Something Ventured:
November 26th

Insight For BC Technology Entrepreneurs

By Brent Holliday

Get IT or Get Out

"Hey, but are you gettin' it?
Really gettin' it?
Come get it from me"
- Def Leppard, Armageddon It

Raise your hand if your sick of the provincial
and federal government's inaction on
stimulating the new economy in Canada. I
realize that I am preaching to the converted
here, but I thought it was time for another
rant. Let's get started:

Wendy Stueck wrote a great article in the
Globe and Mail today about the difference between Seattle and Vancouver. My favourite
quote was from Norm Francis of Pivotal, "Our
problem is that we're losing more and more of
them to the south. But no American kids are
coming here. Basically, you've got a one-way
valve."

Canada's Brain Drain documentary, on TV the
other night, portrayed the one-way valve
theory with the subtlety of a sledgehammer.
We had 60 minutes of the following message:
For the most part, the Canadian born and/or
educated architects of the new technology
economy are going to the US. I spoke to a few people that watched the show and are not as much in tune with the new engine of economic growth. They were flabbergasted. They wondered if it was journalistic sensationalism. They asked me if it was even remotely true. I answered, "Thank God you have seen what we, in the technology minority of the overall population, have been seeing for years."

I don't want to be labeled as a Chicken Little,
but we may be in a death spiral in Canada
when it comes to world competitiveness. Smart people get fed up with the attitude, the taxes, the government ignorance here and they see challenge, opportunity, no fear of failure and a higher standard of living there. You don't need to learn a new language and all the TV shows are the same. It takes 24 hours and a lawyer to get employed there (In an amazingly ironic quirk, the NAFTA agreement makes it easier for a more educated person to move there). There is no shortage of jobs for our best and brightest people there. Wendy's Globe article pointed put another big problem, it's harder to find capital here. Our country is labeled "risk-averse". There are many great reasons to live here. But there are so many reasons not to work here.

Let me make a cynical, sweeping generalization right here. Most politicians only care about getting elected and re-elected. If the majority of people are apathetic towards an issue, then they are apathetic. Any great political leaders, like any great entrepreneurs, accurately predict the next big change in the market. Here is a quote from John Chambers, CEO of Cisco in a Business 2.0 article: "For the first time, the leading candidates in both political parties really believe in a new Internet economy. I don't think you're going to win, if you're a politician who doesn't understand this. Jiang Zemin in China and Tony Blair in the U.K. get it. They understand the correlation among the economy, competitiveness of their businesses in their country, preservation and creation of jobs, and getting re-elected." They "get it". There is a correlation. Hands up again if you think that there is a single political leader in Canada that has made that correlation, that clearly "gets it". Hmmm, not as many hands this time. 

Sorry, but the news gets worse. Our
government leaders have been on record
stating that the lower Canuck buck "elps our
companeez wit dair exports. Dis make dem
more competitive." Sorry, Jean, but the lower
buck makes us weaker. It lulls our companies
into a false sense of competitiveness. If our
loonie goes up a dime, we would be in a
recession because many of our companies will
not be as efficient or nimble in the face of
tighter margins. 

Does this make you angry? I feel that we have
far too much talent, far too much innovation
and far too much to lose for our kids and their
kids if we don't get action. What the hell are
we going to do about it?

Tell me if this quote from a recent NY Times
article sounds familiar: "This is still, after all, a
country where government consumes nearly
60 percent of the national economy, far above the 32 percent share in the United States. Taxes and wages are among the highest in the world. Dismissing a sluggish worker is, in nearly all cases, legally impossible." Canada? No, Sweden. I have watched with fascination as Sweden (and Finland, a very similar social state) has emerged as a new hotspot in technology entrepreneurship. Here is what they are doing: "While the Government continues to finance health care, education and many social services, Sweden has deregulated industries from telecommunications to airlines and banking. As a result, new companies and high technology have flourished. Indeed, much of the growth here is coming from businesses that did not exist 10 years ago. Information technology and service companies have eclipsed traditional manufacturers as the main source of new jobs." Sweden is more of a welfare state than Canada, yet it is booming. Why? First and foremost it is a highly educated country with a deep fascination for the Internet and wireless technologies. As
mentioned, deregulation of all major industries
and loosening the iron grip of unions by
allowing temporary workers has turned the
country into a fast-moving group of nimble
companies finding opportunities to make
money. Oh, and Prime Minister Persson is
making tax cuts, while increasing spending on
health care and education.

