The Jenkins Report - risks for refundable SRED

Recently, the so-called Jenkins Report, "Innovation Canada: A Call to Action," was released by the Independent Panel on Federal Support to Research and Development (R&D). Its purpose was to provide "advice in respect of the effectiveness of federal programs to support business and commercially oriented R&D, the appropriateness of the current mix and design of these programs, as well as possible gaps in the current suite of programs and what might be done to fill them."

 

The full report is available on line and in various summaries as well as commentaries such as this one:

 

http://www.pwc.com/ca/jenkins-report

 

Of particular interest and concern to start-ups, early-stage companies and small business, is this innocently sounding recommendation of:

 

"simplifying the Scientific Research and Experimental Development (SR&ED) tax credit and redeploying funds from the credit to direct initiatives that support small and medium-sized enterprises (SMEs)".

 

Apparently, what's behind this recommendation is an idea of replacing or reducing the "refundable R&D tax credit" by direct "initiatives" (read: grants, investments, etc). This is a huge RED FLAG and RISK for early-stage companies which often rely on cash from SRED refunds as a substitute for the shortages of venture investment funding in the current dismal climate. We can only applaud the idea of simplifying the existing system, but reducing or replacing the "refundability" aspect of it would be a killer and the serious blow to many high-tech startups which rely on this cash to fund their R&D work.

 

Direct funding initiatives, such as the popular IRAP program, are much more finicky, uncertain, bureaucratic, and frequently run out of money. In truth, we need both programs: refundable SRED and direct initiatives.

 

In any case, we can not afford to allow for the cancellation of  the refundable SRED credit - This would really hurt innovation and the creation of knowledge-based companies.

 

We need to lobby our politicians hard to improve the existing system but with an utmost care of not hurting the cashflow of newly-born fledgling enterprises.

CIX - you need to be there!

Canadian Innovation Exchange (www.canadianinnovationexchange.com) taking place this year on December 1st, 2011 at MaRS Discovery District in Toronto, is a cross-breed between a traditional VC Fair, a conference and a giant networking event. You can expect a mixed crowd of hungry company founders and entrepreneurs, jaded investors who have heard it all, benevolent government folks, some media and a variety of hanger-on service providers.

 

The purpose of the event and the reason you may want to be there is well captured in the organizers pronouncement:

 

"Every early-stage company needs exposure and not just in the customer space. Young companies need to establish a profile and promote themselves in the investment community and support industries as well. Even if you are not currently in an aggressive fundraising it is still a useful move to get your company on the radar screen. You are essentially laying down a foundation on which you can build in the future."

 

At the heart of the event is, the so-called 'CIX Top 20 competition', which is essentially a public pitch contest by a number of pre-selected companies. The deadline for the CIX Top 20 applications is October 14 this year, so, you may want to go for it now before you miss it.

 

I participated in the first CIX event in 2008 and have managed to win CIX Top 20 for Kaben Wireless Silicon Inc (www.kabenwireless.com). You get a commemorative plaque plus some media exposure as well as the associated bragging rights.

 

The biggest value for your $495 registration is mostly the exposure and the contacts you establish as a result of your heavy networking. It is well worth the money.

Seed funding and Ontario politics

No matter what your personal political convictions or choices are, if you are a technology entrepreneur you need to be paying attention to what is being proposed, if anything, by the major parties in the current provincial elections in Ontario. What is at stake here is the dismal state of capital funding for high-tech startups which has dropped down by a factor of 10 over the last decade.

What is the essence of difficulty with seed funding? It all has to do with risk and risk management. It goes without saying that at the seed stage risks are enormous and, what is worse, they are hard to mitigate. For all practical purposes, it means therefore that the risk will stay high and is unavoidable. Now, on the other hand, many, though certainly not all, innovative early-stage companies hold an allure of "changing the world" and bringing high financial pay-offs to their investors.

Certainly from the societal standpoint it is a good thing to create and invest in innovative companies. In fact, there seems to be some hard economic data for Canada, which indicates that "40% of new jobs is created by young companies which make up about 4% of businesses." Clearly, finding a workable mechanism which would ease the pain of raising seed funding and provide practical incentives to investors, should result in increased new business formation and therefore significant economic benefits which would contribute to the prosperity of all of us.

So, what is happening on the political stage in Ontario in this context? Well, it appears that just about the only proposal to address these issues is coming from the Liberals. Glen Murray, the Ontario Minister of Research and Innovation, recently proposed

the "angel investment" incentives program which would offer tax credits for individuals contributing seed capital to fledgling startups. The details are somewhat vague and will need to be worked out but, as an example, someone investing $100,000 in a startup could get a 25-per-cent tax credit.

Apparently, this plan is modelled on a similar one which has been in operation for 10 years in British Columbia and has proven to be successful while costing the province something like $30 million a year.

If implemented sensibly and within a reasonable time this plan could really make a difference and help immensely. It would provide incentives to people willing to take a risk - and seed funding new companies is all about risk management and sharing.

To illustrate principles, let's say I need to raise $0.5M for my startup. If I go to you and ask you for the whole $0.5M or just a $100K chunk, even assuming you have the means, you are going to ponder this and agonize over the decision endlessly. However, if I go and ask you to invest $10-15K, you are going to spend far less time worrying about it and will be much more predisposed to take flight. Thus by employing this tactic, an entrepreneur will likely raise their $0.5M because the risk is shared among many investors and each of them does not risk that much individually.

This is exactly how I had raised angels financing for ATMOS Corp by bringing in about 20 private investors, each of whom on average contributed anywhere between $10K and $25K. The beauty of this approach is that nobody is going to lose sleep and the entrepreneur gets his/her objective accomplished. In fact, this is the same principle in action that powers the IPOs and syndicated VC rounds, albeit in a smaller scale. It works, therefore, use it. Of course, there are some pitfalls to watch, such as government regulations, accredited investors requirements etc., but these can be navigated around.

