Is Canada the Worst Consumer of its Own Innovation?

Suzie Dingwall Williams is a Techvibes Guest Contributor and this post was published yesterday on Venture Law Lines.

According to Techcrunch, a whopping $69 billion was spent on tech mergers and acquisitions in 2009. For me, the most interesting part of this data is the almost complete absence of Canadian acquirers.

If there is one common element in recent press about successful start-up exits, it’s this: the acquirer's residence is almost always anywhere but Canada. Large Canadian companies don't share the same appetite for Canada's start-ups as their foreign counterparts. Bumptop's patents? You can visit them at Google. 6N Silicon's silicon purification technology? Send your royalty payments to California. For all the tax dollars we allocate to fostering new discoveries and patents, it would seem that we rarely retain any ability to reap long-term rewards. This doesn’t make a lot of sense to me: when I pay for a facial, for example, I don’t expect to see the blackheads disappear from my neighbour’s face. Which leads me to ask, is Canada the worst consumer of its own innovation?

A long-standing complaint of many in the venture capital sector is that the corporate culture at Canada’s leading tech companies is too conservative to successfully implement a growth strategy based on M&A. Their engineering departments remain dominated by developers who swear by the “not invented here” school of thinking. The result? Often, it’s a deal focussed on acquiring patent rights, together with some transitional services from the inventors. Not surprisingly, this kind of deal: (a) is lower-priced, and (b) tends to drive deal flow away from the acquirer into the arms of a competitor with a more entrepreneurial corporate culture – usually, someone outside of Canada.

This mindset is also often reflected in corporate structure: because some Canadian tech stars do not view M&A as a cornerstone of their growth strategy, they have no real infrastructure to get deals done, or to properly integrate acquired staff into their businesses. In an environment where Google, Cisco and other competitors have entire departments focussed on mergers and acquisitions, this kind of ad hoc approach is a competitive disadvantage. And it shows: a US VC (and client) recently told me that he strongly discourages any of his portfolio companies from speaking about acquisitions with one Canadian tech giant, because it is a well-known “price bottom-feeder” who cannot complete a deal.

Conservatism is hardly a flaw, but is it an approach that Canada’s tech leaders can afford in the current climate, where tech M&A is at an all-time high? As any VC knows, future growth and profit is all about the quality of investment opportunities, or deal flow, that one can generate. I worry that poor access to great acquisition targets will be the long term price to be paid for the current approach to M&A that many Canadian tech companies take.

Beyond that, I worry about the return on my investment as a taxpayer. When we sell a start-up that turns out to have the next billion dollar discovery to a US acquiror, we lose the tax we could have collected from that business. Tax that could have paid for funding for more discoveries.

A common question in the world of Canadian innovation is: when? When will we see the next Nortel? With all the money being deployed (and tax credits awarded) for research and innovation over the last 12 years, why aren't there more emerging tech/biotech/clean tech giants? If we do not focus on improving the more mature parts of the value chain, then Canada’s innovation economy may well become an export industry. This would be wrong. Innovation is not like oil; there isn’t an infinite supply which can be extracted and shipped offshore for profit. How can we incent more Canadian acquisitions of Canadian tech? And beyond this, how do we create tech acquisition leaders?

Facebook Law: Beyond Privacy

Suzie Dingwall Williams is a Techvibes Guest Contributor and this post was published yesterday on Venture Law Lines.

There is a thin line between keeping a trade secret, well, secret and public disclosure, and that line is most narrowly drawn in the world of social networks. All of you who use your Facebook page and other networks as your own personal start-up sites, take heed:

Can postings, messages and/or emails that you send through social networking sites be used against you in contractual disputes? According to last month's ruling by the US District Court (Central California), the answer is maybe, probably, yes - perhaps. Would the same conclusion be reached in Canada? That also isn't clear.

Before the court was a request to subpoena all private messages, wall postings and comments posted by a litigant on his Facebook and MySpace pages. These items, it was argued, would support a defense in connection with a breach of contract/copyright infringement suit.

