Growth Times

As my previous posts show, Ontario’s current hub-centric model for promoting innovation and entrepreneurship is expensive, unfair, and ineffective. The Minister of Research and Innovation should take note and explore alternative models, rather than continuing to pour taxpayer’s dollars into an expanding bureaucratic network with high fixed costs and built-in inefficiencies.

The Chamber of Commerce in Ottawa has taken notice too and is criticizing the lack of oversight of OCRI and its expansion in activities it traditionally conducted, according to an article in the Ottawa Business Journal yesterday.

To explore alternatives and fuel a discussion, I have highlighted a menu of options below. As a disclaimer, I am not a policy expert on the matter of entrepreneurship, but a practitioner, so do please consider those as draft proposals for crowdsourced discussion and improvement.

Overall, propositions fall into 2 groups: clean up and downsize the current system (lots to do on that end , to compensate for the unbridled expansion of the innovation bureaucracy in recent years), and replace it with tax refunds for commercialization investments and (possibly) loan guarantees for entrepreneurs.

Proposition 1: Let active entrepreneurs design the system

Conduct a public consultation with active entrepreneurs or, probably better, let’s put together an objective, wide-ranging group of entrepreneurs and task them with proposing changes to the system. Give the floor to a good range of start-ups and early-stage ventures.

Entrepreneurs are the true actors of commercialization, they are the only ones who ultimately take new ideas and turn them into reality. However, the system so far seems to have been designed and run with limited inputs and influence from those, and I personally noticed an assumption at hubs that entrepreneurs don’t know what they are doing when it comes to commercialization – which is far from the truth. As “clients”, they should be listened to: that’s Commercialization 101.

Proposition 2: Cut executive compensation at innovation hubs

This one is a complete no-brainer — assuming we do not suppress the positions of CEOs and executives at innovation hubs, another proposition worthy of consideration. If you want to restore trust in the public system, you need to rationalize compensation at innovation hubs, and that means slashing it at the top of the pyramids.

There is nothing in what hubs do that justify such salary levels for their CEOs and top executives. If one is going to receive a check every month with no correlation between pay and contribution to the economy, then that pay should be the minimum that’s needed to fill the position. $400K+ is by no means the minimum needed to fill up the position of CEOs at institutions with less than 100 employees like MaRS, Communitech or OCRI. This is true in this period of economic uncertainty, and it will remain true afterwards.

Proposition 3: Eliminate grants and special funds

Governments contribute more to economic growth with tax cuts than with increases in spending. It’s not me saying it, it’s Canadian CEOs, according to a recent poll in the current issue of Canadian Business.

Direct spending by the government is less effective than tax cuts for a number of reasons, primarily having to do with the government not being as careful with its money as companies and consumers. As a result, money is often handed out based on relationships rather than expected performance. That in turn distorts the market, fuels taxpayer’s resentment, and generally does not deliver the expected results.

Hubs love innovation grants and special funds. MaRS, in particular, is pushing very hard to control those, because it has understood that they constitute the key source of discretionary power. As a local entrepreneur emailed me: “Whenever there is government pot of money involved, you get a bun fight and everyone trying to control the supply of buns.” And as the end result, only a small portion of the buns actually reaches the intended recipient.

MaRS apparently took full control of the Investment Accelerator Fund this month. Of course, that calls for hiring more people, so on April 20 they issued this job ad for an Investment Accelerator Fund (IAF) Coordinator, just to help the “IAF Managing Director and Investment Team”. Only entrepreneurs “already engaged with program Entrepreneurs-in-Residence (EIR) or MaRS Advisors to access specialized advisory services” qualify. Since you need to be selected to work with those, paying lip service to the institution is not optional. In business I believe that would be called Tying, also known as Forced Bundling, and it is illegal. Not to mention Dumping of services, too.

Grants and any selective attribution of money are the source of too many evils – they should only be considered a last resort to help entrepreneurs. With little transparency and many potential conflicts of interest, this is a scandal waiting to happen. As entrepreneur Stephen van Egmond commented in part 3 of this series, it is hard not to think of the Canadian eHealth fiasco. So I say let’s be smart and preempt it before we waste more millions: eliminate all grants and special funds all together. Good riddance.

Proposition 4: Eliminate consulting services delivered by public advisors

I developed this point in the previous posts, so I’ll summarize it here: the direct delivery of strategy and marketing services by public advisors is not efficient due to a lack of performance management “by design”; it also distorts the market and hurts the creation of a viable ecosystem of private providers; and finally, it leads to conflicts of interest when coupled with grants and programs.

Moreover, hub advisors paid by the taxpayer should not be allowed to maintain their own private companies on the side, a rule that is already enforced for any government employee. Assuming consulting services are still provided by the hub in spite of the recommendation not to, then there should be fair and competitive procurement policies and only private providers with no work association to the hub should be allowed to bid. Decisions should be fully documented. The people who are hired to make those decisions should come from diverse backgrounds (including minorities – see part 2), and should be tied by strict rules and independent oversight.

In any case, public hubs should focus on what a hub normally does: connecting and educating large number of entrepreneurs (assuming chambers of commerce and universities don’t do it). Not catering to the interests of a few select ones. The private sector does that better.

Proposition 5: Eliminate public incubators

I also talked about this before. In a nutshell: public incubators like the ones ran by MaRS and Communitech are not needed. They compete with viable commercial space and private incubators. Cancel the incubators program and sell the buildings to the private sector. Then use the money to feed tax refunds for entrepreneurs.

Companies primarily rent offices at those public incubators because of the proximity to public subsidies. The “chance encounters” and “creation of a global address” arguments are based on little more than hot-air theories with no fact to back them up. They do not justify multimillion-dollar investments. If I want chance encounters, I can easily go to one of the gazillion events organized by the entrepreneurship communities in those areas.

The hubs actually built those incubators to create endowments equivalent to a perpetual public subsidy. With 80% of the MaRS budget after real estate costs going to salaries, this subsidy is mostly used to add more bureaucrats. Few taxpayers I know would agree with that.

Note that with the extension of SR&ED to commercialization activities (as proposed below), private incubators and commercial office space would be indirectly subsidized, and they would still have to compete for that money with other commercialization activities. That’s a much healthier, market-based way to support entrepreneurs than creating public incubators.

