Best in Show in B.C. Tech

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High tech is all about the next big thing. And here in B.C., we play the game as enthusiastically as anyone else. It was once all about satellites and wireless, then it was biotech and fuel cells, and now we’re all over digital media and cleantech. Each new technology promises to revolutionize the economy, attract foreign capital and create high-paying jobs.

So, of course, the government gets involved. In the past decade, the B.C. government has invested millions to create industry-­supporting institutions such as Genome B.C., the Centre for Drug Research and Development and, more recently, the Centre for Digital Media. But these kinds of projects don’t always go as planned (Hydrogen Highway, anyone?). The government wants to boost the tech sector to diversify B.C.’s resource-based economy, but it’s hard to pick winners in such a fast-moving game or to know which brilliant minds will build the companies that add jobs and inject dollars into our GDP.   

We invited three industry experts to help us understand what it takes to foster a healthy high-tech sector. Michael Brown, a 40-year veteran of the venture capital business, is currently executive director of Chrysalix Energy, a Vancouver-based VC firm focused on clean energy. Gerri Sinclair is CEO of the Centre for Digital Media, the executive director of the school’s masters of digital media program and was the first president of the Premier’s Technology Council. Pascal Spothelfer is president and CEO of the B.C. Technology Industry Association.
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What kinds of challenges come up when government decides to get involved in supporting the technology sector?

MICHAEL BROWN: The first thing that needs to be decided is, What are you looking for? Are you looking for strong, local companies where management is here? Or are you looking for companies that are already world class coming out here? It’s an employment game. If a major digital media studio moves here because they get tax credits, for example, it blows up the likelihood that local companies will succeed, because they have to compete for talent.

GERRI SINCLAIR: I think you’re right; the results are mixed. There is the thought of having anchor companies that attract jobs and that out of those companies come spinoffs. We have more video game developers per capita in Vancouver than anywhere else on the planet, and basically it’s just the small companies that have been spawned from Electronic Arts.

PASCAL SPOTHELFER: I think the net effect is positive. One thing our companies can’t do is recruit internationally; they don’t have the infrastructure. A company like Microsoft can do that, and ultimately I think they increase the talent pool that’s available, which benefits smaller companies in the longer run.

SINCLAIR: Speaking from personal experience, Microsoft bought our company, NCompass, in 2001 – and look at all the jobs that went to Redmond. It’s much better to have the jobs – Microsoft creating a development studio here – than the jobs going down to the U.S.

That’s the other pattern we often see: startups in B.C. doing well, then getting bought up by some large foreign tech company. Is that what we want?

BROWN: There are some positive feedback loops in all that. If a company here sells to a foreigner and you make a lot of money, first of all, the venture capital guys get their money back. Then they have a track record so they can attract investments more easily. And if you can form a reputation as being a place that builds world-class companies, eventually the spinoffs are terrific. Creo was sold to Kodak for a billion dollars, and they started reducing the number of people. But the people spinning out of Creo were well trained to help build other companies, which is fabulous. But the successful companies have to be world class to attract that kind of attention.

What has government been able to do to help build world-class companies in B.C.?

BROWN: When government has tried to do things, except for broad programs, they have not succeeded. But there are a number of federal programs that have worked that the province has attached itself to: there’s the Scientific Research and Experimental Development Credits, which are credits toward R&D; the Industrial Research Assistance Program, an absolutely terrific program that makes grants to small companies; Sustainable Developmental Technology Canada, as well as a teeny-weeny B.C. equivalent, which makes grants to companies that can show benefits on a climate-change basis; and B.C.’s Venture Capital Tax Credit program, which is unique in the country and very successful.

SPOTHELFER: Government is generally really bad at making these decisions because we have a four-year election cycle. I don’t disagree with the current government’s approach to create the best economic solutions possible through lowering taxes and all that kind of stuff; I think that helps. But we have to be realistic. We bemoan the fact that we don’t have enough venture capital here – and we never will. We’re small; we’re four million people. So the next step is, let’s make sure the venture capital of the world can come here, that we don’t have these artificial barriers. And let’s make sure our management teams have the ability to go and get that money.

SINCLAIR: From my perspective, the $40-million investment by the province into the digital media graduate school has been significant, and it is definitely an investment to create a hub for digital media. A recent example is Pixar deciding to put a studio here in Vancouver. Pixar was looking at a number of states that had tax credit programs and that were actively trying to get companies to come – kind of the Ireland model. There is a creative class here, a creative economy, and the people from Pixar were definitely interested in our graduate school. But they were particularly interested in the tax credits that surround the film industry.

But isn’t it somewhat depressing to rely on tax credits to attract businesses?

SPOTHELFER: I don’t think we rely on tax credits. But I’m not a big friend of tax credits because ultimately it’s a race to the bottom. If one region goes down 10 per cent, the others have to go down 10 per cent. The typical example is microchip factories. They have teams going around the world doing nothing else but finding the best deal: free land, tax breaks, training grounds. They built the factory, it has a lifetime of 10 years and then it’s done. Over. The only situation where they work, in my opinion, is when the environment is conducive to making a location sustainable for a company. And in the case of Pixar, it wouldn’t work if you didn’t have those people who make it a sustainable, ongoing concern.
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So if we’d rather not rely on tax breaks and subsidies, what can government do to help companies get to that level?

SPOTHELFER: We have to recognize that anything they do takes years to show an effect. There is no simple route. You can’t do something for a year and then blow it off and try something else. To date we don’t have the structures in place to say, OK, this is what we want to achieve in the next 15 years. We have the Venture Capital Tax Credit program, which is great to get companies started. But where is the money that takes the company through the commercialization phase? You talk about the small companies that sell out; the problem is, that’s the only way out for a lot of them. The next step would be to attract serious dough to build a world-class company. We have to make sure we support all of these phases, not just the start and then put in tax breaks at the end to get a Pixar in. Then you have such bone-headed things like Section 116 of the tax act that put barriers in front of international money.

