Strategy

Now hear this: Technology entrepreneur Terry Matthews

Innovation isn't high enough on the government's agenda and it's going to cost Canada in the long run, says a tech entrepreneur.

The economy is a hot-button issue in the federal election, but Ottawa-based entrepreneur Terry Matthews, national spokesperson for the Canadian Advanced Technology Alliance, says innovation isn’t high enough on the agenda. He tells Andrew Wahl that the government is failing to support companies commercializing research, and that its taxation, R&D and procurement policies undermine an embattled tech sector.

Has the government lost interest in technology? It’s almost as if it’s a yawn. Easier to put a hole in the ground, pump oil out. There seems to be no awareness that this lack of support has become serious. We need a rallying cry, to say “Industry matters.” It’s time we woke up. Otherwise, the technology industries will disappear.

Normally, I’m a very positive person, and I work toward building things and growing things, but the last few years have been very negative for Canada’s ICT sector, and it upsets me a lot. It’s a bit like a balance sheet, and there are too many negative line items on the balance sheet. Some very large negative things are combining to take Canadian technology companies below critical mass, and they may, in fact, disappear. Quite a few of those things come back to the government’s attitude to high technology and not doing the right things to encourage it.

Here’s one big one: the Canadian dollar. In a very short space of time, it went from just over 60 cents to a dollar. That’s more than a 60% increase in a short space of time, and it means Canadian labour costs, and R&D costs in particular, have shot up relative to the United States. Canadian companies do much of their business in the U.S., competing against other companies using the U.S. dollar. This has had a big impact on manufacturing and R&D costs, because most of the things sold by Canadian companies are sold in U.S. dollars, but our costs have gone up 60%.

Item No. 2 is the lack of venture capital funding. Most venture capital funding goes into research-intensive companies, and that cash — those equity funds that go in — is often directly related to the amount of R&D done. Because of Canada Revenue Agency’s Section 116, each one of a venture capitalist’s members have to register as a Canadian taxpayer in order to take capital gains out of Canada. It really is a total pain, and, bit by bit, U.S. venture capitalists, London venture capitalists and Middle Eastern venture capitalists have turned off. They can get around the rule, but it’s complicated. Although the government set out to fix that, it’s still not fixed. Even if the government does fix it, all of the venture capitalists have turned off Canada. They’re not participating at all. Venture capital funding nationwide has dried up. It’s like a desert.

So you say, “Well, how about government funding?” For decades there has been an incredible program called IRAP [Industrial Research Alliance Program]. The program is still there, but there’s no money in the pot. Great program; no new funding.

The next item relates to things where the government used to have 50% programs. As an example, Technology Partnerships Canada. TPC-approved programs would put a dollar in for every dollar supplied by a company, and then the one dollar the government put in would be repaid through a royalty stream on the product. I took advantage of that quite substantially in other companies I’ve run, and it was very effective and always repaid, so I’m a good example of TPC funds working. There is no equivalent now, except for military programs and aerospace.

But there’s another problem with the government, and it’s the way the government procures technology, and ICT technology in particular. Right now, across Canada, provincial governments are spending like there’s no tomorrow to improve their solutions and applications, basically to get new technologies to do their jobs properly. But Canadian technology is typically not included. Provincial and federal governments over, say, the last 20 years have moved more and more to buying from systems integrators, the vast majority of them being U.S.-based. You’re talking about IBM, HP, EDS, CSC. Their biggest client would be the U.S. government — in particular, the defence department. It isn’t just that the U.S. government is 10 times bigger than the Canadian government, it’s the fact that there are carve-outs under NAFTA and other world trade agreements that the U.S. defence department will buy made-in-U.S. products. What happens is the product managers in the systems integrators put their solution sets together to respond to tenders with the U.S. government. When Canadian governments go out for similar solutions, they respond with the same solution they put together for the U.S. government, which is almost entirely U.S. product. The upshot is that Canadian governments don’t buy Canadian technology.

Let me go through it again: costs are up because it’s the Canadian dollar versus U.S.; no venture capital money; no government funding. I may be overstating it, but it’s substantially true: no government help in funding R&D and no government purchases of Canadian technologies. Imagine trying to sell to the government in France, or the government in England, and your competitor, typically from the U.S., says, “They can’t even sell to their own government. We just won the province of Ontario; we just won the Canadian agricultural department.”

Put all those factors together, and that’s bad enough. Now add another outstanding factor. If you hire a new engineering grad from a Canadian university — and they are good — they cost typically $60,000 to $70,000 a year. Now compare that with hiring a really good engineer in India at about $8,000 to $10,000 a year, or in China at $5,000 to $6,000 a year. The upshot is that Canadian companies are having the toughest time.

I’ve noticed over the last five years, in particular, all kinds of Canadian companies that have gone out to get venture capital funds, but can’t, and then the technology’s been lost. Even though the companies may spend tens or even hundreds of millions of dollars developing a business and technology, they’ve been acquired for a couple of pennies on the dollar. I can go down a long, long list of companies in that category, and typically they’ve been acquired by U.S. companies that are more robust. There is a loss of Canadian companies because there’s no venture capital, and a loss of Canadian companies because they get absolutely zero help in trying to compete with innovation and require R&D funds that would eventually be directed toward a commercial venture, not pure research.

Now, the Canadian government will point out, “Look how much we spend on research.” Well, that sounds fine. But it typically goes to universities or government institutions like NRC. There’s a big gap between that spending and the spending that goes into creating companies, who, in turn, hire all kinds of employees to sell globally. If we’re not careful, we become more research-oriented but ignore the development side, and the creation of companies that take that research and commercialize it.

We focus too much in Canada on the research side, not the commercialization side, and if you don’t get on with the commercialization of R&D, there will be no flagships with which to apply the ‘R’ that we spend a lot of money on. It’s the commercialization that matters. The worst thing in life is to be the centre of research and you’re spending all of the money on research that somebody else is exploiting. What a dumb arrangement. Every time there’s one individual in research that gets something successfully commercialized, it typically employs 20 other people. Where are the other 20 being hired if all the money goes into research only, and not the commercializing of it? Where are the production people, where are the marketing and sales people, where are the finance people, where are the auditors for the company? For every one person in research, you can multiple it up by 20 — as long as it’s commercialized. There’s a multiplying factor that somebody in government forgot about.

This isn’t only about the ICT industry either. I don’t care if you went out and bought a cup and saucer, or if you went out and bought a mobile phone, or some electronic gizmo for your home, or even an automobile. If you don’t conduct research today, you go out of business. We live in a world that is very competitive, and to compete you have to spend strategically in R&D, especially the development side. If you don’t do that, you go down.

It’s urgent. Venture capital companies that used to come visit Toronto and Ottawa now bypass those cities and go straight to California or Boston. We’re off the radar. I’ve been in this industry now for almost 40 years, and I’ve never seen it this bad.

At least somebody should say, “Industry is important.” Where is the flag being waved to say, “We are supporting, we are committed to Canadian industry.” Where is that flag? There is no committed leader saying, “Canadian industry is important, and we’ll do things for it.” In France, they fight like hell for their industry, and in Japan and Germany, they fight like hell for their industries. But we don’t here.

You know what I’m doing? I’m investing in companies outside of Canada, and I don’t feel good about that either. I’m investing in the U.K. and the U.S., because their environments are better. Out of the four technology companies I start every year, three of them are outside of Canada. Now, isn’t that sad? I talk to many people of like mind, within government and business, and they agree with my observations. They all see it happening, but the people up in the ivory tower of government, they don’t see what’s going on at street level. It hasn’t hit them yet.