Proposition 6: Require public reporting of all grant decisions and results, with independent third-party oversight

There should be detailed public reporting of the money given to hubs, and of the results delivered: not just on activity and effort (“we helped x companies” and “had x appointments”), or results that might have happened anyway, but on actual “performance improvement”.

This is notoriously difficult to measure, but there is an excellent proxy: the willingness of entrepreneurs to pay for your services at market prices (and without bundling those services with grants!). Hubs should drink their own medicine on commercialization and charge market prices for their advisors. Being in that business, I predict they would fail to cover even 20% of their disproportionate cost base. Only lean cats survive in the wild.

Assuming we don’t get rid of hub advisory services and grants all together (a shame), there are some alternatives, although mediocre:

• Require full disclosure of all program decisions: who applied for grants, who got selected, who completed the selection, and the rationale for the decision.
• Have a (truly) independent third party, paid by an independent body, conduct random, anonymous survey of client satisfaction. To that end, the audience should be defined as any start-up in the area of service, and not just companies that contacted the institution or were selected as a client.
• Have a third-party auditor also conduct random sampling of results for the recipients of those grants.
• Enforce a strict separation between the attribution of grants and the advisory services. Short of that, entrepreneurs will fear for their grant (as they do now) and not disclose their true evaluation of the services.

Note all of this adds to the red tape and costs to the taxpayer though, and since those advisory services and grants have terrible ROI by design, the best option remains scrapping them.

Proposition 7: Require annual reports, financial statements, and full disclosure of all public salaries above $100K

Right now it seems that hubs like Communitech and OCRI escape any form of salary disclosure, even though they received large provincial grants. It’s also unclear whether the disclosed salaries for MaRS include all compensation. According to information I could not verify, the CEO’s annual compensation might be closer to $700K after bonuses. In any case, this all points to potential loopholes in the sunshine disclosure.

Requiring disclosure of all financials and salaries above $100K for institutions receiving public money (be it municipal, provincial or federal) would extend much beyond hubs and would be useful in adding some transparency to the public sector as a whole. This disclosure should include all of the money received, and offer detailed breakdowns.

Proposition 8: Drop the Ontario Network of Excellence initiative

The Ontario Network of Excellence (ONE) has been designed to be a MaRS-led province wide network that will affect every organization that supports entrepreneurs in Ontario. Organizations that submitted expressions of interests to ONE are being asked to prepare their business plans now.

The “access to expertise just around the block” – as mentioned on the page I referenced above – clearly points to a frightening expansion of this bureaucracy, with little in it for entrepreneurs. With the internet, I believe we’ve always had access to (actual) expertise, and we don’t even need to go “around the block”. This looks like more red tape and the fact that a large component of it will be coordinated by MaRS means they will apply their own “worst practices” to the whole network, i.e. no transparency and deficient result report.

Trimming down bureaucracies has always been a great way to fuel innovation, so let’s cancel that initiative.

Those 8 propositions is what it would take to clean up the current system. Having done that, we could move to provide actual support to actual entrepreneurs!

Proposition 9: Refund commercialization expenses through the tax system

I believe the most productive approach to channeling public resources towards entrepreneurs would be to extend the successful SR&ED tax refund to commercialization activities.

First, tax incentives are much fairer because they involve clear attribution rules, with much less room for subjective decisions. A startup in Huntsville would have the same “chances” of getting that money as one hosted in the MaRS incubator. The decision would not rely on whether you pay lip service to hub bureaucrats, and those bureaucrats would not need to be entrusted with picking winners – let’s leave that to venture capitalists.

Second, tax incentives are more efficient, because they feed less red tape: tax auditors conduct random controls, that’s it. That means bureaucrats take a smaller cut. The money goes directly to entrepreneurs, who get to decide independently how to invest it.

How would that work in practice?

Right now, SR&ED offers great tax credits of 35% up to $3M and 20% after that for R&D investments (broadly defined to cover most product development with some level of technological risk). It is controlled by Canada Revenue, anyone can claim the credits (with detailed documentation that makes fraud difficult), and even solo entrepreneurs can give themselves a salary and claim it to receive 35% of it back. My suggestion would be to simply extend that to commercialization activities for start-ups and early-stage ventures.

The key challenge would be to find the right selection criteria to restrict it to true innovation plays, but even that should not be a big problem. In fact, it would feed an interesting debate: what type of innovation, as a society, do we want to encourage? Is it just technological innovation? Not my pick, but you could do that by restricting the commercialization tax refund to SR&ED recipients, or to startups with patents. On the other end of the spectrum, it could even be extended outside technological innovation: after all, as Peter Drucker said, there are many sources of innovation, and I’d argue that a lot of it today takes place in business models and packaging existing technologies rather than from lab technologies. Think iPad and even Blackberry (or, to go farther in time, the banking system, which created lots of value even though it was not technological in nature).

Note there is already a program called the Ontario Tax Exemption for Commercialization (more details on OTEC here), however it provides a ten year tax exemption for new corporations that commercialize intellectual property that is developed by qualifying Canadian universities or colleges. Two problems: the tax exemption is of little use to startups in their pre-revenue years, and the requirement that the IP be developed at universities or colleges makes it very restrictive. So I think an extension of SR&ED would be easier.

But the acronym doesn’t really matter as long as entrepreneurs are in charge of their commercialization spend and the government refunds part of that to compensate for the higher risk in starting new ventures.

Proposition 10: Extend the Canadian Small Business Financing Loan Program

This idea was put forward by Ian Graham of the Code Factory in Ottawa (thanks Ian), who foresees a challenge with tax refunds: an entrepreneur needs to spend money to get the credits back, so a kickstart would be great. With the Canadian Small Business Financing Loan (CSBFL), the government guarantees 75% of a loan and the entrepreneur 25%, working with the banks to do this.

The problem with CSBFL today is that it is only for capital expenses, which are used as collateral for the loan. A similar program for operating capital (salaries and opex) would be ideal.

I see risks of fraud if there is no tangible collateral for the loan, and I tend to think that entrepreneurs should find a bit of money to pay themselves before starting. However, assuming that the risk is addressed in the design of the program, it would indeed be a useful program that could get lots of entrepreneurs started.