The key in seed funding is to incentivize and reward risk taking. It is disappointing that other political parties are not paying attention to this important issue. The current Ontario Liberals proposal is addressing this need well. Let's hope we shall see it implemented without much delay.

OCRI Leadership

 It has been with relief that many of us in the Ottawa high-tech community greeted the recent appointment of Bruce Lazenby as a President of OCRI. Bruce is an experienced entrepreneur, a doer, an action man, and not yet another bland bureaucrat who never took any risks, never had to worry how to meet a payroll, or build a business from scratch. Bruce becomes, by my count, the 6th President of OCRI    (of which history goes back to 1983).

I recall with particular fondness and nostalgia the first OCRI President, Mike Caughey (1983-1984, but present and active way beyond that). Before Mike moved into management, he used to be a researcher at the Department of Electronics at Carleton University - we are talking about the 70s here. At that time I had been working overseas on my Ph.D. in semiconductor technology and as part of this endevour I had been using a well-known Caughey-Thomas mobility model which was employed widely in device modelling and simulation.

After moving and settling down in Ottawa I bumped into Mike, and not knowing who he was, I asked half-jokingly if he heard about the famous Caughey-Thomas equation.  To my embarrassment and delight it turned out that this was his achievement. Since then, it became a constant tease each time we met but I think Mike was pleasantly tickled by my referrals to his work from his younger days. It has been a fairly specialized piece of work in a rather obscure field, so not very many people were aware of Mike's role in its discovery. As a side note, "Thomas" refers to Raye Thomas, a professor at Carleton University, who became one of the early pioneers of the solar cell engineering and was a founder of such companies as TPK Solar Systems, Megasol and others.

Mike Caughey, currently retired, has always been a very pleasant, if not jovial, gentleman and a pleasure to deal with. His background includes stints with Mitel, BNR and the founding of Cadence Computer Corp, which after several re-incarnations became WebPlan and currently is known as Kinaxis. Mike's background with its combination of researcher-manager-entrepreneur experience set the right foundation for OCRI and his colorful personality was instrumental in attracting attention to OCRI in its early days.

It was apparently Mike's initiative to start what became a very popular event - the so-called Technology Executive Breakfast (TEB) meetings. I remember some of the early TEB meetings held at Rick’s Pizza and Pasta Restaurant on March Road. The TEBs became so popular that, rumour has it, once the coat racks crumbled to the floor under the weight of excessive number of coats, it had to move to a larger venue - The Palladium, currently known under a much more prosaic name as Scotiabank Place.

Later on, during the exhilarating high-tech boom years around 2000, Mike ran monthly Technology Venture Dinner (so called TVD) meetings which were a highly exclusive affair, hosted in the famous and prestigious Rideau Club in downtown Ottawa. These dinner meetings provided an ideal platform for intermingling between early-stage companies' CEOs and venture capitalists. There was a fun and glamorous characteristic to that era, but regrettably it all fell victim to the bust that followed. I have to admit I miss those events.

Gerry Turcotte (1984-1998), was the second and the longest serving President. His pedigree goes back to Algonquin College and its Electronics Department. Gerry was a very approachable man, full of unbridled enthusiasm, and a bit of a hustler in a positive way. He presided over the longest period of OCRI stewardship from which he was parachuted to the presidency of the Communications Research Centre (CRC) down the road at Shirley's Bay.

Bill Collins (1998-2001) used to be Turcotte's sidekick - I remember both of them having fun working closely together out of the office in the Gateway building - so it was natural for him to take over from Gerry after his departure in 1998. Bill was a true operator, an enthusiastic marketer, networker and salesman. He had the good fortune of presiding over the glory days of Ottawa high-tech and was ideally suited for those heady times.

Jeff Dale (2002-2009) got the unenvious job of running OCRI following the tech bust. Times were tough and he tried to do the best under the horrendous circumstances, which involved among other elements, a precipitous drop, by a factor of 10, of available venture capital. His personal style was different - more reminiscent of city hall managers than a flamboyant entrepreneur.

When Claude Haw (2009-2011) took over, there was a scent of expectation in the air. His background is appealing: a long and financially successful stint in Terry Matthews stables (Mitel, Newbridge) followed by starting his own venture capital fund Venture Coaches and the subsequent plethora of activities with 'investee startups'. In addition, he is one of the founders of Mindtrust, a Kanata-based kind of CEO Club. What could be a better profile for a champion of Ottawa high-tech? And yet, it still remains to be seen if all of this did  translate into a spectacular success or a memorable term? I have known Claude for over 12 years and he still is a bit of a puzzle to me.

So now, what about Bruce Lazenby? He holds an ample promise but, as he wrote back in response to my congratulatory note, he "will need all the help he can get" to fulfill the renewed high expectations. And there are many coming from all sorts of stakeholders with different agendas. Here is my short wish (dream) list:

• Revive the Ottawa high-tech to its glory days from a decade ago

• Re-kindle the culture of entrepreneurship with its sense of anything is possible, opportunities abound and tomorrow we shall win the world

• Lobby hard with local politicians to bring high-tech into focus as the future of the region

• Build a financial foundation (risk capital, investment incentives, grants, etc) to leverage and support entrepreneurial efforts

Tall order? Unrealistic? Maybe, but inspirational! :-)

I wish you good luck, Bruce. We are all behind you: some with the energy of young blood and some with the wisdom of grey hair. If you reach out, we shall be there for you. All the best and enjoy the ride!