Industry Committee on May 27th, 2008

[Ian Smith]

That's a surprising one, isn't it? What two industries could be more different than the auto industry and the medical industry? What we were talking about was high-frequency ultrasound, which is used in the automobile industry to look for bad welds. It gives a very good picture, akin to the things you see with X-rays, but of course the ultrasound is non-ionizing radiation. It can't cause collateral damage. It's possible that this could be used for imaging things like teeth, bones, and so on in a non-invasive and non-destructive manner. So that's what we were talking about.

There are many more of these crossovers, and that too is a question of communication, because we don't often meet. The auto industry doesn't often meet a doctor unless somebody breaks a leg, and then they do. So that too is just taking the initiative. Take the initiative, be informed, know what's going on.

We bumped into Dr. Maev at the University of Windsor more or less by accident. So we're lucky to have been able to pull that through in the end, and it's now begun.

Roman, you wanted to say something.

[Roman Szumski]

Yes. Just to build on that example, it's serendipity. You have to be in the right place. You have to be in Windsor to make that leap from one technology to the other.

Another good example we have from our IBD branch in Calgary is the use of MRI technology--which we normally think of for medical applications--in the pipelines to look for water. They are essentially using it to look at the quality of the material coming through and when there's too much water in it.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We talked about the valley of death, angel financing, venture capital, and the three f's: friends, family, and fools. Part of the problem I see is that there doesn't seem to be much initiative for people to venture into that area.

There's another problem too, and I think Mr. Arthur treaded on it lightly. We're talking about correcting some of the mistakes we've made in the past in innovation, and better ideas for doing things, but are we training our kids at the university level that it's okay to make a profit? When we're talking about venture capital, going out into the world of business, and encouraging young people to do that, are you getting enough help from the universities from the economic standpoint? This is a capitalistic society, and if we're going to succeed we need to encourage them, rather than possibly giving them some other message.

[Ian Smith]

I work a lot with the University of Manitoba, and I think that has changed enormously over the last five years. I'm part of an advisory group for the faculty of engineering that is interested in what they can do in medicine, for example. Now we're trying to give them some real-life examples of what engineering can do in a completely different subject than bridges or roads, etc. That realization is a fact now, and it'll depend on the university and what stage they are at in realizing this and exploiting it.

Here in Manitoba it actually has begun. The engineers have courses in the real world in their final year: examples of jobs, how to start companies, and how to run companies. So I think you've hit on the problem, but society in general has fortunately hit on the solution as well. It's just going to be a few years until you see the product.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Do you see a need for us to talk to different industries? We talked about the automotive industry and the field of medicine. Should the government open up some channels so you can collaborate with different industries?

[Ian Smith]

I think we're managing okay without any help. It's a question of will and time. How much time do you have to devote to things that are not directly productive--in other words, investing your time as opposed to your money? Once you've seen success, it's easier to do it again. That's how I would describe it. It's pretty obvious that you should talk to more people than just the ones in your own field. That means you have to go to subjects that are a little off topic for you and learn. That's also happening more and more.

I think the industrial societies, the life sciences associations, etc., are inviting more speakers to come from outside rather than inside, so you start to expand the perspective. Over the past decade there has been enormous change there, from what you would call a “silo mentality” to a “let's work together mentality”. But it's communication. It takes time.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Van Kesteren.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

After this morning's presentations, I was ready to open my wallet or raid my little piggy bank to invest in everything that you do. But, right at the start of your presentation, Mr. Smith, you said that you had a trade deficit of $2 billion.

So here is my question. You said that you would like to have more venture capital, a bigger investment from teachers' pension funds. How can you attract new investors?

You also mentioned that you could have government guarantees. But how can you persuade people to invest their money in venture capital? How would you be able to convince them?

[Ian Smith]

It's very simple: show them a success. That's what has happened in California. They started very small. The CalPERS union is a very large union. As I tried to explain, take a very teeny percentage of your resources—take one-hundredth of one percent of your $20 billion, invest it in one for which you have very good advice, and win 20%, or something like that.