Proposition 11: Make it more attractive for both Canadian and foreign private investors to invest in Canadian early-stage ventures

In the footstep of recent successes to lobby the federal government for the modification of section 116, which removed some bureaucratic obstacles to foreign investments in Canadian start-ups, we must continue to make it more attractive for foreign angels and VCs to invest here.

The proposed extension of SR&ED to commercialization activities would go a long way in making such investments more attractive. Other measures should be explored to reduce red tape and optimize incentives (through the tax system).

In parallel, we should also explore the successes of other regions, such as the Silicon Valley or Israel.

Proposition 12: Engineer an “Own the Podium” culture, again

Canada has a great immigration policy, a solid engineering base and long winters to keep us all working. It also has universal healthcare. This is great for entrepreneurs.

We have the key ingredients to create a real culture of entrepreneurship, to make local champions like RIM less of an exception and more like the norm. What’s missing is self-confidence and entrepreneurship-friendly policies.

We need to trust that Canadians can own the Podium, that they can win without social assistance. We need to accept failure and frown upon inaction. We need to stop wasting time applying for grants. The Silicon Valley wasn’t built on grants, it was built by attracting the best talent, the best companies, and setting up an environment in which they could freely use their skills, try things out, and try again until it worked.

We also need rules that are designed by entrepreneurs, not by bureaucrats. I’ll give you a tiny example, one that affects me personally: stock options are taxed differently for contractors and employees. And SR&ED does not refund money spent on contractors. Yet the best mode of delivery of my services is as a contractor, not as an employee. Now because of this, it is difficult to offer stock options payment to my clients, or leverage SR&ED when I get involved in product development work. Take many rules like that, put them together, and you have the basis for a system that is not as friendly to entrepreneurs as it could be.

So we are back to proposition 1:  the government should crowdsource its innovation policy-making to active entrepreneurs. An entrepreneur would not have given MaRS $130M to buy buildings and create a bureaucracy of smoke and mirrors.

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Canadian entrepreneurs bmep, communitech, ilse treurnicht, innovation policy, irap, mars advisors, mars discovery district, oceta, OCRI, Ontario Network of Excellence, public accountability, public support, ric, sr&ed, venture capital

In my previous posts, I took a good look at MaRS Discovery District, to raise attention about the meager $400+K salary of the institution’s CEO, the restrictive $130M in subsidies, the crystal transparency of grant decisions, the real estate successes, the tireless dedication of a selfless network of underpaid advisors mostly stemming from the visible minorities of our beloved city, the fantastic public-private partnership and synergies of the hub with private incubators and providers, and the focus on supporting actual start-ups as opposed to associating with companies on a proven winning trajectory that could make for great political advertising.

Well, I am glad to report today that Waterloo’s Communitech, too, is on its way to becoming a success story itself. Not to be left behind in the “space” race with MaRS, it is adding an impressive tool to its arsenal, one that will without a doubt propel Canada from its position of innovation laggard to that of superstar: yes, it has secured the lease to a building!

And one to be filled up with advisors, too! Special thanks are extended to all taxpayers across Ontario for generously agreeing to sponsor those. A smart move, since the public hub model has proven to be so profitable for those advisors. It surely will add value to the Waterloo economy by creating a number of well-paid, stable bureaucrat jobs. As we know, those don’t go away when a sneaky financial crisis hits the nation, so they should be encouraged.

In the lease announcement, Communitech highlights all of the fantastic inputs that will go towards helping innovators. Like “square footage”. And “advisors”. And “square footage” too! They even commit black-on-white to actual results, this is not just a multimillion project with no teeth: they expect the initiative to attempt to try to possibly help create the next RIM! Wow! How? Don’t ask silly questions! Those folks know what they are doing! Remember, they’ve already managed to secure millions from the government and some white boards and markers from private sponsors.

Surely the CEO of Communitech in Waterloo, as well as that of OCRI in Ottawa, deserve their undisclosed salaries (and MaRS’s CEO could learn a thing or two from those undisclosures). If the rumors that their salaries are also in the neighbourhood of $400K are true, then I say: good for you CEOs, you deserve every penny for all the start-ups square footage and advisors’s positions you’ve helped add!

Crowdsourced exploration, and a call to entrepreneurs for media inputs

The other good news is that my previous posts got people talking and asking questions for themselves (if not publicly as much, at least privately as a number of emails I received have shown). As I was hoping for, they have helped “crowdsource” the exploration of this fascinating topic.

And now a mainstream medium has taken an interest too so, who knows, we might actually see some objective reporting, rather than this rant by a grumpy-utopian (yes, that’s a perfectly valid combination of adjectives) French immigrant evidently using this story to be seen in the positive light of a whistle-blower – an obviously effective way to attract new business to his fledgling start-up consulting business.

You can help: I have been asked to provide introductions and I would like to offer additional contacts beyond the ones I already know, so if you meet the following profiles or know someone who does, please contact me at gregboutin-AT-gmail.com.

• entrepreneurs who have tried to secure support from MaRS unsuccessfully
• entrepreneurs who were selected as MaRS clients but are unhappy with the support
• other entrepreneurs trying to start a business who never approached MaRS because they heard there was nothing in it for them
• folks previously or currently affiliated with MaRS who have issues they want to share

Anonymity is guaranteed. Why am I not asking for people who had a great experience? MaRS has resources devoted to lining those up, let’s make them work a little for the money we give them.

This is your chance to be a sh*t-disturber like me, and maybe even help redirect some money towards the real entrepreneurs. One last fact to motivate you: after real estate costs, over 80% of MaRS’s 2008 budget went into salaries.

In my next and possibly final post, I will tackle the topic I said I’d tackle in this post: recommendations for providing effective public support to entrepreneurs.

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Canadian entrepreneurs canada, communitech, Mars, mars discovery district, oce, OCRI, Ontario, Ontario Ministry of Research and Innovation

In the first two installments of this blog series, I looked into the massive salary of MaRS Discovery District’s CEO, the vast deficit in public reporting in spite of over $130M in public subsidies, the lack of performance management, the systemically poor results and low ROI, the lack of transparency of grant decisions and the reliance on intimidation and ostracization to silence critics.

