-Why are Canadian Technology Companies Disappearing? Cantech Letter talks to Jeffrey Crelinsten of Toronto’s Impact Group. Mr. Crelinsten, along with Gennum (TSX:GND) founder and former CEO H. Douglas Barber recently completed the fourth in a series of white papers examining Canada’s innovation performance and culture. These gentlemen interviewed former CEOs and investors from 18 R&D performing companies that are no longer part of Canada’s business landscape – and came to some sobering conclusions.
Nick Waddell: Your study, (Understanding the Disappearance of Early-stage and Start-up R&D Performing Firms) examines Canada’s innovation culture. One of the findings that might surprise some is that Canadians can be “too” focused on technology and don’t concentrate enough on finding customers. Do you think having customers early on in a business plan can actually improve a businesses technology?
Jeffrey Crelinsten: It depends on what you mean by “improve”. When Intel was still a young company its engineers developed the 8080 microprocessor. When they were ready to launch, they discovered that Motorola had just developed the 6800 microprocessor and that it was technically far superior. Intel’s senior management huddled with their sales, marketing and research heads and asked themselves “how can we overcome the fact that our product is technically inferior to Motorola’s” They brainstormed and came up with the idea that they should make their chip so easy to use for customers that they would prefer the Intel chip over the Motorola one. The Intel team developed a list of ways to make their product the easiest to use, implemented the ideas and the rest is history. Intel has over 90% of the chip market to this day. A similar story evolved with video tape. Beta was the superior product, but VHS was better marketed and was adopted by the vast majority of consumers. So, attention to customers early on helps a company develop the best product or service that has the best value for the customer. And there is more to value than just technology. Early customer engagement “improves” technology in the sense that it maximizes the technology’s value to customers who will then more likely pay for the product or service based on the technology. And that does not necessarily mean that the technology is the best in a technical sense.
Nick Waddell: One of the things we find out by reading your study is that some of the cliches are true. For instance, the majority of CEO’s you interviewed felt that Canada’s Venture Capital community is too risk averse and
inexperienced to properly assist companies. Why do you think we try to hit singles when the US is swinging for the fence, so to speak?
Jeffrey Crelinsten: To be fair to Canadian investors, they’d prefer to hit home runs as much as their colleagues south of the border. So everyone is swinging for the fences, but in Canada we have rookies whereas south of the border we have veteran players. The venture capital community in Canada is populated primarily with people with financial backgrounds. Few have the enterprise skills that come with running a company, talking with customers, meeting the payroll (or not!), creating value and figuring out how to out perform competitors. In the US, many VC firms are populated with serial entrepreneurs who have run companies successfully and are now investing and mentoring others. So Canadians have been hitting singles because they lack enterprise experience. Rather than focusing on how to grow a company, they see their role as monitoring their investment and seeking an exit. Canadian firms tend to spread their investments widely and thinly in order to “diversify their portfolio.” The result is that they don’t have enough funds left for the firms that prove successful and they tend to stay too long with those that don’t get any traction. So it’s no surprise that they are content with selling firms early for a small multiple – a single – instead of cutting off the losers early and sticking with the winners for the long term home run.
Nick Waddell: One finding that struck me as particularly sad was reported in a table later on in your report. It showed that one factor in firms that had a strong element of success was the presence of “foreign born entrepreneurs
who were free of the “Canadian Culture of Commerce”. This sounds endemic! Are we stuck with this culture or do you think we can “unlearn” it?
Jeffrey Crelinsten: Entrepreneurs are people who can tolerate risk. If you’re too comfortable, why take unnecessary risks? Immigrants to Canada who have nothing will more often take the risk of starting a company and trying to grow it profitably. They will do what it takes to succeed. The Canadian culture of commerce has developed within a rich endowment of natural resources and a huge market just south of us that speaks the same language and has similar customs and history. The world comes to us for our natural resources because we have something they need. We haven’t had to go out and engage them to find out their needs and figure out how to help them and convince them that our solution is better than anyone else’s. But things are changing. Other countries are competing to provide the world with natural resource products. The world has opened up to companies from anywhere to sell to anyone. While the new global reality means intense competition from the outside, it also brings opportunity. I’m hopeful that more Canadians will realize that they too can seize these opportunities and grow global, profitable businesses that sell to the world.
Nick Waddell: Why do you think technology happens in “clusters”? A large portion of the companies we cover come from the “tech triangle” in the Kitchener-Waterloo area. Ten years ago Ottawa had a vibrant telecommunications scene. Can these situations be encouraged or incubated?
Jeffrey Crelinsten: I think these so-called clusters evolve organically over long periods of time. You need critical mass – population, higher education institutions, financial institutions, cafés, meeting places, good schools, culture – all in an area that is easy to move around in and connect with other people and institutions. It requires a community where people can work and play together, where the human skills required in commerce are nurtured and developed. I know that there are many initiatives to try to create clusters in different parts of the country. I’m not sure that you can force people to engage in this way, but time will tell. If the focus remains only on research, technology and money, they will fail. If there is an equal focus on value creation, understanding, respect, listening and other human skills, then they may have a chance.
Nick Waddell: We recently hosted a roundtable discussion about the demise of Nortel and the future of technology in Canada. Of course it didn’t take long to get around to the topic of government policy. Does our government send mixed messages about supporting R&D in this country? We have flow through tax credits, but only for resource companies. We bail out auto makers, but not Nortel, who contributed significant intellectual property to the country…
Jeffrey Crelinsten: Some of the people we interviewed spent a significant part of their career in Nortel. They told us that the company was imbued with a research culture, not a business culture. The focus was on technology and research. Remember, Nortel grew out of Bell Northern Research, the research division of Bell Canada. So, when Nortel employees left to start up a company, they lacked the enterprise and customer-facing skills to succeed. Government policy is similarly focused on research and technology. There is an implicit science policy that if you put enough money into research, something good will happen. There is a reluctance to support companies that are already meeting the needs of customers and helping them grow. I call it an “unholy alliance of the right and the left”. The right is ideologically opposed to government playing a role in the market, so they refuse or severely limit direct support to companies. They invoke the dreaded mantra of “picking winners”, not realizing that if they “back the players” the winners will emerge from the pack. The left simply mistrusts companies and refuses to provide direct support to firms, calling those that do get support “corporate welfare bums.” The other problem is that politicians are obsessed with jobs in the short-term. So they tend to prop up industries that already employ a lot of people. That can be myopic and destructive, but as they say, “that’s politics.”
Nick Waddell: What do you think governments need to do to address the problems you raised in your paper?
Jeffrey Crelinsten: There is no quick fix. Unfortunately, that’s exactly what governments look for all the time. Governments want to be able to announce programs with budgets that will fix things and make everyone want to vote for them again. They also don’t want to kill programs that have been going for awhile because the constituencies that have benefited from them might not vote for them again. So today we have a patchwork of programs that have evolved and proliferated over time. Although they were all created to help Canadians and enhance prosperity, as a whole they are ineffectual. The best way to overcome these obstacles is for governments to articulate a vision for Canada’s prosperity in tomorrow’s global economy and embrace a model for success. The current model that provincial and federal governments use is “ideas to market” or “ideas to jobs”. This model is flawed. It leads to a preoccupation with research and technology and the belief that with enough money, they will lead to success in commerce. A better model recognizes the importance of understanding and creating value for the world. Only then will governments and other institutions such as universities nurture and support the right combination of human and technical skills required to succeed in the 21st century.
To view all four parts of the white paper by By Dr. H. Douglas Barber and Dr. Jeffrey Crelinsten copy and paste the link below: