“So where is that gap being bridged? One place is in early-stage financing. The financing today for early-stage companies in Canada is a lot better now than it has ever been in terms of options, thanks to things like venture capital micro funds, etc. I’m very, very bullish on the new generation of entrepreneurs that are coming out of university and tech school because their financing options have never been better. The U.S. market is still more mature, but we’re finally closing the gap in terms of options.”
- Canada is finally closing the gap on venture capital options in midst of entrepreneurial ‘renaissance’, By John Shmuel, Published by the National , March 27, 2015 2:59 PM ET
A long time ago, I read a book called “Why Mexicans Don’t Drink Molson: Rescuing Canadian Business from the Suds of Global Obscurity”. Written by Andrea Mandel-Campbell, a former journalist and candidate for the Progressive Conservative Party of Ontario, the book has always stood out as a clear and deep meditation on the problems which plague Canadian Industry.
In her observations, Canadian Industry was not bold or aggressive enough in many of the markets it competes in. Additionally, Canadian Industry didn’t do enough to learn about the world around it. Instead, for example, of going into India, Pakistan or China with people who had local knowledge – Canadians who spent time in those areas, ex-patriots of those countries or members of diaspora immigrant communities in Canada – Canadian Business Executives would just assume that the legal, cultural and business rules were universal. In her book, she makes that point clearly.
Ms. Mandel-Campbell rightly points out that some of this could be changed by having more competition among Canadians as well as a self-examination of Canadian business practices. This includes being more global in orientation and having more homegrown corporate leadership. Our proximity to the US should provide us with impetus for growth and it should not encourage complacency.
Yet the reality is simple: that proximity has been a crutch and/or a hindrance to our true potential. For many years, Canadian Business has not built the infrastructure to be successful. The question is what has been stopping us? Here is where Ms. Mandel-Campbell and I would part ways. She feels it is because Canada has too much Government regulation. This, in my opinion, would be drawing the wrong conclusion. Switzerland, Denmark, Germany, Norway, Finland and Sweden are all examples of governments that have higher levels of regulation and significantly higher levels of personal and corporate taxes. Yet, those countries do better than us. So the question is simple: what Government Policies will help Canadian Business grow? Provinces need to experiment and Alberta can lead the way.
In Alberta, we could try to create Government-Sponsored Business Incubators. For those who don’t business speak, a Business Incubator is an entity that provides services and infrastructure to start-up or new companies. The idea is simple: entrepreneurship is hard but it can be developed. With that being said, while businesses can be developed, there are endless amount of methods to get there. Accordingly, each Business Incubator provides has a different suite of products, services and resources to get to the end result: developing new companies.
Throughout Alberta, the need for such institutions is obvious. In a Report by the Conference Board of Canada, called Alberta’s Rural Communities Their Economic Contribution to Alberta and Canada (Published in Nov. 2013), it was made clear that while economic growth was positive between 2001 and 2011, the growth was only “half the pace of the province as a whole”. Additionally, the report seems to indicate that rural Alberta has a wholly different economy. For unlike most of urban Alberta, Rural Alberta has a Goods based economy which seems to be more tied with the International Economy. Consequently, when the International Economy dipped, between 2006 and 2011, rural Alberta followed. Further, to this point, those rural communities that were closer to Edmonton and Calgary seemed to do better because many of residents were likely able to find work in the Service based Urban Economy. Therefore, rural Alberta needs a solution that can help them grow.
However, this is not to say that Urban Alberta couldn’t also profit from such a project. As we have just seen with the drop of oil prices, Urban Alberta is quite dependent on the royalties, dividends and wealth generated by our energy industry. When the industry is doing well, we all benefit with higher paying jobs and more government revenue. With that being said, Alberta is now experiencing the other side of that coin. Wouldn’t it be nice, if our economy had more balance? That type of balance can only come from the development of a number of new, homegrown industries. Hence, the need for a plan.
Alberta-based, Government sponsored Incubators would be a significant change from what has happened to date. From Klein onward, PC administrations have tried various approaches to growing the economy. These ad-hoc approaches have included interest-free loans, tax credits, tax cuts and grants. However, as seen by the boom-bust cycle, those approaches have not promoted diversification, enlargement of the Alberta Heritage Savings Trust or the creation of non-Energy related companies. In fact, under recent PC administrations we have not seen the creation of a “Silicon Valley North” or “Silicon Valley Alberta”.
Additionally, the NDP Government policies, of late, are not any different. Premier Notley’s plan to provide a $2 Billion dollar plus investment to the Alberta Investment Management Company (AIMco), the Alberta Enterprise Corporation (AEC) and the Alberta Treasury Branches (ATB) will not increase the amount of entrepreneurs in Alberta. For none of those three financial agencies are structured in such a way as to foster entrepreneurship. Unlike some private pension funds, AIMco is a pension manager which is legally mandated to make a profit. Consequently, it refrains from making investments in the types of early, risk oriented projects that foster the creation of new industries.
AEC and ATB have similar problems. The Alberta Enterprise Corporation, for instance, invests in Alberta-based Venture Capital Funds. So, if the Venture Funds that AEC invests in don’t go for early, risk oriented projects, then more money provided by the NDP Government will not help. While, ATB is a provincial owned, deposit taking institution. Accordingly, one needs to have money, credit, a credit history and collateral to use ATB’s services. Or in lay man terms, they are a sort of bank. Therefore, they only lend money and don’t buy equity. Accordingly, AEC, ATB and AIMco are not structured to put money into fresh ideas that might fail. None of them are going to found the next “Google”, “Blackberry” or “Cisco Systems”; and they will likely not act like James Miller Williams of Hamilton Ontario. For, he found discovered Oil in Ontario in 1857 and foreshowed Canada’s future.
With that being said another pair of Premiers did have some success. From the 1930’s until 1947 and again from 1957 to 1965, Alberta was a have not province. Consequently, when the Progressive Conservatives came to power in 1971, this history likely drove Peter Lougheed – and Don Getty after him – to try to diversify the economy. At that time, Diversification meant increasing oil production and having a few other industries. According to Ted Morton and Meredith McDonald – in a paper called “the Siren Song of Economic Diversification: Alberta’s Legacy of Loss – “the Lougheed-Getty ‘forced-growth’ economic diversification projects are conservatively estimated to have cost Albertans $2.2 billion”.
However, in that same paper, it must be noted that Ted Morton and Meredith McDonald concede that the province’s share of Syncrude made $352.2 million in 1995. Furthermore, as of the writing of their paper, Syncrude had paid “nearly $700 million in income” to the Heritage Fund and “more than $14.6 billion in royalty payments, federal taxes and provincial taxes”. By rescuing a private sector company along with Federal Prime Minister Pierre Elliot Trudeau and Ontario Premier Bill Davis, the Government of Alberta was able to give Albertans and Canadians more than $15 billion dollars. Given that $15 billion dollars is much more than the $2.2 billion dollar loss on all other attempts, one might ask why Conservatives hate Government investment so much.
But before I move on, I must note that according to Mr. Morton, there are more government successes. In 1973, Alberta created the Alberta Energy Company. Its purpose was to “lessen Alberta’s dependence on foreign-owned oil companies.” It did so, while providing the Alberta Government with capital returns, dividends and eventually taxes. The same is true of the Bank of Alberta which was merged into Canadian Western Bank to tell a familiar story: money paid back to the Government of Alberta through continued capital returns, dividends and eventually taxes. Consequently, from 1973 to 1993, Alberta invested in a way that would impress Warren Buffett, William Ackman, Steve Jobs or Bill Gates.
By analyzing Alberta’s History, one detail becomes clear. While, the Government of Alberta doesn’t need to put money into the Oil Sands now, it had to in 1973. For, as Rebecca Walberg noted in the National Post, only three industries “are poised to play an increasing role in Alberta’s economy in the next decade”. They are “forestry, agriculture, and tourism, but each of these sectors faces its own expansion challenges”. (Looking beyond oil: These three industries will drive growth in Alberta, by Rebecca Walberg, Published by National Post, March 5, 2013 7:00 AM ET) The irony is that it was those three industries which were the backbone of the province of Alberta in the 1940s, 1950s and 1960s. Or put differently, the only new industry in Alberta today is the mining of our Athabaskan Oil Sands deposits.
While, the process of Government Investment was not perfect, it did allow for the development of our main industry. In the 1900s, Government and Industry knew that the Athabaskan Oil Sands deposits existed and yet they did nothing to develop them. Our Athabaskan Oil Sands were only developed because of the participation of Government through Premiers Lougheed and Getty.
Consequently, tt is easy to say that Lougheed-Getty years (from 1973 to 1993) provided the only significant brake from “three decades of Social Credit laissez-faire policies” (From the Siren Song of Economic Diversification: Alberta’s Legacy of Loss, Written by Ted Morton and Meredith McDonald) that came before them and the laissez-faire policies of the PC Premiers after. Furthermore, it is easy to say that Government Involvement and Investment is the only thing which caused the development of the Oils Sands. Therefore, let’s consider a similar model. Let consider one publicly owned Business Incubator and a framework for Private Ones.
Now someone is going to argue that even considering this is wrong because “Governments should not pick winners and losers”. Or put differently, picking winners and losers is something that governments are bad at. If the previous words don’t show that is patently false, let me ask you to consider other choices governments make. Our legislators pass law which determines who goes to jail and who doesn’t. Our laws determine who gets tax credits and who doesn’t or who gets grants and who doesn’t. Using the guidance of law and precedents, our government determines who should be deported and possibly return to a country that tortures or kills their citizens and who should stay here because that risk is too great. But it doesn’t end there. In a million different ways, on a daily basis, our system of government – politicians, hospital administrators, lawyers, police officers, doctors and paramedics to name just a few people – decides who lives and who dies. Surely that same government can administer small amounts of money.
For my proposal doesn’t require large amounts of money. I am proposing that the Government of Alberta would provide $10 million dollars to the project and the project would be called Alberta Business Incubation Cooperative (ABIC).
The project actually is very simple and might remind you of the television show, the Dragon’s Den. ABIC would act as a middle man. ABIC would have entrepreneurs come to them with a business plan. A Financial Specialist would review the plan and fill in the holes. If the Financial Specialist liked the idea, they would set a funding requirement – the minimum amount of money to make the project viable. And here is where it gets interesting: ABIC only provides part of the funds. In fact, it is proposed that ABIC only provides a maximum of 20% of the funds. The Entrepreneur will be required to put in a minimum of $5,000 which will guarantee them 5%. For ABIC to fulfill their part of the deal, though, the rest of the money has to come from private sources. Consequently, ABIC will shop around the proposal to get the private funds available. Therefore, the Government agency known as ABIC will only be on the hook for 20% of the cost of the project.
For those who say this will not work, I would disagree. ABIC would only stick around until another round of financing or an IPO could be arranged. In fact, if ABIC could get could get out early it would be required to.
As an additional help, we would propose that each of these funded projects would have a Board of Directors which would be chosen by ABIC. This independent board would be made up of those who have passed the Institute of Corporate Directors Programme, have been and can continue to sit on a Canadian publicly traded corporate board or have equivalent experience. Those Directors would provide both the experience and mentorship to ensure that each investment is a success.
This type of “public venture process” will provide both the accountability and transparency needed to vet a project but allow government to do what it needs to do to create positive outcomes for the vast majority of society. It is true that such an policy proposal will require a regulator to ensure that things do not go awry. This means that one of the existing financial regulators (i.e. ASC, AIC, superintendent of Insurance or Superintendent of Pensions or the Ministry of Finance) could be used or a new one (Superintendent of Incubators) could be created.
It is also true that any new monies for the Alberta Business Incubation Cooperative (ABIC) should come from the investors. As a result, it will be proposed here that ABIC be allowed to issue GICs and a deposit insurance system – similar to CDIC, Assuris, CIPF or the Credit Union Deposit Guarantee Corporation (Alberta) – be instituted.
For those who are still not convinced let me remind them of a man named Elon Musk. Mr. Musk was a dual citizen – South African Canadian – who came to Queen’s University to study undergraduate Engineering. From, there he proceeded to go to the University of Pennsylvania to finish his degree. He then went to Stanford University but left after two days to pursue his entrepreneurial aspirations. Mr. Musk has since been involved in a number of venture capital projects including the electric car company known as Tesla, SpaceX and PayPal. Imagine for a second that Calgary or Edmonton had a large and world renowned innovation hub. I believe it would be easy to argue that Alberta could have received Mr. Musk’s innovation and drive. As Silicon Valley has proven, Funding is the key to have a world renowned innovation hub. For funding allows people to create and develop and innovate. Funding allows people to sit and think; and the more of that that happens, the more the world changes. That is the type of public policy that comes form not thinking of one’s self but the benefit that comes from thinking of how government can provide the most benefit to the most people. For that benefit ensures that the “Other” is thought of and that their interest is guaranteed. Given that we are all the “Other” at some point, we all benefit from that consideration. Consequently do you have an idea that can change the world? I think we can make it happen together.