Quick, think of a Canadian technology company with annual revenues of more than a billion dollars. OK, you said Research in Motion, right? But what about a second, a third? The truth is the number of Canadian tech companies with more than a billion in revenue is woefully slim.
This worries Canadian tech legend Terry Matthews. Matthews, a Welsh born Ottawa immigrant who became a billionaire by forming telecommunications companies Mitel and Newbridge Networks, thinks Canada’s technology companies are facing their most serious challenges “in at least 25 years.”
Matthews investment firm, Wesley Clover, recently released a white paper called “The Challenge of Survival for Canada’s Technology Sectors”. The paper warns “we cannot rely on the export of oils gas minerals, grain and wood alone” The document also sets to dispel what it believes to be a commonly accepted fallacy; that Canada got through the recession unscathed and is a model for the world.
If that is true,Wesley Clover asks, “Why were we only 13th of 34 in the OECD for real GDP growth in 2010?” adding “Why were we twenty-first in unemployment rate in the OECD for 2009 and still just 17th by 2010?”. The reality, says the report, is that we are “in the middle of the pack.”
Matthews is also the national spokesman for CATA, the Canadian Advanced Technology Alliance, which is Canada’s largest high-tech association. The Ottawa based organization believes that technology is path to getting out of the middle.
CATA recently released a comprehensive update to its ‘Innovation Nation’ Campaign, an effort to bolster technology in this country that distinguishes itself with its detail. The campaign has the very specific objective of creating ten domestic companies in the information and communications technology sector with annual revenues exceeding $5 billion by the year 2020.
John Reid, who is CATA Alliance’s President & CEO, says Matthews and Wesley Clover are one of the main drivers of CATA’s Innovation Nation, especially since 2009 when Sir Terry became national spokesman. Reid says while senior government bureaucrats tends to shy away from committing, the group is gaining grassroots political support. “We’re starting to see a very strong buy in” says Reid. “All our social media advisory groups are increasing significantly; premiers, mayors and thought leaders are joining our Governing Councils.”
So what are they buying into? One of the recommendations of the report is familiar; that the SR&ED program should be reformed. But the report also takes the less conventional view that support for the tech sector is too focused on tax credits , pointing out that 90% of support for Business R&D is through SRED, while in the US 80% of the support for business R&D is through direct funding.
One tweak the group would like to see is the adoption of a federal equivalent to the B.C. Venture Investment Tax Credit. A report prepared for the BC Ministry of Small Business,Technology and Economic Development on this credit showed that between 2001 and 2008, investments made in 517 companies received a total of $191M provincial and $65M federal tax credits, and that these companies generated an estimated $379M in provincial and $368M in federal taxes. The provincial tax multiplier was 1.98 and the Canadian tax multiplier was 2.92.
Another recommendation is for the Business Development Bank of Canada to invest existing resources as a limited partner in Canadian venture funds on a similar basis to the Israeli government. Wesley Clover believes the government should do this because Canada’s R&D is seriously lagging the US, where businesses do twice as much R&D as Canadians, and Israel which does four times as much R&D.
The report also says the government should provide funding to hire new university tech graduates, and expand the availability of business credit because out banks are too conservative. Wesley Clover believes Canadian firms are too exposed to the US and that the Canadian government should do more to open up trade partnerships in India and China. Another suggestion is to reform the investor class immigrant program and turn it into an Entrepreneur Class Visa that requires applicants to start a new firm, raise fund and hire staff, or leave.
Matthews isn’t just an interested observer of these suggestions, he’s become and active participant. Last year, he formed the Wesley Clover Technology Acceleration Fund to invest in smaller companies that might fill the gap left in Ottawa’s technology scene by Nortel’s departure. Through this fund, Wesley Clover hopes to incubate and nurture the next wave of billion dollar companies.
Matthews, however, believes that time is limited to capitalize on the opportunity. At a forum held by CATA last year, he said “The Nortel ecosystem is still there. There is still lots of research and development capability in Ottawa. But the ecosystem has a shelf life of seven years at most. This is a really good time to start a new company before the talent disappears.”
“The company that once generated 20 per cent of Canadian research and development is gone” said Matthews “Get over it.”