Silicon Valley North #57 September, 2003

The Way I See It… by Michael C. Volker

Crossing the funding chasm is a startup’s biggest challenge

There’s a widening chasm forming between ideas and the successful commercialization thereof.

In the recent federal budget, an increase of almost $2 billion was announced for R&D and universities are major beneficiaries of this. $11 billion has been invested since 1997 and for the first time, indirect research costs are being supported to the tune of $245 million per year. 

Total R&D spending in Canada - government and private sector - now stands at some $20 billion, up from $15 only a few years ago when Paul Martin, then Finance Minister, stated an objective of tripling to $45 billion by 2010. 

What worries me greatly, though, is that much of the new knowledge that's being created will sit in university labs and offices and never see the light of day. That's because there's a dearth of very early stage funding available to support technology entrepreneurs in the early pre-commercialization stages of an innovation. Actually, "dearth" is an exaggeration. There's none.

A recent AUTM (Association of University Technology Managers) survey, noted that whereas American universities created 402 spin offs in 2001 at the rate of 1.46 companies per US$100 million in R&D expenditures, Canadian universities formed 68 such companies at a rate of 3.84 new ventures per US$100 million. And, B.C. is outperforming other provinces in this regard with SFU, UBC, and UVic routinely churning out new companies.

I recently listened to Charles Wessner of the U.S. National Academy of Science's National Research Council.  To address the early stage funding gap, he noted that the U.S.'s SBIR program (Small Business Innovation Research Program) formed in 1982 provides early stage funding, via federal agencies in the $100K range for Proof-of-Principle support. SBIR is funded at approximately US$1.3 billion per year. This is a competitive program and applicants compete for support.

It reminds me of our UP Program - that's the old "unsolicited proposals program" run by our federal government's Department of Supply and Services. Unfortunately, it was abandoned some years ago.

Another program discussed by Wessner was the Advanced Technology Program (ATP) that, although politically controversial, was recognized as one of the most effective of the major innovation funding programs in the U.S. today. The mission of this program is to "bridge the gap between the research lab and the marketplace". Over a 10 year period, some 41 competitions resulted in over US$1.6 billion in support. 

Wessner compared these types of programs with the tax credit programs such as Canada's SRED tax credits for companies performing R&D. He made a good point in noting that the competitive programs encourage excellence whereas the tax credit programs reward activity without necessarily recognizing results. It's hard to argue with that.

In comparison to the U.S.'s SBIR and ATP, Canada's SRED program invests more in R&D on an absolute basis, i.e. in the $1.5 to $2 billion per year range, meaning effectively 10 times that of the U.S. on a pro-rata basis. Even so, many tech companies don't understand how this works or, when they do, they choose to ignore it because they find it too complex. They also don't understand that, in B.C. for example, they can get up to 68% of their direct R&D salary costs fully refunded.

We've got a great innovation climate - fountains of ideas and I.P. at the universities, not to mention many other research institutions, budding entrepreneurs, angel investors, mentors, and growing pools of capital that are ready to fund enterprises when they get to a certain stage.

Getting companies to the VC-ready stage is a completely different ball game than getting companies launched in the first instance. In B.C., there are two new early-stage funds that have been formed thanks to a Provincial tax incentive. These are the BC Advantage Fund and the Western Universities Technology Innovation Fund. Both of these offer B.C. investors a 30% refundable tax credit and RRSP eligibility.

The way I see it, we need more initiatives such as these to support technology entrepreneurship and to see our national investment in R&D bear fruit.

Michael Volker is a high technology entrepreneur and director of Simon Fraser University’s Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is past-Chair of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at mike@volker.org.