by Charles Plant | Sep 9, 2016 | Entrepreneurship
The lack of Canadian venture capital has been denounced consistently in studies and think tank reports, and by the media, entrepreneurs, and even venture capitalists themselves. Yaletown Partners completed a report on the state of venture capital in the country, stating among other things that:
“Yaletown found there is too little capital spread too thinly across Canadian tech companies compared to the U.S., and that the lower amounts of capital available for Canadian companies hamper their competitive position and dampen their value when they either sell out or go public.” Sean Silcoff |The Globe and Mail |July 12, 2016
The general view expressed in the press is that Canada is short-changed by the lack of venture capital; and this hurts our prospects as a world-leading innovator.
“Despite recent successes, tech firms in Toronto and the country at large still face funding challenges that hurt their growth prospects.” Shane Dingman | The Globe and Mail | Feb. 14, 2016
However, a sign of changing times was the recent report in the National Post that stated:
“Venture capital surged to a new record in the first quarter (of 2016)….The value of venture capital investments made in Q1 surged to $838 million, nearly double the amount recorded during the same period last year….The CVCA [Canada’s Venture Capital & Private Equity Association] said that it expects the frenzied pace of the first quarter to continue this year.” John Shmuel | Financial Post | May 18, 2016
Venture capitalists are funded by outside investors to provide capital to companies at three distinct stages. In the seed stage, small amounts of money (typically under $1 million) are used to establish a position in a market and ensure traction for an idea or product. Growth capital ranging from $5 million to $50 million is needed to accelerate growth for a business with a proven market. In the third stage of growth, amounts over $100 million are needed to create a significant international presence and to turn a company into a Unicorn or prepare it for public markets.
If Canada is truly underfunded in terms of venture capital, then what stage is underfunded?
- Do we lack funding to seed smaller enterprises at the startup stage?
- Is funding insufficient at the growth stage to establish solid mid-sized companies?
- Do we have enough later-stage funding to create world-leading enterprises and Unicorns?
This report attempts to examine how much capital Canada has available per business stage and whether Canada has enough VC funding to take its startups from inception to world-class companies.
Available data suggests that for seed- and growth-stage VC deals, Canada compares favourably with most other countries in the OECD.
However, if we want to have the capacity to create Unicorns locally and not rely on external funding, then we need to do one of two things.
- We could increase the proportion of funding available to later-stage deals away from seed and earlier-stage companies. We could do that either through reallocation of funding from seed to later stages, or we could do it by raising more dollars in the aggregate and allocating it entirely to later-stage funding. We would also need to create significant funds that have enough horsepower to invest larger amounts in select companies.
- Privately funded Unicorns are a relatively recent phenomenon. Only recently have US VC funds been large enough to fund later-stage deals entirely in private markets. One result of this trend has been technology companies going public at a much more advanced stage that they used to. When such large funding amounts were not available, companies had to rely on public markets, going public at lower valuations than Unicorns now command. Perhaps when combined with government incentives, Canada could establish a vibrant market for later-stage deals in public markets.
In addition to determining whether we have sufficient levels of Canadian venture capital funding available, we need to determine whether we have enough experience to be effective at managing larger funds (should we be able to raise them). We must also better understand whether we are investing in companies at the right time and in the right amounts to create Unicorns.
by Charles Plant | Jun 13, 2016 | Management Training
The comments from my last blog got me thinking about MBA programs in general and Masters in Innovation programs in particular.
The businesses that are succeeding today (and by succeeding I mean are having huge growth in acceptance, revenue, valuation, etc.) are the ones that are disrupting the status quo in novel ways. So if these are today’s successful businesses, where can students go to learn these new ways of thinking, the new skills and the new business paradigms that create successful disruptors?
MBA programs are good at teaching people how to analyze everything that moves, preserve the status quo, and avoid risk. But they don’t do a very good job of teaching students to think outside the box. There may be courses within an MBA on disruption but I haven’t found one.
