Growth Times

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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• Background Note on Whistleblowing (in Context of the Series on MaRS Discovery District) (growthtimes.com)
• Troubling Facts about MaRS Discovery District (Part 1 of 4) (growthtimes.com)

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