Yesterday I published a companion post with extracts from the feedback  I received so far, the importance of whistleblowing in a healthy democracy, and the direct impact those who get more than their fair share (like the CEO of MaRS) should know they have on others, like entrepreneurs  who have to work another full-time job to make ends meet.

Now I will take a look into the claims by MaRS that it constitutes a “public-private partnership”, and its expansion into the realm of private services.

But first, the 2009 salaries of MaRS employees were just published as part of the latest provincial disclosure, so below is a screenshot. The CEO made $436K in 2009, and MaRS continues to use public funding to add positions compensated over $100K – there are now 16 (out of 42 employees in 2008 – staff numbers for 2009 have not been disclosed yet):

MaRS salaries above $100K in 2009

What public-private partnership?

On its website, MaRS claims that a “combination of private and public funding allows MaRS—a charitable organization—to offer these services.” While MaRS spins its communication to imply that private donors generously contribute to the budget, and thus that taxpayers’ dollars acted as a catalyst, the reality is very different. Almost all of the revenue (over 90% in 2008) comes from government grants and rental / meeting room income from buildings purchased with public dollars.

If you think much private capital went into MaRS, think again. In an interesting 2006 Powerpoint presentation by the hub, the numbers already showed that only $16M came from private sector donations – while government subsidies amounted to $79M. There were loans too, but those qualify as much as private “investments” as the money credit card companies lend us every month. Overall, a far cry from the catalyst effect we were sold on.

From a planned $79M, the subsidies actually reached $130M by 2008. But the private contributions did not increase – the sure sign of a good public-private partnership. I would also be curious to learn what the private donors got in return for their money. Private companies do not tend to give away money for nothing.

Tell me again, why do we need a taxpayer-funded incubator, when there is plenty of office and private incubator space in the city?

I met MaRS CEO Ilse Treurnicht once in 2007 as I was seeking support for TagOver, a web startup I was working on at the time (an app to replace folders with linkable tags – a technology Gmail recently introduced). I think she was looking to hire people for MaRS, and I was looking to get some help with my venture. The discussion, although courteous, ended quickly given that my little operation was of no interest to her.

See, Ilse was busy presenting MaRS as a public-private partnership to the public. Take a look at this 2008 video (or its transcript). In it, the CEO pulls all the stops to introduce MaRS as a trendy catalyst of private investment.  She talks about “the unique public-private partnership nature of MaRS’ (2:26 in the video), and then in even more epic ways at minute 5:40. The key argument supporting this partnership model was phase II of the MaRS center, which was to be built by a private U.S. developer.

While phase 2, unlike phase 1, might have been a partnership of sort, the developer pulled out of the project during the crisis (see David Crow’s write-up at the time).

But now that the crisis is apparently behind us, it is likely that there is appetite from MaRS to resume the plans, if they haven’t yet proceeded with that. I suspect that the government might be asked again to contribute. After all, the provincial authorities gave Waterloo-based Communitech $26.4m last year for the creation of a “Digital Media & Mobile Accelerator” (a $107-million project, with the rest coming primarily from other levels of government and “some private sponsors”). It looks like the bureaucrats think the main problem of start-ups is to find offices, and that private incubators don’t cut it – so why not take advantage of that flawed belief while it lasts?

Which leads to the real question here: why is a non-profit organization like MaRS in the business of hosting companies using taxpayer’s money, when there are plenty of private office buildings and incubators in the city? And when so many in the entrepreneurship community don’t think it is a good idea (I’d love to call for an independent professional survey here). The extravagant building of the hub goes against the very essence of entrepreneurship and all the advice about bootstrapping. Do you picture Steve Jobs starting Apple from those buildings?

MaRS charges high rates for booking meeting rooms and hosting companies, and one key reason clients go along with it is preferred access to public money and connections (remember the very reason the U.S. selected Washington D.C. as their capital city was to distance it from the business interests in N.Y. and Boston). The claims of creating a “global address” as MaRS puts it is highly debatable. Most people in Toronto don’t know what MaRS is, let alone people internationally. If we spend those millions for awareness, then it’s not clear that it worked – we could achieve better results with much less money. VCs and investors I know also tend not to look at delegations led by a public-sector institution as a sign of dynamism.

The bottom line: our taxes should not help create bureaucracies that replace a more efficient private sector.

It’s not just real estate

MaRS, a non-profit organization, and the other hubs in the region increasingly offer private-sector services like business planning,  sales and marketing, financing and funding strategy, human resources, financial management, product development and marketing, customer relationship management, strategic partnerships. Now, I may be biased, since many of those are services I offer through my private practice, but I think my experience both as a private provider who also saw MaRS “in action” (or inaction) – and has to be deliberately retained by clients based on performance -  is relevant.

Currently, consultants or contractors in strategy and marketing are seen as “generally not as effective in dealing with the needs of emerging companies as people with more specific background”, as I was told last year by the head of the Market Readiness Program, in spite of the projects I was referred and complimented for by MaRS advisors (and a specific background of dealing with the needs of emerging companies!)… Yet the publicly-funded institution has no problem partnering closely with lawyers and accountant, even co-organizing events with selected private practices like Deloitte and Ogilvy Renault, and welcoming several as tenants in the MaRS building, so it looks like a clear case of rejecting competitors to the hub – and to the private practices that multiple advisors support or run on the side.

But, if the private sector is that efficient, why can’t it simply out-market the non-profit institution? We often do, actually. But it’s hard to beat free. Free creates a culture of free – entrepreneurs who received free help from hubs are not only less prone to paying for commercialization services, but they also end up more suspicious of the added value, since the institution frequently falls far short of the expectations.

MaRS’s selective give-away advisory services disrupt the marketplace, harm a perfectly viable private sector and prevent the creation of a viable, sustainable ecosystem for start-ups and early-stage ventures. With the right tax policy and less red tape (congratulations to the Federal government for repelling section 116), I’d argue that the private sector is best equipped to provide commercialization support.

After all, the essence of commercialization is about making people pay for a solution to their need: if hubs can’t do that for themselves, they should not be in the business of teaching it to others.