The court based its ruling on the antiquated Stored Communications Act, enacted by Congress in 1986 to protect emails and other private communications that individuals placed "in electronic storage" with "electronic communications service providers". The court went through a heavily-footnoted, elaborate analysis to conclude that yes indeed, direct messages sent via Facebook should be treated like emails sent via an ISP, and therefore protected from disclosure.

The court's findings did not extend to wall postings or comments, although the court hinted strongly that it would, if the facts indicated that the user had set his privacy settings to limited disclosure only.

Would the same reasoning apply here in Canada? It is difficult to see the line being so firmly drawn in many cases. Privacy settings allow for selective social networking, which is not the same thing as private, confidential or privileged communication. I can think of a number of situations where extending privacy to a user who has selected "friend only" access to his postings would be absurd.
What if the user granted all friend requests? What if the friends who could see the postings were, in fact, people with no relationship to the user? (One of my Facebook friends is, in fact, someone I've never met. He likes Farmville. A lot, according to my news feed.)

Until Facebook comes out with some kind of focussed business networks offering that manages these issues, you need to proceed with caution. Not a day goes by without a lawyer somewhere thanking the billing gods for the delivery of Facebook. For lo, unto us lawyers has been born an entirely new niche of legal practice: social networking, or "Facebook" law. Now that the body of Facebook law is expanding to deal with trade secret and copyrght disputes, and other commercial matters, the fun begins.

SRED Reform: Warning Signs Ahead

Suzie Dingwall Williams is a Techvibes Guest Contributor and this post was published yesterday on Venture Law Lines.

I've often worried that Canada does not have a organization that advocates exclusively for the start-up. After all, who has the time? Instead, we rely on organizations such as CATA and the CVCA to address issues on our behalf.

For the most part, this makes sense. But what happens when the interests of the start-up community diverge from those of other members of these associations?

SRED reform is one such area. The federal government currently is undertaking a review of the SRED program, and is soliciting active input from the private sector. CATA, ITAC and all these folk have opened their coffers and paid for handsome white papers, industry studies, advocacy programs and the like. But what they are advocating is not necessarily in the best interests of start-ups.

The SRED program, albeit full of warts, has been a valuable source of additional cash to Canadian start-ups. Under SRED, the federal government will refund up to 35%of the first $2 million spent on research and development each year to Canadian controlled private companies(CCPCs). For companies which do not meet the CCPC criteria (foreign-owned subsidiaries, publicly traded companies, start-ups backed by foreign venture capital), the cash refund is not available; instead, tax credits are awarded.

CATA and ITAC have quite rightly pointed out the many flaws inherent in the system. The process for claiming SRED refunds and credits is certainly no picnic, and has given birth to a lucrative cottage industry of specialists who will prepare the paperwork for you for the price of a small hybrid car. Audits of SRED claims are on the rise as well, making the time to refund, and the amount of any refund, uncertain in some instances.

But for many lobbying groups, addressing these flaws has taken a back seat to a different priority: getting cash refunds into the hands of later stage companies. Public companies, foreign-owned subsidiaries, profitable private companies - all of these folks should also, lobbyists argue, be eligible for SRED cash back.

Now, I know what you're thinking: if Canada provides direct cash government assistance to mature companies, will this turn SRED into an illegal trade subsidy that will cause all kinds of problems for Canadian companies in international trade? (Okay, I know you're not thinking that - it is Monday after the long weekend - but really, could someone explain to me how this would NOT cause problems? Has anyone been watching the increasing tech protectionist tendencies of Europe? Why not just paint a red target on the back of, say Opentext or RIM, and turn them towards the EU?)

What you are really thinking is, why do I care if there's more companies at the SRED refund party? The answer is simple: a tax base of 33 million people. The amount of federal money available is finite, which means that, should the federal government concede the point, the end result may well be less pie for everyone.

Unless advocates can explain where the extra cash to fund an expanded refund program will come from, we need to proceed with caution. Back in high school, I once shared a summer job with Tony Clement. I followed him around the Old City Hall courts for two months, doing furniture inventory for the Ministry of the Attorney General. Let me tell you: even as a university student, that boy could count. I would not bank on him advocating an unfunded policy.