Here is another quote that sounds vaguely
familiar, from an article in Business 2.0 :

"The island continent, mostly known for its
wool, mining, and agriculture, with crops such
as wheat, sugar cane, and wine grapes, is
witnessing an exodus of its high-tech
swashbucklers, who are moving their seedling
ventures to the United States. Mineral-rich
Australia, which had its own gold rush more
than 100 years ago, has become a fertile
breeding ground for computer geeks and
engineers. After all, the sprawling,
underpopulated country, is one of the most
wired continents in the world." Read the entire article, which refers to brain drain, attraction to US venture markets and overall better opportunities than in their homeland. But here is the most important quote from this article:
"Adam says that like most U.S. technology
startups, the members of Verve's engineering
team, based in Australia, own options in the
company but must pay taxes on them before
they are vested. Whereas in the United
States, stock options, which are also used as
a currency for hiring talent, are not taxable to employees until they vest them. Lopez says he finds the Australian taxing system confusing and hard to deal with, with a higher capital gains tax than the United States, which inhibits U.S. investors from funding companies based in Australia. Pooling-of-interest mergers are not allowed and Australian employers do not typically grant stock options to their employees." Exactly the same problems that we have here, with the exception that we generally do give stock options.

Remember, it's $2,000 for an Aussie to fly to
the Valley. It's a couple tanks of gas for a
Vancouverite. The article quoted above was
written in September, 1999. Here is what just
happened last week:

"SAN FRANCISCO, Nov. 19 /PRNewswire/ via
NewsEdge Corporation -- The Australian
Minister for Communications, Information
Technology and the Arts, Senator Richard
Alston, visited the Bay Area yesterday to
promote Australia as an investment
destination for major U.S. pension funds and
venture capitalists. The visit follows recently
announced proposals to significantly improve
the Australian Capital Gains Tax code, making
investment in Australian companies more
attractive to foreign investment funds." The
article goes on to state that "individuals will
pay no more than 24 percent, and that
pension (superannuation) funds pay no more
than 10 percent on nominal capital gains,
making Australia's capital gains tax rate
internationally competitive. The proposed
reforms will also introduce "rollover relief" to
encourage the use of stock options to attract
talented employees to Australian startups.
Rollover relief will eliminate capital gains
liability when there is an exchange of interests in companies or fixed trusts because of a takeover. This measure will enable the
restructuring of rapidly growing innovative
businesses and means Australian companies
will face tax treatment similar to their U.S.
counterparts."

The government of Australia, faced with a
weak currency, a large debt and a social
safety net that rivals Canada's own, sucked it
up big time and delivered a 1-2 punch to get
their knowledge economy going and stop the
flood of people from leaving. It is easier for
Australian VCs and companies to raise money
from the US and it is much more attractive for
Australian entrepreneurs to hold and vest
stock options. This makes SO much sense,
because the US pension fund industry is the
biggest source of money for VC funds. The
Australian government (which already matches
investment dollars in start-ups 2 for 1) doesn't
need to add cash to the system. They
encourage other country's cash into their
system. Brilliant! 

From the National Post, Wednesday November
24th: "Fastest Way To Prosperity Is To Cut
Capital Gains Taxes - …Forming and moving
capital -- and in so doing preventing mistaken
investment decisions from persisting too long
-- are the basis of prosperity. Taxing capital
gains discourages investors from moving
capital to more promising ventures, creates
brain drain as the "vital few" seek a more
hospitable economic climate and diminishes a
country's tax base as taxpayers either find
loopholes or move to other countries…

Politicians are reluctant to diminish taxes --
capital gains taxes in particular -- and are
reluctant to open up financial markets
because the resulting prosperity would quickly
reveal that private, rather than government,
financing of entrepreneurs brings about
prosperity…. Capitalists, banks and other
financial intermediaries do make mistakes, but they make fewer mistakes than governments, and they put a quicker end to them." 

If you bothered to read those long quotes, you will see a solution cropping up here. Far be it from me to just be a whiner. We need solutions and we all need to speak up a bit to get it done.

Brent's Sure Fire Guide To Getting His Vote

1.Go talk to the leaders of the US
economic engine in the Valley and in New
York. Ask them why they are so
prosperous. Ask them why they look to
Scandinavia and not to Canada. In other
words, try to "get it". 
2.Immediately crop capital gains taxes to 5
points less than the lowest rate in the
US. 
3.Institute the deferral of capital gains tax
if gains are re-invested in early-stage
private Canadian companies. 
4.Roll out the red carpet to the gigantic
sources of US capital, just like the
Aussies did by doing step 2 and by
making it clear that they will be treated
as if they were investing in their own
country, with respect to taxes. 
5.Get rid of the stupid rule that has
un-exercised stock options treated as
personal income and taxed accordingly.
Tax them only when they get the money,
you dolts! 
6.Stop trying to play capitalist. If you fund
one more make-work super project, I'm
really going to go postal. Let the private
sector place the capital. 
7.Strategize with the private sector
players and come up with a
communications plan to tell the students
in our universities, the entrepreneurs in
our country and all of the ex-Canadians
in the US that we now "get it". And we,
together, will make Canada the best
location to grow technology companies
and prosper in the new economy. Hell, at
best, we might make the playing field a
bit more level. 
8.Oh, I almost forgot. Lower personal
income tax by 2% every year for the
next 5 years. That should give you time
to make the debt manageable, while
giving us all a reason to stay here.