We don’t need no start-up bureaucracy – give the money to start-ups instead

Start-up evangelist David Crow pointed out the expansion of those public hubs in this post. There is now a myriad of agencies each with their own “advisors” and “entrepreneurs-in-residence”, competing for power and funds, and increasingly venturing into activities that are perfectly viable for the private sector.  The expansion of those bureaucracies seems insatiable (MaRS alone added another 10 positions in 2008) and anyone in that space knows that there is a clear power struggle at play, along the attempted institutionalization of commercialization activities.

What’s clear is that MaRS so far has been little more than a public play. It operates an incubator using public money and competes with perfectly viable private interests. It does not have the private sector efficiencies and built-in performance management. It would fit right in Dubai but does not get us closer to a Silicon Valley.

We all agree that a public “oasis” acting like a forum and meeting space for entrepreneurs downtown is a good idea. But taxpayers in Toronto pay $50 each for this oasis, now taken over by a group that by all account is using these resources to further their own interests. As a Toronto venture capitalist recently told me: “this is a honey pot, and parasites are going to take advantage of it until the last drop.”

There are other hubs running mostly with volunteer professionals as advisors, and the help they provide is not subpar compared to MaRS with its highly-paid professional staff. Their ROI is likely much higher. With the rise of commercial hubs based on the Y-incubator model and the growing number of highly-experienced commercialization consultants with a clear incentive to perform, there is no need for public advisors, and with the money we save from their salaries we could help many startups. So give the money to start-up founders instead – and through tax breaks.

We could also make use of an organization with the clout to represent entrepreneurs’ interests in the political arena, but MaRS isn’t even well equipped for that, since it is paid for by the government. That’s something professional associations are best equipped to do, as NACO and CVCA have recently shown.

Even if the hubs’ generic advice and select grants help some start-ups, overall it distorts the playing field and hurts our attempt to create a self-standing, sustainable innovation economy based on sound market principles. Overall, the MaRS model costs too much and does not work.

In my final post, I will make suggestions on how to improve public support to entrepreneurs in Ontario.

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Canadian entrepreneurs commercialization, entrepreneurship, incubators, mars discovery district, marsdd, Ontario, performance management, public accountability, public policy, public-private partnerships, toronto

Since I started this series, I have received multiple emails of support from entrepreneurs – several of whom are “clients” of MaRS – and innovation practitioners. Here are some extracts:

I appreciate your courage to post your views (which I share) on the MaRS topic”  (from a university research commercialization specialist and entrepreneur)

“Being a client of MaRS, I share your sentiments, but wouldn’t do so in public (for the same reasons you mention)” (from a Toronto entrepreneur)

“I forwarded your site to some of my friends at MaRS. I’m finding it quite revealing to say the least!” (from a MaRS tenant)

“I saw your post on MaRS. I had heard the numbers, but had not had the link to them. Thank you.” (from an angel group member)

“MaRS is like the planet. It’s cold and distant. Apart from some educational sessions, it doesn’t do much for actual start-ups, yet it wants to control our galaxy. They should call it the Death Star.” (a Toronto entrepreneur)

“Can’t disagree with anything you are saying” (a long-time MaRS client)

“The story sounds interesting, and clearly quite relevant.” (from a national paper business columnist)

“They’re all so pompous and useless at MaRS, as if they’re running a NASA lab (…) If they had given that money to real entrepreneurs instead, they would have created more jobs and wealth” (from a Toronto entrepreneur)

“MaRS lacks any sort of accountability. Their impact is unknown because they don’t publish any relevant metric” (executive at another innovation hub)

In case you wonder, I received only one negative comment (see the update to my first post – showing that according to MaRS’s own statistics, each advisor works a total of 5 days per year to help entrepreneurs). In a way, it is disappointing. And no news from MaRS, which I imagine is making sure not to give this any publicity.

Note I am looking to inform relevant people in the political sphere about this issue, and I would welcome any suggestion as to whom might be appropriate. You can email me at gregboutin -AT- gmail.com.

On whistleblowing

A recurring theme in most of the emails of support communications is fear. There are many, many people agreeing that something is wrong with the MaRS approach, but most of them admit fearing the consequences on their reputation and revenue if they were to publicly express their thoughts.

There is something very wrong with our system if one can’t put forward valid concerns without feeling threatened. Being a whistleblower is rarely a career-enhancing move – but I’d argue that, when confronted to such a waste of dollars, raising concerns and asking questions is an ethical requirement. How can one go home and look at their kids in the eyes otherwise?

In the past few years I have done that a few times, so I am used to the label. Plus, I was born in France, which doesn’t help given the reputation. I guess I should have been a journalist, but I don’t write that well and I prefer to be actively involved in companies.

In 2003, while working shortly as an intern for a financial analysis firm in Richmond Hill, I discovered that Shell was misreporting their oil reserves. Told that to my boss, who chose to ignore it. Bad move: 6 months later, we had this.

Last year, I pointed out that the web app Twine lost 80-90% of its traffic after being flagged by Google. A number of us had mentioned the usability problems of the application, meeting a hostile response from the founder. After wasting $25M, Twine’s CEO was recently let go and the company’s resources “merged” with another company in the same investor’s portfolio. The investors could have saved a few millions, or even the whole venture, simply by listening to the concerns.

Hey, I’ve been wrong sometimes too (my recent RRSP investments in cleantech prove I can’t predict the future!), but the point is: raising relevant questions shouldn’t be punished, it should be rewarded. See financial crisis.

Wasted lives

There is a direct connection between wasted money and wasted lives. Between poor policies, indecent executive compensation, and poverty.  I have a picture I can’t take out of my head: when I was living in Manila, I saw a woman sleeping on a bridge, a baby in her arms, above the busiest highway in the city. I could contrast that with the opulence of the diplomats I worked with (for the record, I was making just a little over $1,300 per month as a trainee.)

Anyone getting a salary they don’t deserve is responsible for supporting the wrong system, a system that put that woman and her baby on that bridge. They will look the other way, make donations to feel better and find excuses for themselves, on how $470K per year is justified given this and that, how others make more, how the system requires them to make that much – but the only valid question is: all things considered, am I destroying value and human lives by taking more than my fair share?