BROWN: This is one of the dumbest tax laws this country has ever seen. These laws affect vendors of shares of Canadian private companies when they are sold. So if an American owner sells to another American owner, the Canadian government says, “Aha, you owe me tax.” It’s so bad that 25 per cent of the gross profit, not of the net profit, of the sale is withheld from the vendor. The U.S. is the greatest venture capital market in the world by far, and they’d be interested to come to us if we got rid of 116. And we deliberately say, “We don’t want you here.” It’s really stupid. So does the provincial government know about the problem? Yeah. Will they do anything intelligent about it? No.

SINCLAIR: I was recently at an event that brought together the venture capital community and people in the technology industry looking for funds. It was a really depressing event. There are a lot of companies looking for funds to get them to commercialization, and there aren’t any. The big question is, What impact is that going to have on the big breakthroughs in technology that are not getting seeded right now?

But on the other side, there’s something else going on. When I started NCompass back in the mid-’90s, it was inconceivable to start up a company without an influx of capital; it cost us $100,000 just to wire our offices for an Internet connection. Then I look at my students. Our first class of 21 graduated in April. Three companies come out of that because the entry costs are very low. You can build your company at Starbucks with an Internet connection and a cup of coffee. In terms of distribution and marketing, at least, the game has changed, and I think that’s a ray of sunshine.

BROWN: It has changed, no doubt, but it’s changed for everybody. Every jurisdiction in the world says, “Aha, that’s for me!” So now you have massive competition.

But isn’t our advantage that we have a school of digital media that produced 21 graduates?

SINCLAIR: But competition is coming here too. We’re one of the only schools, if not the only, that offers a master’s degree with the seals of four major academic institutions behind it, so we’ve had a pretty unique product here. But guess what? Ontario is now following suit. Manufacturing there has hit very bad times, and the government is putting incredible dollars into the new media field; University of Toronto, Ryerson and Waterloo are getting together to create a school just like ours. And I got a call from a group in Montreal that’s putting together a set of universities with schools just like ours.

BROWN: It’s a really interesting question: do you want to grow companies out in the mainstream, where you’re in competition for resources, or do you want to find stuff that nobody else has done yet and be at the cutting edge? Think of quantum computing. D-Wave has been here for 10 years. Absolutely the only commercial effort in the world for quantum computers. Why doesn’t B.C. become the place where this is recognized by government, in the same way that government has recognized digital media?

SPOTHELFER: The problem for the government is choosing. We have a tendency to jump on stuff. We had a lot of enthusiasm for wireless when it was hot. We then had a lot of enthusiasm for biotech when QLT was hot. Then it was digital media, and now we have a lot of enthusiasm for cleantech. It’s really hard for the government to make these decisions. We can’t jump on stuff if we don’t have a strategy and some consistency. Either we say we’re going to do it, and then you do it over 10 or 15 years, or you don’t do it. Strategy or not, B.C. has seen some incredibly successful tech companies over the years, so we must be doing something right.

BROWN: Yes, we do more world-changing things than the rest of the country combined. Why here? Is it because we have mountains? The best brand-new breakthrough ideas come from people who don’t think like everyone else. They have to be weird people. What was it that got them here and how do we preserve that opportunity?

SPOTHELFER: I think some of it has to do with the culture in Vancouver. We accept the wackiness of these people. We accept the fact that not every proposition has to make money tomorrow. But it’s not just about money; there’s more to it. We don’t lose people at the same rate as other regions, because this is a different place. Why do we have the strongest angel network in the country, size-wise and money-wise compared to the size of our market? My explanation is, if you make a lot of money in Ottawa, you go live somewhere that’s more pleasant.

BROWN: It actually comes back to that, to the fact that this is a great place to live. It’s partly the climate, but we have a system of government that looks after people and gets them to square one, and I think that’s fantastic; it’s a completely different attitude to the U.S. I have nine grandchildren and whenever my kids went into hospital to have my grandchild, we never had to worry about the great care they’d get. And I was never worried it would break one of the families financially. You should never lose sight to that sort of thing.

SPOTHELFER: So when a major company dissolves, the people stay.

BROWN: They stay. Ballard gets to raise unbelievable amounts of money and hires a bunch of people. They can’t sustain keeping that number of people on board, so they start chopping them. Then you have these people that were terrifically well trained by Ballard who spun out and started doing some other stuff.

What can we do to build on that advantage?

SINCLAIR: Yes, what is it that has created these breakthroughs in technology without government support? It is time to stand back and say, OK, we are small, the capital investment is also small, where can we really leverage it? My own feeling has a lot to do with education, and I think our schools are failing us. I’ve got wonderful students, and half of them are coming from B.C. with the other half coming from all over the world. I’ve spent a lot of time with young people in China and India and in the Gulf, and they are better off in terms of their educational preparation in almost every field. To me it seems that we need to be worried about that because that’s where the ideas are going to come from, from young people.

SPOTHELFER: There are two things that will drive our industry: money and people – and we have people that are under-educated. We need better management teams. If I could have anything from a provincial point of view, I would like to see the leadership saying we want to make B.C. a knowledge economy over the next 10, 15, 20 years. The way we have put climate change to some extent on our political flag, let’s put knowledge economy on it. That can drive a lot of things: it influences decision-making in industries and influences how society thinks about these things, how our parents talk to their kids about what they should do. It’s a long process, but it has to start. It’s hard to change the system without changing the culture, and if the leadership isn’t there, it will be very hard to make it happen.