I thought that perhaps there might be Masters of Innovation programs that teach disruption in general but my quick review of these programs is that they seem to favour continuous innovation and fitting in to corporate norms. I’m still searching for a program in disruption but not having much success.
There are disruptive ideas in every part of a business. They crop up in human resources through the adoption of Holocracy. They create new means of financing such as crowd funding. They disrupt supply chains as Amazon has done. They change the face of marketing through social media. I could go on and on with how every facet of our lives is being disrupted but I think you get the point.
We are living through a time of massive disruption and yet I can’t find anyone focussing on disruption in a business program. I think we need to remedy this. We need to create a Masters of Disruption.
We could cover basic business topics in such a Masters but focus on how the world of business is being disrupted right now. Even more, we could challenge students to become disruptors themselves, to find new ways to alter the status quo.
I suppose we can’t call it a Masters if Disruption as I don’t think that would fly very well at an interview. (Can you see your typical HR manager actually want to hire a disruptor?) But we could easily focus on just such a topic through series of courses on innovation.
But to actually create just such a program I suspect that we need a disruption in business education. And how we do that is leaving me stumped.
by Charles Plant | Jun 2, 2016 | Entrepreneurship
There was a great article on the Harvard Business Review site yesterday that said that companies that have a founder’s mentality deliver returns to shareholders that are three times higher than in other companies. It goes on to say that a founder’s mentality has three traits that are insurgency, an owner’s mindset, and a frontline obsession.
The article that goes on to show that as a company gets bigger, it loses its founders mentality. While I was reading it, I suddenly thought that there is another thing that happens as companies get bigger; they hire more MBAs.
Now before I get jumped on for inventing a correlation between the number of MBAs that a company has, the loss of its founder mentality, and inevitable slow decline to irrelevancy let me say that I have an MBA. Not only that, I actually taught MBAs at York’s Schulich School of Business for seven years. And what did I learn and what do we teach?
Well there certainly isn’t much in an MBA about insurgency. We’re more likely to teach students how important it is to understand and develop process and ensure it is followed so that we can have a consistent level of quality. I don’t remember any courses on insurgency, just frameworks like Porters Five Forces, the BCG Matrix. Lots of analysis and risk reduction instead of radical wild ideas.
As to an owner’s mindset, students are more likely to learn about accounting, finance, and driving shareholder value through short term profit maximization. I just checked Rotman’s site and even in their specialization in Innovation and Entrepreneurship, there is no course that looks like it focusses on ownership thinking.
As to a frontline obsession, an MBA will spend a lot more time understanding the concept of materiality and how to look at the big picture than to obsess over operational details. In fact people who obsess over frontline details are told they are too operational, not strategic enough and they don’t get promotions.
The article says that owners “abhor complexity, bureaucracy, and anything that gets in the way of the clean execution of strategy. They are obsessed with the details of the business and celebrate the employees at the front line, who deal directly with customers.” That doesn’t sound very MBA like to me. MBAs celebrate process and analysis, not details.
So my hypothesis is that MBAs are being taught the wrong things. They are taught the things that make businesses predictable and safe instead of dynamic and bold. And when companies hire too many of MBAs, they begin to lose their founder’s mentality, they become predictable and safe, and they begin a slow decline to a merger (aka death).
by Charles Plant | May 9, 2016 | Innovation
Canada’s Innovation Culture may not be the problem people think it is. While many commentators claim that Canada lags behind the United States in its ability to innovate, we found no evidence of this in our recent study on corporate culture. Through a series of studies the Impact Center is examining Canadian attitudes, beliefs and practices in innovation. Our prior study looked at attitudes towards innovation and found undeniable differences in Canadians willingness to take risks. This study set out to determine whether there is a difference in Canadian and American corporate innovation culture.