In the case of MaRS, is the CEO’s obscene salary forcing some entrepreneurs to take a full-time job while starting their company? I know a number of such entrepreneurs in Toronto. Two of them just had babies. So cut MaRS CEO’s salary and give them the money instead – I assure you they will create more value.

Now, I am not suggesting we cap salaries or downsize all well-paying jobs. I am suggesting that there should be clear performance management and accountability, especially for large public-sector rewards whose value to the public constituency they are supposed to serve can be fuzzy.

And if we ever want to live in a true meritocracy, raising questions and protecting the whistleblowers is a must, not an option.

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Canadian entrepreneurs canada, commercialization, entrepreneurship, executive compensation, mars discovery district, Ontario, public policy, toronto

Two days ago I wrote about the incredible $470K salary of the MaRS Discovery District CEO and UofT president spouse, the $130M in subsidies the institution pocketed between 2002 and 2008, and the deficit in public reporting. Today I take a look into the results of all that spending.

Why spoil a good party with performance management?

The poor public reporting I talked about in my last post is only one of several issues with MaRS, which fuel palpable resentment against the institution among many in Toronto’s growing entrepreneurial community. Another problem area that entrepreneurs often point to is the low ROI of the hub. While we are aware of the costs, little is known about the hub’s actual results.

For an institution that promotes science, performance measurement appears surprisingly unscientific. Externally, all we hear are sound bytes such as “Kalgene (a division of Kalgene Pharmaceuticals – a MaRS client company and incubator tenant) raises $500,000”. And quite often, as in Kalgene’s case, this fundraising is achieved through a province-sponsored investment fund. Talk about healthy due diligence.

Scientific measurement of the hub’s performance would require assessing actual “performance improvement”. Not fundraising events that may have happened anyway without the institution’s help, and not the inputs into those results (“we helped x companies” and “had x appointments”) as was put forward by the hub’s communication officer when I asked the question last year [April 10 update: and the only indicators on the "Where does my money go" page at the time of this post]. It would also cover more than just select MaRS clients, to assess the effectiveness of the help provided across all startups in Toronto, since that’s the mandate that comes with $130M in public subsidies. Handing money out selectively might help the recipient but it leaves many in the cold, harms local competitors of that recipient, and overall distorts the marketplace.

(As a sidenote, MaRS channels entrepreneurs in different categories, each with a different volume of support. The winner-picking approach means that the hub ends up throwing a lot more support behind ventures that are quite far along the commercialization curve, rather than actual start-ups.)

Of course, MaRS holds internal performance reviews, but in the absence of public scrutiny, there are few reasons to be critical and many to just keep cashing the checks and claim victory.

System deficiencies and a sample of poor results hint to a low ROI

So, how effective are the advisors at helping companies? Is their advice really worth the salary they are paid? Is it cheaper to provide through MaRS than through the private sector? In the current system, how many clients would MaRS advisors secure without the grants that compel a company to sign up?

Believe it or not, I used to work for a government as a commercialization consultant. The French ministry of Economy and Finance, of all things. As surprising as it may sound for a French initiative, we charged companies for most of our services, even though our rates were subsidized. Now, although I was doing this as a diplomat in the Philippines and then in Pakistan, where few French-speaking consultants could be found, I can tell you that a majority of our “clients” only signed up because we also offered grants and had some administrative power (e.g. we could facilitate visas for their clients and suppliers), and they wanted to keep us happy.

The bottom line is, under such conditions: 1. one generally couldn’t expect great results, because there was no link between an advisor’s pay and the services we provided (I certainly felt more effective as part of the Boston Consulting Group in Toronto) 2. the attribution of grants plus the power coming from being part of the public system made sure clients would invariably provide great feedback. See anything wrong with that? I did, and it further motivated me to emigrate to Canada…  (the Canadian emigration officer in Islamabad had a hard time believing my motives, he told me he had never seen a French diplomat apply before!)

MaRS doesn’t even charge for its commercialization services – unless it has to do with renting space (more on that in the next post). Result-wise, companies generally get what they pay for. “Clients” know that and those I interacted with care little for the free support. What they want is what we all do: cash. So they go along with this circus, and pay lip service to the institution. Some good advisors open doors and get stuff done for their clients, but they seemed the exception rather than the rule – the system just does not reward that behavior much. More often than not in my observation, entrepreneurs just had an opinionated public servant to deal with, who might sit on their board and even sometimes collect equity for its public sponsors (that last fact was mentioned to me by an insider although I did not doublecheck it.)

In the course of my activity and my discussions, that was a recurring theme – even before I started seeing the issues with the hub for myself. Several entrepreneurs, who won’t go public not to threaten their MaRS-administered grants (and there are many), mentioned in private that to get grants they felt they were obligated to work with the advisors, even though those helped very little. One told me that “MaRS people think high of themselves but results don’t second that. In hindsight, we would have been better off without their help.”

Granted, my assessment is not highly scientific either – my sample would not be considered large enough to constitute a true survey. But since MaRS regards soundbytes as valid performance measurement, I am certain they will consider the ones I collected seriously.

Opacity in grant attribution decisions, and back scratching

MaRS relies on close-knit self-serving networks to attribute projects. One could even say caucasian networks… Check out the list of advisors – out of 26, not one is part of visible minority (at the time of this post) – that can’t possibly be an accident in a city where 47 percent of the population reported themselves as being part of a visible minority. I know this is not the only organization in the city where most executives are white, but as a subsidized nonprofit, I would expect better – and it supports my experience, which is that grants and projects are attributed not based on performance, but on loyalty, reciprocity and generally being part of the club.

For most grants, such as BMEP or a subsidized “Outsourced Executive”, you can’t apply directly. You have to be “retained” based on undisclosed criteria. The process puts a lot of discretionary power in the hands of advisors. Are they better at picking winners than, say, venture capitalists who do that for a living and even then have to spread their bets widely? Short of replacing grants with tax incentives, which would be fairer and level the playing field, the selection process of a publicly-funded service should be much more transparent and open.