It has been said that the squeaky wheel gets
the grease. We tech folks, with the exception
of John Roth at Nortel, are little voices in the
wilderness in this country. If change is needed, we need to take action. E-mail the leaders and the local members. Make sure that the lobby groups, like our own BC TIA, know how you feel. Do it now!

Last point. Even if the government announced
all of my 8 steps tomorrow, we still have many
other challenges in growing global technology
companies. But wouldn't it be nice…

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Responses From Last Week

Brent:

"Invisible airwaves
Crackle with life
Bright Antennae bristle
With the energy"
Until your phone cuts out. 

I have a Sprint account. (Fortunately, I had
the foresight to purchase a dual band PCS
phone) I can be driving from home to work and it will switch over to analog roam 4 times in the 5 minutes it takes to get here. Even at work going from the front door to my desk it will switch to roam. If I had not gotten a dual band this would have meant no connection.

In my opinion, wireless data access through my cell phone has a long way to before I will use it with confidence. I have access to the Internet through the Sprint mini-browser and believe me access times are sloooooooow. One time I was actually lost. I thought no big deal, opened the mini-browser to get MapQuest and find out where I should go. After 5 minutes (For which I paid premium access) I got nothing.

Until these issues are resolved, I won't be
using my cell phone mini-browser or as a
modem for my laptop which is also an available
option.

Bimal Parmar
Responsys.com
Palo Alto, CA

Bim:

Every party has a pooper, that's why we
invited you… party pooper.

Actually, you have stumbled on the key
ingredient to the success of the whole wireless data industry. Is the potential market lucrative enough to encourage the carriers to build out their networks to go from spotty at best to high quality. It will cost big money to do so. Some say that the 3G standard might solve part of the problem by having homogeneous networks. But, if you are a true party pooper, you might say that the people touting 3G are the equipment vendors, who have the most to gain, by far.

As if we didn't have enough rain up here…
Sheesh.

Hi Brent, 

I've just finished reading your column.
Impressive, as usual, less a single irritation... 
...and I'll quote you commentary for context: 

"My favourite presentation was by a couple of
young kids from Edmonton. They displayed the exuberance and shoot for the moon attitude that usually  comes from south of the border. When the 21 year old presenter said that the CTO, his brother, was not done high school yet, the audience giggled. I looked  at their stuff later and it was impressive. These kids have a bright future and it is never too early to start thinking big. A local boy named Don Mattrick had the same chutzpah at their age... " 

It's obvious that you were impressed with 'their stuff', their exuberance and their attitude......and yet, no mention of their company or product... ...why? 

Before the eyes of this reader, you've
effectively 'shelved' these young mavericks for
what reason... 
...the age of their CTO? Perhaps the old adage remains, 'The more things change, the more they  stay the same.' It's shameful that our prejudice towards youth hasn't changed much since the formative years of Thomas Edison. What exactly are our qualifications for innovation and genius? 
Perhaps we should just be honest and tell the
next generation of hi-tech entrepreneurs,
"Sorry, you're not qualified... ...come back and see us when you turn 40."

Little wonder Canadians continue to witness
our future seeking greener pastures 'south of
the border'... 
...perhaps those 'south of the border' better
understand the true value of our bright and
bushy-tailed youth. 

Am I being idealistic? Perhaps. But when we
start collecting our meagre CPP allowance... 
...and those income taxes seem a little
higher... ...and the medical lines seem a little
longer... 
...we'll be able sit back and reminisce that we
did our part to ensure this explosive hi-tech
growth was capped at a manageable level. 

Brent, you have a journalistic duty to your
readers, to identify the dreamers, the
innovators and the mavericks... 
...regardless of their age. I look forward to
reading more about these 'kids [with] a bright
future' and many other like them! 

Keep up the great work!

Michael Stenner 
Vancouver, B.C. 

Michael:

I privately revealed their identity to you,
because you asked. I was a little hesitant to
publicly state whom I liked at the Forum,
because as a VC, it might give the company
the impression that I really liked them and
would therefore invest. The particular guys I
was referring to have since read the column
and used it as a quote on their web site. So
much for the surprise! We continue to talk with them and help them find capital. They are at http://www.control-f1.com for anyone interested. Your welcome, Veer.

I can assure you that the average age for a
start-up CEO that we are seeing at Greenstone is well below 40. More like 33.

What Do You Think? Talk Back To Brent Holliday

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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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