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Something Ventured:
Mar 5th


Insight For BC Technology Entrepreneurs

By
Brent Holliday

Fed Up

"'Cause I'm the taxman,
Yeah, Yeah, I'm the taxman
And you're working for nobody but me."
- Beatles, Taxman

An Open Letter :

To: Hon. Paul Martin, Minister of Finance
Hon. John Manley, Industry Canada Minister
Hon. Sheila Copps, Heritage Minister

Cc: Rt. Hon. Jean Chretien, Prime Minister
Everybody else in technology products or services in Canada (hell, why not everyone else, period)

I would like to speak to you three on behalf of the technology sector of our economy. To be accurate, the technology sector did not ask me to be their voice. I am assuming the role for convenience, although I do expect that some members of this sector will make their own voices heard. This is a democracy, right?

I want to take issue with your economic strategy and the policies emanating from it. Actually, I would like to think that you indeed have a strategy. But it does not appear to be very coherent. Most importantly, I believe that you three are seriously underestimating the impact of technology on our future.

I am a venture capitalist. I have a unique perspective on the technology sector from my vantage point as a financier of early stage technology companies (typically less than 50 employees with the goal of becoming the next Newbridge Networks, Biochem Pharma, Cognos Software or ATI Technologies). What I do is risky because some of the companies I back will fail completely. But by getting in early and helping these companies grow, I can make my backers get huge returns on their money. It is exciting and exhilarating to participate in the "start-up" roller coaster ride with the real heroes: the entrepreneurs and their employees that make the sacrifices necessary for every small business wanting to grow quickly. Most, if not all of the companies I work with are on the leading edge of technology innovation. You might say that I have a window on the primordial soup of the next economy.

In the soup of the next economy, there are certain fundamental truths:
You can have the best technology and still not sell a damn thing.
Smart, effective, driven management with experience in the chaotic world of start-ups will usually win.
Access to a talent pool of brilliant engineers and developers is a must.
Cash is the fuel... and all start-ups burn through it faster than it can be printed.
Connections to financiers, customers, partners and distributors can often be the difference between billions and zilch.

Now, back to you. The next economy will be the U.S. economy if you don't get your collective act together. You three could be senior managers of a struggling company with massive potential called Canada Inc. If I was on the board of directors of this company (representing the 30 million odd shareholders), I would be pounding my fist on the board room table, demanding some focus. A clear strategy for moving forward in a new global economy. Right now I'm completely confused by your wanderings.

Let me see if I have this straight:
Paul - You increase taxes (in every imaginable form) from individuals to a point where a full tax revolt is just around the corner. You slash spending in health, education and other essential services that Canadians hold sacred. You get the books balanced and preach stability. Then you take 50% of the new surplus and increase spending again. And you do no meaningful tax cuts in the latest budget. To top it all off, you hold onto the 80/20 rule on foreign investment that is tantamount to you deciding where every last Canadian must invest what scraps of savings they have.

John: You have innumerable organizations aimed at stimulating various industries. You, the government, with political will clouding your business judgement, actually invest in any and all industry. You and your minions choose which companies in Canada get money. Unfortunately, way too much of it is going to resource based industries (13% of R&D to agriculture, forestry and fisheries, while the US does 2.4%).

The WTO is all over you about some of these programs, because they see it as unfair trade practice. You control the R&D funding and the tax credits and refunds for the technology industry (We have fallen behind the Americans to the point that without these handouts to Canadian technology firms, we could not be competitive). In short, you are in the business of giving money to business.

Sheila: You have damaged Canada's reputation as a good trading partner by trying to protect two industries that already get a pile of money from John, media and film. All in the name of culture. Now, the U.S. is looking at cutting off your political legs by hitting your hometown steel industry with sanctions. I have news for you Sheila. The Internet makes what you are crusading for irrelevant. Like it or not, people now have the choice to read, view and listen to what they want. Cripes, you let Disney buy the rights to the Mounties! Is anything sacred?

So, what we have here in Canada is a government push me-pull you. Squeeze more tax dollars out of corporations and the individual employees in order to put money back into the corporations as R&D or protected markets (for culture) or repayable loans (that are often defaulted) or other subsidies in the name of increasing their chances of success in a global economy. Huh? Call me simplistic, but cutting the taxes and giving every company more money (that they can decide how to spend) makes more sense than letting bureaucrats decide who gets it and how that money is spent. And explain to me again how protectionism helps in the global economy? Long term, it clearly does not.

I thought government money was only needed when there is something called "market failure". In other words, when no free enterprise will provide the service due to necessary public standards, the government would intervene. Makes sense for health, education and employment insurance. But investing in Bombardier? The political corruption of such investments makes a cynic of all of us. Hmmmm, wonder why John has spent twice as much in Quebec than in the rest of Canada? In a better world, we would let these companies fight it out for market share and profits on their own, with competitve tax rates and less red tape!

I have to say that I am not against subsidies, per se. I just want consistency in their application. The real reason that I suspect that John needs to spend much of this money is the zero sum game created by other countries subsidizing their industries. Subsidies are an ugly reality of our world economy in a transition to a real global connected economy. So we rationalize hundreds of millions of dollars into direct private industry investment through finger pointing. "See, the Brazilians did it. It's not fair!" And to be fair, Sheila, you can't hold a candle to the French for coming up with ridiculous cultural protection barriers.