I was the consulting recipient of two MaRS grants last year, thanks to relationships with advisors. One of the clients renewed my contract twice, and the other secured multiple more leads than initially expected as the outcome of our work. I received recommendation letters for both, one by a MaRS advisor. After understanding the system better, I raised my concerns about the institution’s opacity through some discussions with advisors and others. As I imagined it might happen, in spite of the acknowledged results, I have not been referred any project from MaRS since.

Note that in my conversations last year, I was told, both by MaRS insiders and others who shared similar concerns and had experience with the institution, that if I publicly raised my concern, I should expect to be sidelined. That it is a “highly politicized minefield”, with lots of interests at play, and “yes, this is opaque and not ideally ran, but you can’t change city hall”.

No way. I came all the way to this country because that’s where anyone can express themselves and change things if they have a case. Canada is no banana republic, and so here is my attempt at changing city hall. And those who agree should stop fearing for their own self and stand up before another $130 million get wasted. Revolution! ;)

My post next monday tuesday will be about the MaRS-led institutionalization of viable private-sector services and real estate expansion of innovation hubs in Ontario.

Canadian entrepreneurs innovation hubs, innovation policy, mars discovery district, Ontario, Ontario government, Ontario Ministry of Research and Innovation, toronto

At a time when the Ontario provincial government is feeling heat on the executive compensation of public-sector CEOs, I think a deeper look into MaRS Discovery District is warranted. Growthroute had some affiliation with the hub last year as we were referred a couple of projects. I raised my concerns with some insiders about the opacity of those decisions and general “clubiness” level of the institution.

Since then, and in spite of excellent results (I’ll expand and back this in one of the next posts), we have not been referred anything – as expected when I raised my concerns. Instead, we continue to see money handed over to consultants through personal networks, expansion into viable private services, and a hiring frenzy at salaries most start-ups would be envious of.

To those who think bad feelings may affect this post, you are right – and that’s why I have documented all facts and tried to highlight personal experience and opinions as such. And as I found out, I am certainly in good company in Toronto, as so many entrepreneurs and leaders have issues with the way things are run at this innovation hub!

In the first post of this series, I will focus on compensation, expanding on numbers recently raised by @StartupNorth on twitter, and the deficit in public reporting.

“Competitive” compensation

The CEO of MaRS Discovery District in Toronto was paid $471,874 in 2008 and $437,500 in 2007. The information first surfaced in a 2008 MacLeans article on the President of UofT – who happens to be the husband of MaRS’s CEO and makes over $380K from UofT, before substantial benefits.

That salary made MaRS’s CEO one of the highest-paid public employees in Ontario, and the 4th highest-paid person in the “Other Public Sector Employers” category – right after the leaders of Canadian Blood Services, the Ontario Institute for Cancer Research, and the Ontario Power Authority. This is more than the salary of CBC’s head, although he manages an organization that is a hundred times larger.

The original source is the Ontario Ministry of Finance’s “Sunshine report”, which discloses public sector’s salaries above $100K. Run a search for “Ilse Treurnicht” in the report’s addendum to find for yourself, she is in company of eleven other MaRS members paid more than $100K (they had 42 employees in 2008, as reported here).

Deficit in public reporting in spite of over $130M in public subsidies

We would most likely never have known was it not for the sunshine report. Public reporting by the institution is virtually non-existent, in spite of $130M in public subsidies between 2002 and 2008, and that’s excluding another $15M for “MaRS Innovation”, which MaRS Discovery District (and UofT, of course) contributed to. The institution received $8.7M from the provincial government in 2008. The subsidies for 2009 haven’t been reported yet.

For all that, the only public report MaRS has to file, as confirmed by the institution’s communications head in october of last year, is a Registered Charity Information Return. There was a “Where does my money go” page on their site, but since the launch of a new site last year, there is no sign of it (or it’s well buried). Unlike most non-profit organizations, MaRS does not issue any public annual report.

[April 10 update: a reader under the name of William Howitzer (with IP address from the Hospital for Sick Children) pointed out in a comment, unpublished due to strong language content, that the Where does your money go? page actually exists - http://www.marsdd.com/donate/where.html - I ran searches with those exact terms on google and on the mars website when researching this article and could not find it - but as I mentioned I could have missed it.

Beyond his strong language, I would like to thank that commenter for the find: the page is a perfect illustration of my thesis. Let's see: it only highlights inputs e.g. time spent etc, not actual results (see part 2 of this post series for more on that). It mentions that MaRS "spent more than 2300 hours helping companies with their businesses". That's a whopping 5 days a year per advisor assuming an average of 15 advisors over the past 4 years (generous assumptions since they likely count time spent since MaRS's inception), or 1.45h per company helped (2,300h divided by 1,300 entrepreneurs), assuming that later-stage companies did not get much more time than bootstrapping entrepreneurs. Now we can rest assured our $130M was put to productive use.]

To make things even muddier, the institution also runs a private for-profit organization, which has no public reporting obligations. If this structure is legal (as can be expected), then rules should be changed to increase public oversight and include better reporting on actual results.

One thing we learn from analyzing the Registered Charity Information Return is that  the average salary there was over $95,000 in 2008, dividing a reported $4M in salary expenditures by 42 employees. That tells us the top employees didn’t decide to emulate most of the start-ups they serve and take sub-$100K salaries.

In the next part, to be published on Friday, I will focus on performance management and the opacity in grant attribution decisions.

Canadian entrepreneurs innovation hubs, innovation policy, mars discovery district, Ontario

Karen Mazurkewich, Financial Post, in an interesting article on Monday entitled “The new uber-angels” comparing the VC-fund approaches of Ontario and Quebec, declares on the Ontario Venture Capital Fund that “What Ontario didn’t — or couldn’t — predict was the lack of potential co-investors for these funds.”

Karen, I would invite you and Ontario’s decision-makers to step up your due diligence and review Growth Times’s August 4th, 2009 blog post entitled “Who Will Match Ontario’s $250M Emerging Technologies Matching Fund?”……………..

Really, was it that hard to anticipate? Ontario could have predicted this, but there were political and financial forces at play and incompetence at the top. Let me guess that the persons in charge will actually get rewarded with more assignments and rewards for their mistakes, while the rest of us in the private sector get to work harder to actually make innovation happen.