There are valid reasons why CATA and others are advocating SRED cash for bigger industry players, but these needs should be balanced against those of the people currently benefiting from SRED. And you, entreprenuers, need to do the balancing. Agree that there should be cash made available to foreign-backed start-ups, as CATA recommends (although I will note that in my experience, while US VCs and angels have found SRED interesting, it hasn't been a key driver of investing in Canada. It's like leaving cookies out for Santa - sure, he might come, but I know that it's more likely I'll end up eating them)

SRED reform could enhance or further decimate the prospects of Canadian start-ups. Your participation is needed.

Just How Pressing Is the Immigrant Entrepreneur Issue?

There appears to be a widening gap between the rate of innovation in Canada and the rest of the world. The statistics should scare the bejesus out of you.

The World Intellectual Property Organization (WIPO) reports that in 2008, 77,501 patent applications were filed in the US PTO by resident Americans.

To match the same rate of innovation as Americans, Canadian residents would have to file 8,488 patent applications during that same period. We fall short by a large margin: in 2007 a total of just under 5000 patent applications were filed in Canada, and 90% of those were filed by non-residents.

Now, there's a lot of challenges to these numbers that can be made- not all innovations are patentable, many Canadian companies file in the US and by-pass Canada, some of the non-resident applicants are really filing innovations by Canadian employees, etc. But as a raw measure of innovation, WIPO's numbers still highlight a compelling and troubling gap between inventions by Canadians versus others.

Let me put it another way (or more accurately, let me quote other WIPO data): For every million Canadians, 151 patents are filed. That's a low, low number when you compare it with the following:

Country : # patent applications/million residents

  • United States : 800.17
  • Germany : 581.67
  • Israel : 224.93
  • Ireland : 193.99
  • France : 238.58
  • Finland : 341.10

What is the rate of innovation that we need to maintain in order to be proportionately competitive with other innovation economies? That's something people who don't have clients can debate. Me, I'm just going to point out the yawing gap between Canada and Finland (Finland?!? This isn't hockey! On sheer numbers of daylight hours alone we should have more inventions than they). But the compelling fact for me about these numbers if they cry for a proactive immigration policy that will close the gap.

Start-Up Brain Drain: The Next Threat To Canadian Venture Capital?

Suzie Dingwall Williams is a Guest Contributor and this post was published yesterday on Venture Law Lines.

When US VCs grow introspective, it’s almost never good for Canada. Which is why we should all be concerned about the self-reflection now taking place south of the border.

In recent months, US VCs have cottoned on to the importance of immigrant entrepreneurs to an innovation economy. This used to be Canada’s exclusive domain; thanks to historical inclination and demographics, we’ve long known we need foreign innovators in order to grow our economy.

Now, US venture capital is catching up. Their zeal is fueled by a recently released study by the NVCA, which notes that (a) immigrants have started more than 25% of U.S. public companies that were formerly venture backed, and (b) more than 50% of the employment generated by U.S. public venture-backed companies has come from immigrant-founded companies like Intel, eBay, Yahoo!, and Sun.

The New York Times has also taken note, citing Harvard Law professor Vivek Wadhwa’s claim that 52.4% of today’s Silicon Valley startups have at least one foreign founder. US VCs are figuring that, to expand domestic deal flow, they need to expand the immigrant entrepreneur base.

As a result, US VCs are now actively lobbying the Obama administration to increase the number of specialty worker visas (referred to longingly by Canadians with dreams of a Silicon Valley life as H1B Visa).

This is not the best of news for Canada, unless you are a young entrepreneur who believes his business would get more and better financial backing if only he could relocate to California. The limited number of H1B Visas in the US has driven high tech growth in Canada, in some respects; in several cases, American businesses who cannot attract or sponsor adequate numbers of high tech professionals have near shored that work to Canada.

In a larger sense, there is an active competition heating up for innovators from outside of North America, one which Canada can ill afford to lose. Canada has some immigration programs for entrepreneurs which are laudable, but not spectacularly effective. There is a need to think and plan for how to capture this desirable talent pool, before new market entrants steal our thunder.

Does Silicon Valley Really Ban Non-Compete Agreements?

I love non-compete clauses. I can go on for hours, maybe even days if there are donuts around, about this particular issue.