As they get used to it, they become less risk-averse, so it is “practice makes perfect”, essentially. You have to start. Try to start with winners.

We have been very lucky here that our two big companies, of which I spoke, both started from one, two, or three employees and are now at 100 and are now not begging for money—they are turning away money—because they showed success. In our particular business, it's not so difficult. If you sell to the United States and create a competitive advantage, your product will sell like wildfire also.

So the market you go into should be one where your product will create a good competitive advantage. That's the best way to have a success.

I'll give you an example. In Minneapolis, they bought an MRS machine at one hospital. Within months a second hospital said the first now had an unfair advantage—because hospitals make money in the United States—so Minneapolis bought a second machine. Now they have two.

This is what happens when you make a good investment. The trick, of course, is to know which is the good investment. You want to have a relatively high level of success for your initial probe. You have to prove to the pension funds—I just use them as an example—that it is not as risky as they think; that with good advice they can find a good investment. Then the confidence will grow.

It's a slow process. It's that initial pulling in that is very difficult, because it's easier to invest in apartment blocks in Toronto, as Mr. Simard has said. It's a communication problem, it's a risk-determining problem, and it takes a lot of dedication by people from the community, which is what we're trying to do here.

Had it not been for the crash of this labour-sponsored fund, I think we would be there already with the pension fund. OMERS, the Ontario employees group, is very successful. In Quebec I believe the venture capital situation works pretty well. It is far better there than anywhere else, because they have lots of successes. The Government of Quebec has been very helpful in that respect in helping people make the investments in the first place.

Does that give you an adequate explanation?

[Robert Vincent, Bloc, Shefford, QC]

Thank you very much. What sort of government guarantees were you mentioning earlier?

[Ian Smith]

They would promise, let's say, “If you lose, we'll give you 50% of your loss”, or something like that. You can't guarantee 100%; that would be ridiculous, and people would go crazy. But there has to be some way to offset. It could be that you use your loss as a special tax incentive of some sort. There are ways to do it that will not cost the government too much money either.

The government should show confidence in the people to do this, to be behind them in whatever way it is. It could even be giving some wise advice on which markets are better to enter.

It's a complex answer. I would love to have a one-hour discussion on this subject, because I think the only thing holding Canada back is the risk aversion of the large funds. It's not as though Canada is short of money. It's short of will.

[Robert Vincent, Bloc, Shefford, QC]

You touched on the issue of intellectual property, which, for industry, is really interesting and really vital, especially in each of your areas.

Could you talk to me a little more about that? How do see the intellectual property issue evolving in your respective areas?

[Len Dacombe]

In TRLabs, for example, our charter-member industry sponsors are buying into the partnership and gaining royalty-free access to all intellectual property that we generate on all of our research programs from all of our provinces. The smaller companies, which don't pay as much to join the family, end up in a position whereby they can commercialize something with a royalty-bearing kind of arrangement. That is negotiated on a one-off basis, depending on what they're doing with the product or the intellectual property.

The model works. It takes the management of the IP out of the company's hands and it takes care of it for them. We manage the patent process.

[The Chair, Conservative, James Rajotte]

I'm sorry, but we're out of time.

We'll go to Monsieur Arthur.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Very quickly.

I heard Mr. Smith say, show us the success and then we'll find the money, but I'm not too sure if I understood Mr. Schulz to say, if we found a cure for cancer, we couldn't find the money to finance it.

Could you reconcile those two?

[Harry Schulz]

If I could make a comment on this, I think Dr. Smith's institute has done a very good job of taking technologies to market, and it has very concrete examples of how that's happened. But I would go into another perspective, and this goes back to Henry Friesen's remarks to you this morning. If you were to walk into our hospital's operating room today and go to the supply shelf and point out the products that have come from Canada, you would be able to find them on the fingers of less than one hand. If you were to go into the inventory of other elements of our hospital, any Canadian hospital, not just the Health Sciences Centre, you would have a very, very tough time finding Canadian products on the shelf, of any type and any kind of technology.