We set out to examine three dimensions of corporate culture including:
- Receptivity to new ideas
- The factors which pressure companies to innovate
- Employee beliefs as to internal capabilities to innovate
To conduct the study, we asked 1,000 knowledge workers about their attitudes towards innovation, receiving responses from 600 Americans and 400 Canadians.
And while we expected to find differences between Canada’s innovation culture and that in the US, when we looked at the data we found it difficult to identify any real differences. In many cases, the responses came back with such similar numbers. The only consistent trend that we found is an increased likelihood of Americans to be polarized in their opinions; more likely to answer “Strongly Agree” or “Strongly Disagree” than Canadians are.
Our study found that 69% of both American and Canadian knowledge workers believe their companies to possess positive innovation cultures.
- There was less than a 5% difference in Canadian and American responses for nine out of the twelve questions.
- Americans are 11% more likely than Canadians to identify problems at work.
- Americans were 13% more likely to think that their culture makes it easy to put forward new ideas.
Corporate innovation culture plays an important role in fostering or inhibiting the development of new innovative ideas. Culture sets the tone for an organization and permeate employee lives on a daily basis. This in turn affects a country’s ability to create and foster an innovation economy.
While these results may appear inconsequential, they allow us to eliminate a potential cause of Canadian innovation problems by highlighting the similarities in the Canadian and American beliefs about a culture of innovation.
by Charles Plant | Apr 9, 2016 | Innovation
The Myth of Canadian Industry’s Poor R&D Performance
Canada’s R&D Expenditures have been underreported for quite some time. Numerous reports on Canada’s innovation economy have noted Canada’s poor record of private sector spending on research and development (R&D) relative to other Organization for Economic Cooperation and Development (OECD) countries. While we are among the middle of the pack on public R&D spending, we rank near the bottom when measuring Canada’s R&D expenditures (BERD).
However, these statistics may all be incorrect. Because of the way that the data has been collected, it appears that Canada’s BERD may have been significantly underreported over an extended period of time.
Until very recently, annual spending on R&D by Canadian businesses has been reported only for work that meets the definition of Scientific Research and Experimental Development (SR&ED) in the Income Tax Act. The definition of R&D used by most OECD countries is substantially different; it uses the current Frascati model that includes R&D in the humanities and the social sciences, and product development based on existing knowledge.
Because of these differences in definitions, Canada may have been underreporting its expenditures on R&D since 1997. It is difficult to estimate the level of underreporting spread out over nearly two decades, but we tried to gauge the extent of the problem by looking at salaries spent on R&D. We tabulated the differences between the total salaries spent on personnel involved in R&D activities and the amount allowed to be claimed for SRED purposes for a sample of ten companies. Although measuring total R&D salaries will overreport the amount that would be allowed under the Frascati definition, it is indicative of the problem that the differences in definitions have created. Our conclusion is that the R&D for our sample of companies may be underreported by up to 73%.
Are Business Expenditures on Research and Development Declining?
Numerous reports on Canada’s innovation economy have pointed out not only that Canada’s BERD expenditures are lower than the OECD average but also that they appear to be declining over time.
In recent years, the administration of the SR&ED program has become more structured, and expectations have been set for private sector R&D work to include formal experimental procedures and complete evidence records. According to program users, it is more difficult to get SR&ED credits approved now than in the past.
This may mean that not all R&D that was reported by companies in past years is captured with the tightening of the SR&ED program. Hence, if SR&ED is the number used by Statistics Canada for R&D reporting nationally, then R&D expenditures would have declined as the program was tightened.
Policy Implications
But if we are using an incomplete definition of R&D that leads to erroneous conclusions, then have we been developing flawed R&D policies and expenditure programs?
And if our R&D spending has been higher than reported, why aren’t we doing better?
Unfortunately, without a substantial amount of work, it is unlikely that we will ever know how much business has actually been spending on R&D. Thus we may have lost critical time that could have been productively used to develop a more targeted innovation policy. We can only hope that recent changes to data collection by Statistics Canada will enable us to rectify these problems.