If deployed correctly, restricting key employees from competing when they a company leave makes the intellectual property assets of a company easier to protect, start-ups easier to finance, and incents employees to produce. The harder it is for founders or key employees to leave a start-up and pursue the same innovation elsewhere, the better.

During the last two or three years, however, mine has not been the most popular view. Outside of Silicon Valley it has become de rigeur to decry the practice of requiring start-up employees to be bound by non compete and non solicitation restrictions. Critics argue that clauses like this stifle innovation. They point to California, where non-compete clauses are void by state law. California’s ban, they say, allows a free flow of ideas as employees churn between start-ups, which in turn stimulates the continuous generation of new start-ups and innovations.

Over in New England, Spark Capital's Bijan Sabet and others have even convinced Massachusetts legislators to take a similar “open source” approach. In January 2009 legislators even introduced a bill that would copy California's ban on non-compete clauses in employment agreements.

Yeesh.

Now, it seems I’m not the only one who rejects the idea of open source innovation - some of Silicon Valley's larger players may also feel the same way.

Yesterday came news that the United States Department of Justice has opened an investigation on the recruiting practices of Silicon Valley companies like Google, Apple, Yahoo!, Genentech and several others. The investigation is looking into whether the companies entered into agreements to not actively recruit talent from each other, which may be a violation of antitrust laws.

Stay tuned.

The Challenge (and Opportunity) for Regional VCs

An oft-heard comment about Canadian entrepreneurs is that they don’t aim high enough. Lately I’ve been wondering if our local angels and VCs are doing the same thing. In focusing on nurturing the local startup community, are they missing a larger opportunity?

Let me start by agreeing that, no question, local VCs need to prove to their LPs that there really is a critical mass of fundable entrepreneurs in Canada. But this focus needs to be applied with a sense of the broader trends in North American venture capital. The industry is consolidating and reinventing itself south of the border. Canadian VCs need to think where they fit in this new, emerging industry. Will local excellence be enough?

To date, Canadian venture capital has not been able to survive as an industry that services solely Canadian start-ups. That doesn’t mean it won’t change, but that’s the track record, neatly summarized in a handful of consultant reports tucked away in certain VC offices. And past results generally drive LP investment decisions.

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Growthworks: Not Just a VC

You have to hand it to Growthworks - when management fees fall across the industry, they find ways to diversify.

Last week Growthworks anounced its intent to acquire Mutual Fund Manager Mavrix. To do so, it is likely GW rolled over some of their own management fees received for managing GW assets into buying, effectively, more management fees (i.e., the one Mavrix earns for managing its own assets).

What does Mavrix have to do with venture capital? Nothing, as far as I can tell. But if they provide one VC which a creative source of operating capital, I'm on board.

Nortel Severance Package - Enhanced for eBay

There are only 3 days left to bid on a wonderful Nortel "enhanced" severance package (eBay item 180340590158). I know others have blogged about it, but I love it so, I must give it the space it deserves. Here are my favourite excerpts from the auction description:

"...This package includes the following items collected largely from Nortel over 17 years of service (subject to change depending on expected Grinch-like behavior from former management; like items will be substituted if reclamation occurs)....

A box. This sturdy 16”x12”x8” box was at one time filled with dreams and unrealized potential. Just like me, you can use this to clear out your personal belongings in 4 hours or less, and later to store mounting unpaid bills as you search for employment in this vibrant economy. In a pinch, you can put it over your head to keep off rain, make “will work for food” signage, or kindle fires in trash bins in back alleys to keep your hands toasty warm. The possibilities are endless. Truly Business Made Simple....

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The Return Of Heavyweight Entrepreneurs, Part II

Vince Kadar has earned his start-up stripes through just about every stage of the high tech boom, starting with Ottawa's Crosskeys in the late 1990s, then on to Saraide/Infospace and Taral Networks (now Airwide Solutions). These days he can be found at the helm of Ottawa's Telepin Software, a thriving mobile financial platform. In January, Telepin was named one of Red Herring's Top 100 Global companies, and has continued to build momentum off the VC buzz grid. 

Another example of the growing group of those entrepreneurs who, after one or two highly successful rounds, have re-entered the start-up scene in Canada.