So irrespective of all of the glowing reports that all of you are hearing on your cross-Canada tours of how well everyone does at commercialization, the reality is that we all, in this country, stink on this subject. That's why you guys are doing your job right now.

So the venture capital community is not there. From our perspective, at a geographic level, it's hard to source that. But Dr. Smith is correct, if you have successes, they breed confidence. I'm just saying that this confidence hasn't exactly been a wildfire so far.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Mr. Chair, I think that's a wonderful mot de la fin, so I'll just end there.

[The Chair, Conservative, James Rajotte]

Okay.

We have about four minutes left. I can take the time, if....

I did want to follow up on that, because IMRIS is a very good example. But looking back at that example, which was commercialized in 1998, I believe, or around then, how do you replicate it? Did they follow a model? Was there something specific they did? Is there something we can learn from that example in terms of commercialization?

[Ian Smith]

Actually, the IMRIS case was one of learning by making mistakes. It would have been much faster if we had had better coaches; I think the concept of mentorship in the commercialization business is very important.

We are also trying to do that here in Winnipeg, taking some folks who don't want to work quite as hard as they did when they were 45 years old—they're 65 years old now, but they still want to keep their paddles in the water—and using them as mentors. That way you can avoid some of the obvious errors, like expanding your staff too quickly, making luxurious kinds of expenditures when you really just need to buy tools--borrowing, collaborating, and all of these various things that you can do to maximize your productivity and minimize your expenses.

All of those things are what we learned. What else can I say?

Hiring the right staff is an obvious one, right, if you're lucky? We've done pretty well on that one with our company so far in finding the right people. We don't necessarily find them only in Winnipeg. In fact, in the institute we have 42 different languages. So by having the right combination of things to attract people, you can get skills that hit the floor running. That is, you want to have the employees who have the skills you need at the moment you need them, rather than having to say, “I know you're an engineer, but could you learn to build an MRI machine?” That's a slow process. So you need to do very clever recruiting, and that means doing quite a bit of travelling, giving quite a few talks, going to many different countries. We have them from all over the world now.

So those are some of the lessons we learned.

The last thing you need is luck. Who could have predicted 9/11 and all of those kinds of things? The best laid business plan can crash completely from an unanticipated event—and in IMRIS, we were right in the middle in 9/11, which meant that the confidence level in everything disappeared, except in the army. Everybody wanted security, so the smart company then moves into security devices, which we did as well.

[The Chair, Conservative, James Rajotte]

I did want to ask a question, just a wrap-up question, about the valley of death.

In terms of venture capital, you mentioned that labour funds are drying up, and you talked about pension funds, which I think you've explained. Now there's a statement that tax credits are not enough, although one of you—I think it was Mr. Dacombe—said that we should look at SMEs utilizing SR and ED credits more often.

Would the four of you add flow-through shares to that as an option? Was that what you were referring to when you talked about the government sharing the risks of an investment that might not succeed? Is a flow-through share a better model than a tax credit for this type of investment?

[Ian Smith]

I am no expert in that, but because I work in Alberta quite a bit, it has been suggested that we find people who are willing to do that, because it works very well in the petroleum industry—

[The Chair, Conservative, James Rajotte]

And the mining industry.

[Ian Smith]

—and the mining industry in particular. So I think it is a good idea.

People need to know what it is; there is an educational problem there, I think. There's not such an awareness of it in the market in general.

[The Chair, Conservative, James Rajotte]

Mr. Smith, IRAP is a program that gets universal praise, but my understanding is that Alberta has apparently already allocated all of its funding for IRAP this fiscal year.

I don't know about Manitoba. Is it the same in Manitoba? If it is, I think you should tell this committee that IRAP needs more funding, because if we don't hear that as a committee, we can't recommend it.

But is it true that IRAP is already allocating funding a year ahead of schedule?

[Roman Szumski]

As you indicated, it's a very successful program, and we know from our metrics that its performance is high. The companies that have IRAP support end up successfully raising venture capital; there's greater confidence in them and the like. It is an oversubscribed program.