With GLOBE 2016 underway, the spotlight once again shines brightly on Canada’s opportunity to leverage its early leadership position in sustainable innovation and “cleantech” to catalyze low carbon initiatives to mitigate climate change. Vancouver and the GLOBE conference are playing host to not only business leaders, politicians and advocates from around the world, but also Prime Minister Justin Trudeau who delivered the opening address; and with this, we are in a unique position to showcase Western Canada’s significant advantage in sustainable innovation.
The concentration of natural resource producers in the Western provinces means that by focusing on market-driven need, local entrepreneurial start-ups are advantageously positioned to solve problems that matter to this set of end customers. Potentially, this leads to a double win. Firstly, resource productivity innovation (or “cleantech”) enables Canada’s natural resource producers to become more competitive globally while improving their environmental footprint and social licence. Secondly, Canadian high-growth technology companies can become export success stories, contributing to domestic job creation and tax revenues.
However, if the goal is to enhance the flow of Canadian innovation into the mainstream, key will be identifying and removing certain impediments and bottlenecks including: first pilot and project finance; overcoming resistance to change in large industrial customers; filling the talent gap and building world class teams; and providing better incentives to start-ups.
First pilot and first project finance. The resource industry comprises conservative and risk averse customers where everybody wants to be “first to be second”. This means that it can be very challenging to get early innovation projects financed by customers or start-up equity because they represent greater risk. Typically, the value of these projects lie in the $1M-$10M range but can sometimes be much larger, often creating an insurmountable obstacle. Unfortunately, many technologies die on the vine at this stage.
Some ideas for how to solve this problem include investment tax credits for large industrials to incentivize the adoption of new technology; a first project finance fund; and new technology project finance debt. Progressive programs like these would help finance early projects with a mechanism that large end customers can monetize. The B.C. government already announced compelling measures for this during the recent BCTECH Summit but more needs to be done at the federal level that could potentially be managed by an existing body like Sustainable Development Technology Canada (SDTC), Business Development Bank of Canada (BDC), or Export Development Canada (EDC).
Resource industries are culturally very conservative and underestimate the strategic value of innovation to their business. Canada has an exciting opportunity to lead the way with “innovation supply” through high potential start-ups. However, we also need to nurture innovation demand. Many large industrials have a poor understanding of how best to evaluate and implement innovation. Improvement here requires change management, exposure to innovation success stories and creating the right incentives to take calculated risks. These could include stronger federal support for industrial innovation consortia that lead problem identification and facilitate new technology pilots (such as the Canada Mining Innovation Council); incentivizing large industrials’ engagement with the broader innovation ecosystem via venture capital funds that play an important connecting role nurturing entrepreneurial innovation (often from universities) and growing young technology companies to supply the mainstream; an investment tax credit for Canadian industrials that invest in Canadian “cleantech” VC funds emphasizing resource industries; and government matching of the large industrials’ investment in these funds.
Building world class management teams and attracting top international talent, especially CEOs, is often cited as the critical ingredient to building successful technology companies. While Canada does have some excellent professional start-up managers, the U.S. has a much deeper pool. Canada needs to create a virtuous cycle where attracting top international talent and serial entrepreneurs breeds success through training Canadians to be the start-up leaders of the future.
Some ways to kickstart this include minimizing the Visa obstacles for international talent to come to Canada, for instance providing a Visa fast track for individuals with extraordinary ability similar to the O-1 Visa in the U.S. Canada can also better promote its attractive characteristics for start-ups to international entrepreneurs and CEOs. We are advantaged with some exceptional forward thinking programs that are very attractive but are often poorly understood by international start-up CEOs. Our country has a real edge through its SRED, IRAP and SDTC programs that should be very appealing to the right foreign talent.
Lastly, there are some critical areas where Canada lags the U.S. in supporting venture capital and technology start-ups, leading to unintended disincentives. One of these is the way that employee stock options are taxed. In the U.S., employee options in private (high risk and illiquid) company stock are taxed differently from public (low risk and liquid) company stock. When start-up employees exercise their options, they are not taxed until there is a real gain upon a liquidity event (acquisition or IPO).
Conversely, in Canada employee options are treated the same in private and public company stocks. When a start-up employee exercises their options, they are taxed immediately on the “paper gain” even though there is no actual liquidity event. The employee risks the paper gain never being realized but they have still paid the tax. This is a massive disincentive to join a start-up in Canada.
Canadian innovation is at an exciting crossroads. There is an opportunity to create the conditions that foster the growth of Canadian technology businesses that can enable our resource industries to become both more competitive and reduce environmental impacts. Well thought out policy that directly addresses what blocks the flow of innovation into the mainstream locally would have tremendous impact at both ends of the value chain. Canada can and should leverage its natural strategic advantages to become the global sustainable innovation leader.
Wal van Lierop is President and CEO at Chrysalix Venture Capital.
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