What I am saying to you three is that if you are going to do subsidies, then do it right. Go all the way. Your strategy then becomes to make Canada, Inc. a reality. Buy up all of the big manufacturers, media companies and resource companies and then reinvest all profits into R&D and training for your immense labour force. You could corner world markets in certain sectors and reap the monopoly returns. Continued re-investment would keep you at the leading edge of the curve in the industries that you choose to be in. Build a wall along the 49th while you're at it. We could invest a small chunk back into the National Hockey League teams and the Montreal Expos, too! Build their stadiums and own the teams. We'll show those stinking Americans! No more dickering around. Run the whole thing!

Seriously, we are lagging behind the rest of the industrialized world in transitioning to a knowledge economy (my aforementioned "next economy"). In BC, we are acutely aware of the booms and busts of commoditized resources. We must get technology to the forefront. The National Post talked today of the huge lag in growth Canada has in technology industries, when compared to the US and Japan. Yikes!

There is another way to stimulate growth, especially of the next economy. Stop the vicious tax and spend spiral right now! Cut taxes dramatically and stop the majority of the subsidies at the same time to offset the loss in revenue. (We don't need government mega projects in the name of jobs. Again, here in BC, we will all collectively pack our bags if there is another "fast ferry" project announced!) This has enormous political ramifications that the three of you, ready to beat the hell out of each other in a leadership fight, will not want to try. I know that. I also know that we have a huge workforce recieving paycheques from resource industries. Instantly choking off their subsidized air supply would be politically inadvisable.

But can't you be creative, you three? Look at Ireland. They chose to stimulate a technology-based economy and kept the subsidies and incentives (for technology and manufacturing only) along with the massive across the board tax cuts. Incentives are the key. Start thinking long term. Instill the entrepreneurial culture. Reward risk.

Remember the fundamental tenets for creating the next economy? Make cash come in from other places to fuel the new companies. Lose the capital gains tax for any gains made from a) investment in early-stage, private technology companies b) employee stock options c) foreigners investing in any Canadian companies (the withholding tax). Massive capital intensive projects need a boost, not through grants, but through tax avoidance. All of this lowers your revenue today, Paul, but happy investors and employees re-invest in Canada and eventually much more tax revenue comes in.

Help train and keep brilliant employees through education and work incentives. To keep the Waterloo graduate from walking away with all of his/her know-how, tell them that as long as a qualified Canadian company is processing their paycheck, they collect credits to be used against student debt or for further training programs. Most people in technology are driven by what they can learn and who they can learn it from. And right now, many of the exciting and challenging opportunities are south of us.

Make all efforts to reward the self-starter and not completely discourage failure. By making seed capital available for early stage companies to develop proper business plans and do market research you are encouraging people to get the necessary experience and knowledge about starting business. For the first few years a program like this would see little success. But, as these entrepreneurs "get it" through iterative failures, they will collectively be a much more savvy group for the next idea. Eventually, they will start to hit it out of the park, so to speak.

There are lots of things that you three cannot possibly legislate. For instance, the conservative nature of Canadians is not something that you can declare unnacceptable tomorrow. Rampant pessimism in business is a disease partly incubated by horrific government decisions of the past. I hate these two endemic states-of-mind that Canadians now have. They are so counter-productive. We have to get the communities thinking that the glass is half full again.

Stop the current slippery slope we find ourselves on and get a clear economic strategy together. Make a firm commitment to the future and stop pandering to the old boys resource club and cultural self-interest. And, for the love of God, stay out of the business of doing business.

If you have any questions, you can reach me at
bh@netcom.ca.

Sincerely,
Brent Holliday

P.S. for the rest of you that may want to send your own version of a "call to action" here are the various e-mail addresses you will need:
Paul Martin:
pmartin@fin.gc.ca
John Manley:
manley.john@ic.gc.ca
Sheila Copps:
copss@pch.gc.ca
Jean Chretien:
jchretien@plc.gov.ca



Random Thoughts

- March 4, 1999 Globe and Mail had a superb article on the chances of reversing the brain drain. My comments above, notwithstanding, it held out hope for the best and brightest returning to help ignite the tech sector here. One fortunate Canadian, Jeff Skoll, is worth $3.4 billion US, according to the article, through his holdings in eBay. And Jeff Mallett of Yahoo fame is from Vancouver! Either one of you Jeffs can feel free to give me a call. I can help you invest some of your millions...

- I wanted to take a moment and pay tribute to two members of the BC tech community that passed away recently. We should all be thankful to those that have helped pioneer technology companies and investment in BC. David Bensted and Alvin Fowler were two of those pioneers. David was the principal of dba Telecom and a past president of the TIA. I met him a few times regarding new technologies and companies that he was mentoring. He was a pleasure to talk to and had an optimistic air about him that was refreshing. Al Fowler was involved with the University Liaison Office at UBC, responsible for licensing and commercializing technology. Al was also an entrepreneur and was involved in many companies through his years. From my meetings with him it was clear that Al was fascinated by technology. He worked diligently to balance the protection of UBC's property and the commercialization opportunities that abound out there. They will be missed.



What Do You Think? Talk Back To Brent Holliday



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).


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