innovation.
Industry observers know only too
well that our GERD-to-GDP ratio, or gross expenditure on R&D per unit of
gross domestic product, has averaged 1.5% compared to the Organization for
Economic Co-operation and development (OECD) average of 2.2%.
I
recall Finance Minister Paul Martin declaring just over a year ago that Canada
must triple its annual commitment to R&D to $ 47.5 billion by 2010.
Accordingly, new initiatives such as the Canadian Foundation for Innovation
were launched and increased support for existing government programs was
announced.
Last
year our Universities spent almost $3 billion on R&D. That accounts for 15% of all R&D
expenditures. This was an increase of almost 25% over the previous year. Hence,
the pool of intellectual property with commercial potential is bound to grow
over time.
Bridging the
gap between this new wealth of raw intellectual capital and the marketplace is
both a challenge and an opportunity for our high technology industry. So, how
will this additional creative output migrate from ideas and concepts into the
market place? There’s only one way: through technology entrepreneurs.
Entrepreneurs
are the champions of innovation. They are the ones who build the bridges, i.e.
the new ventures that turn inventions into viable commercial products. Doing so
requires talent and capital.
The capital
flows to support innovation increase as ideas move from concept to products and
customers. Attracting investors in the later stages is not difficult. After
all, it’s less risky to bet on a technology venture when it has real products
and sales. But, accessing capital to take inventions from the labs to the
prototype stage is a different story. Fewer investors are available to
entrepreneurs in the startup or pre-startup phases.
Organizations such as NRC’s IRAP or regional institutes such as the B.C. Advanced Systems Institute (ASI) play a key role in bridging this gap. They will invest in projects long before venture capitalists and even many angels are interested. More of these are needed and as ASI has demonstrated, the cycle can be repeated by sharing in the spoils of successful ventures.
The Standing Committee’s report offers a list of recommendations for the Innovation Agenda. Way down at the end of the list, the eighteenth point speaks to the financing of startup firms but falls short of presenting any particularly novel suggestions other than to suggest that more private investment should be encouraged.
This should
not be all that difficult. There are practically no programs, incentives, or
mechanisms which in any way encourage investment at the formative stages.
Investors are rewarded with low capital gains taxes when they exit an
investment, but what is really needed is a going-in incentive to provide
patient risk capital. The smaller, retail investor is almost entirely excluded
from the innovation equation. Yet, these retail investors are growing in
numbers and there are many that would risk modest amounts. A vibrant, junior
equity market with up-front tax breaks, swapped for downstream benefits, may be
just what’s needed.
The
way I see it, we need to take a much bolder step at mobilizing capital for
start-up entrepreneurs. Having been involved in the tech startup game for three
decades, there's no doubt that we could be doing more of, as well as doing
better in, that which we do fairly well in this country - launching superb
technology ventures!
Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at mike@volker.org.