[Addition to the post following subsequent inputs I received: the setup of the Ontario Venture Capital Fund remains such that Business Angels can barely play. The restrictions pretty much rule it out ($1MM min investment, full net worth disclosure, etc.). They should reduce the barriers for Angels to participate, given they are one of the few true sources of capital these days.]

As a rule, I am starting to realize that the public institutions in this province, and that includes a lot of the nonprofit hubs, are not quite designed to really encourage innovation. Except in rare cases, they are designed to grab taxpayer’s money and redistribute it to their supporters based on loyalty, not performance.

One thing Ontario and Canada really needs to get urgently, is that smart regulation has much more leverage than direct intervention. If Ontario really wants investments, it should work to repel section 116 to get American capital flowing here.

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Canadian entrepreneurs, Fund Due diligence, Financial Post, Financial Services, innovation, Investment, Karen Mazurkewich, Ontario, venture capital

Last month I gave a presentation at the Research Innovation Center in Mississauga, looking at the topics I discussed in my last post, and presenting some implementation of a CRM system, which I did for a client.

The video of this presentation is now available at http://www.youtube.com/user/RICCentre and the slides are here: http://www.riccentre.com/images/Greg_Boutin.pdf 

Canadian entrepreneurs, Market, Scale Angel investor, Customer relationship management, Mississauga, sales process

A great post today by Suzanne Dingwall Williams of Venture Law Associates LLP in Toronto, regarding the recent considerations by the U.S. to increase the number of H1B visas for skilled foreign workers, apparently thanks to a push by venture capitalists.

The stats she quotes are startling: 

“A recently released study by the NVCA 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.”

Having lived in six countries including the U.S., I can tell for a fact that the amount of energy I deployed to learn about and obtain the visas and other administrative passes giving me the right to stay and to work is stupendous. In volume, it easily equals the time required to launch the operations of a start-up. This truly is wasted time. If the U.S. had made it easier for me to stay after my years at Stanford, I’d likely be there. I truly love Canada and Toronto is my favorite city in the world – but on a professional level, for tech entrepreneurs the environment is just not comparable to California. So the main advantage of Canada over the U.S., as Suzie points out, is that it is easier to immigrate as a skilled worker here.

But if that advantage diminishes, what’s left to retain immigrant tech entrepreneurs in Canada?

Better public support for start-ups? More grants? Sure, that’s one thing we have over the U.S. But it’s also a double-edged sword: in the previous years and months, the government and semi-public/nonprofit bodies have rapidly enriched their offering to better support the local tissue of tech entrepreneurs. That part is great. But a problem that’s not often raised -no one wants to publicly irk the hands that feed them, I guess- is the increasing institutionalization of venture commercialization actitivities that came with it: internal competition between agencies and “nonprofits” (whose employees clearly profited from this boom) are now leading some of them to expand into the private sector’s realm, for example by offering free market research and consulting services for start-ups. That move even goes against the public service mandate, as those services are generally only available to handpicked “clients”.

Even though it is motivated by a will to better support start-ups, it troubles me that the government and the bodies it supports increasingly choose to nationalize this activity as opposed to supporting the private providers already present. I didn’t leave the most successful communist country in the world – I’m talking of France – to land back in a growingly soviet-like environment, and have to make a living by begging for public grants! Hubs and catalysts are much needed. But it is to complement and promote, not replace, our private entrepreneurial ecosystem.

Sure, there is a lot of good work done hand-in-hand by private, public and publicly subsidized nonprofit organizations here, but when it comes to actual commercialization projects, it’s been my experience again and again that someone with a guaranteed salary and an institutional job simply doesn’t deliver as much value as a private sector provider whose next job depends on the quality of the one at hand. But unfortunately for us, it’s hard to compete with free. ”Free” also creates the wrong culture up north, with start-ups getting used to focusing on the technology and not investing much in commercialization and marketing, which obviously comes back to bite them. The higher valuation Americans place on commercialization activities, in my opinion, is another characteristic of the U.S. entrepreneurial ecosystem that still makes it more compelling than the Canadian one. With higher quotas for H1B visas, it won’t just attract better entrepreneurs , it will also attract better professionals to support those entrepreneurs.

As for VCs in Canada, there are few left, and so companies here are forced to look south or reduce their fundraising expectations and go after angels (who have done a tremendous job filling the gap left by VCs in early stages, but simply don’t have the same financial firepower). Interestingly, the VCs that are left also tend to only provide small amounts and thus really start looking more like angels with extra overheads. Among the Canadian clients I helped this year, and other start-ups I know here that received term sheets from Canadian VCs, not one accepted them. They went for local angels or U.S. VCs. Canadian VCs are stuck in the middle.

Luckily for Canada, U.S. H1Bs are not as compelling as the permanent residence our country is handing over to skilled workers, since they are tied to employment – it’s E visas and green cards the U.S. should make easier for entrepreneurs to obtain (and perhaps they are working on that too, I haven’t checked). But if the great Canadian advantage in facilitating entry and residence of skilled workers goes away, there will be little left here for immigrant entrepreneurs. A Canadian spouse and public healthcare (also something the U.S. may address) as the main reasons for most of them to stay here doesn’t make for great headlines about the state of our entrepreneurial system.

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Canadian entrepreneurs canada, Entrepreneur, h1b, immigration, permanent resident, Silicon Valley, skilled workers, Start Up, tech venture, toronto, US, venture capital, visa

I will soon have another opportunity to test my beta talk on the Divide between Technologists and Business folks, and why that is the number one root cause of tech venture failures (see my slides – torn apart by Slideshare, here!). Communitech has kindly invited me again to speak, this time at their entrepreneur group in Guelph, where I currently reside. It will take place from 6-8pm at SYNNEX Canada Ltd, 107 Woodlawn Rd W.

As a preamble to this talk, I just came across a very interesting blog post, recommended by Guelph’s very own Brydon of start-up Brainpark, arguing for the need to shift from a product development mindset to a customer development approach. I added some comments there too.

I look forward to seeing many Guelphites and having a good chat about this topic. Bring your war stories!

Canadian entrepreneurs canada, divide, entrepreneurship, Guelph, innovation, market development, marketers, product management, start-ups, tech divide, techies, venture