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

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.

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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

I am glad to report that Canadian Business decided to reprint the main part of a post I wrote in May on this blog, pointing out the weakness of their argument against the Green Energy Act.

It’s not online so I can’t point to it, but you will find it on P8 of the August 17, 2009 issue (they pre-date their magazine), the first comment on the page, entitled “California Dreamin’” (unfortunately this title misleads the reader about the nature of the argument, but let’s not be too picky…)  The fact that they publish a pretty strong critique like this one speaks volume about the willingness of the magazine to show all sides of a story. Kudos to Canadian Business!

Canadian entrepreneurs, Market Canadian Business, cleantech, commercialization incentives, green energy act, innovation incentives, innovation policy, public support, R&D incentives, renewable energy

Canadian Business totally misses the mark in its poorly researched editorial on Ontario’s Green Energy Act and the Emerging Technologies Fund in the June 15 issue.

I support innovative ventures in the cleantech space on a daily basis through my consulting practice at Growthroute Ventures, and I recently co-authored an article entitled “Could Ontario be the Next Germany?” with regard to both the Act and the Fund, published in Renewable Energy World Magazine, the most widely-read magazine on clean energy.

As we all know, Ontario has been pouring money by the billion into the car manufacturing industry and other dinosaurs. It is about time some public support be devoted to innovation in cleantech. The Green Energy Act is modeled after the German incentives, which are recognized in the industry as widely successful. California, which Canadian Business refers to as a great model, has in fact been seriously discussing moving towards the German system. But more importantly, Canadian Business’s assertion that California’s model is significantly different in its support of clean energy — claiming it does so less selectively– is downright incorrect. Among many other examples, the western State pays a premium for 5 years on all solar photovoltaic projects, and offers select incentives to wind and biomass projects. This “winner-picking” approach Canadian Business criticizes is a constant in the energy industry, as a quick look into the huge tax incentives our government is offering for oil sand exploration, or all the public money that has gone into nuclear power R&D, would have told the editor. The support now offered to cleantech is a minuscule fraction of those amounts. If Canadian Business advocates for a leveled field, it should make sure it is looking at the entire field first.

As for the Emerging Technologies Fund, it is again just a drop going to innovation against the ocean of dollars poured into the US car manufacturing black hole. Canadian Business forgets to note that Quebec recently announced the launch of a fund offering over 3 times the amount of Ontario’s fund, and that la Belle Province is increasingly being seen as much more supportive to innovation than Ontario. Dismissing the Ontario’s ETF initiative on the basis that there is little venture capital money to match, and that “most VC-backed investments fail”, demonstrates a serious misunderstanding of how venture capital works. VCs bet that out of 10 investments, nine are going to fail or just get by, and one or two are going to make up in a big way for all the others. The metric that matters here is the investment ROI on the entire fund, not on individual investments. The VC industry raises its money from larger funds, who allocate their investments based on ROI and risk. Until now they had found it quite lucrative to place bets on VC funds.

But Canadian Business argues that VC investments are inherently too risky. Taking the magazine’s logic to its conclusion, it is not advocating against the Ontario fund as such, but against the VC model as a whole, in essence saying that VC investments are bad investments, and that no money should be put into that model. The truth is, the VC model may be under fire, but again, one needs just to take a look at the broader picture to see that is but a flawed assumption: how about the recent financial returns from the securities industry, the car manufacturing industry, or real estate? If we are to invest anywhere, I say putting more money in the hands of VCs (and angels too, by the way) is as good a bet as any. Actually, it is a much better bet.

The VC industry in the US is widely seen as a critical catalyst for the rise of the Silicon Valley. Companies like Google, eBay, Facebook, Cisco Systems and a number of other innovation heavyweights act as vivid proof that the model works. In my daily job, I constantly witness how the quasi-permanent lack of funding for early-stage innovation in Canada stifles growth and highly-qualified employment. I am not arguing against Canadian Business on the importance of letting markets do their magic, and getting out of the way, but at a time when the government is distorting those by throwing money at any moribund dinosaur that can still shout, I say any effort to direct funds to the innovative sector through the existing channels should be encouraged and supported. Certainly, reducing taxes and removing regulatory barriers to all forms of investment is needed (making it easier for US VCs to invest here is a definite need!), but it does not prevent other initiatives that leverage the power of targeted incentive towards sectors of strategic importance for our collective future.

Shame on you, Canadian Business, for popularizing half-baked arguments on the Green Energy and Green Economy Act and Ontario’s Emerging Technologies Fund. You couldn’t serve the purpose of traditional corporate money-grabbers any better, at a time when the job-creating innovative economy is in dire need of your support.

PS. And while I’m on Canadian Business, what is it with its choice for the “25 most influential people in business“? All white male except for one woman! The magazine might want to drink a bit of its own medicine, see their last-page article “Women wanted“, as I doubt there aren’t more females or visible minorities in the top 25…

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