Industry Committee on June 19th, 2012

[Clément Fortin]

As was said, one of the problems is the culture. I think if you are a very product-driven company and you have to push the products out the door and that is what you do, and you make money doing it, that's fine. If you're in this culture and don't have a longer-term vision of where you should be five years or three years down the line, you don't deepen your knowledge so that you can create more value for your company. It's a culture change that you have to move up the chain.

In Canada, we've been very successful. We're resource rich. We've been very successful in traditional manufacturing, in traditional companies. This move to a higher level of R and D in a global economy to be more competitive I think is the change that has to be done, and it's not easy to do.

[Rob Annan]

No, and I have to agree with those statements. I'll add one more, which is that because we don't have a lot of large companies in Canada, we also don't tend to produce people with the experience to be R and D managers within smaller companies. In the United States, you'll often have these large companies—like an IBM or a Google or what have you—where people move up the R and D chain. They get to a certain point where they leave and then they can run an R and D shop somewhere else.

In Canada, we don't have the companies that are spinning out these experienced R and D managers. If you're a small company and you have 12 employees, you might want to be doing more research, but you don't have anyone there who can be dedicated full time to managing new PhDs coming into your shop and engaging in research.

We've launched a program that tries to address this gap, or whatever it is, to try to train research managers, but there are some structural elements and cultural elements, as well as historical elements. It's a real challenge.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Okay. What could government do to help with that?

[Rob Annan]

It could invest in our management program. No—

[Voices]

Oh, oh!

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Something a little less self-serving—

[Rob Annan]

I think what Monsieur Fortin was talking about in terms of increasing some of the competitive pressures, so that there's the need to innovate, may well be part of it. Companies will recognize that they need to be doing more R and D on an ongoing basis.

[The Chair, Conservative, David Sweet]

Thank you very much.

Mr. Lake, five minutes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

I'm still trying to get my head around Mr. Harris's last line of questioning. I don't know too many Canadian SMEs for which a $1 billion threshold would come into effect when someone is considering buying them, but maybe our definition of small and medium-sized enterprise is a little different.

Also, by the way, section 20 of the Investment Canada Act.... He's not really listening now anyway—

[Brian Masse, NDP, Windsor West, ON]

On a point of order, Mr. Chair—

Mr. Mike Lake —but section 20 of the Investment Canada Act does list six factors to be taken into account for the purposes of determining it.

—I'd like to know how Mr. Lake knows what Mr. Harris is thinking.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I can't figure that out, for the life of me, actually—

[Brian Masse, NDP, Windsor West, ON]

Yes, that would be interesting to know.

[Voices]

Oh, oh!

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Anyway, as our economy gets stronger relative to the rest of the world, we are going to attract foreign investment. Many of us would think of that as a good thing.

I did want to follow up on that line of thought a little bit. When we talk about small and medium-sized companies being bought or pursued by foreign entities—and we've had a little bit of conversation about that—to what extent is that a positive?

Someone starts a company. They have a really good idea, they build it up a little bit, and a buyer comes along who offers them the opportunity to cash in, in a sense, and maybe use the money they make from that sale to start a new company.

I think this concept of serial entrepreneurship is a concept that's really important to the success of the tech sector particularly, but of many sectors. I see a few of you nodding. Maybe I'll start with David and then hear from each of you on it.

[David Harris Kolada]

Thanks for the question. I'm glad to come back to this topic.

I have just a couple of things to bring forward. The first is that we're great at creating companies in Canada. We're a prolific creator of small companies. In fact, when I was a venture capitalist in the late nineties, some research I did showed that in the greater Toronto area there were more tech start-ups than in Boston and Austin, Texas, combined, and they are two very large tech hubs in the States, outside of California. So that's not the problem in Canada.

The problem is twofold. The first is killing off the underperformers. That's just part of the life cycle. Some companies should not proceed. They should just shut down early because they don't have a winning technology in the global marketplace.

The second thing is that we don't put enough money behind our winners. This is part of the issue in terms of companies getting bought too early. It's that we don't fund them to the point of a sufficient value threshold where they can attract a significant offer that is going to really deliver benefits to the shareholders and to the economy in Canada, or for them to be able to go it alone for an extended period of time—to be public, to be independent.

So there are a couple of things to consider in terms of that issue.

I agree that M and A by foreign or Canadian buyers is a good thing. It's absolutely necessary. But M and A too early is not a healthy thing.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Avvey, do you want to jump in?

[Avvey Peters]

Sure. I would absolutely agree with that. We do see M and A activity as a great exit for entrepreneurs. It helps them to start their next venture. In the best case when a Canadian start-up is acquired by a big multinational.... I'll give you another Waterloo example.

About four or five years ago now, Google came to the Waterloo region to acquire a 14-person start-up called Reqwireless. There's now a 400-person R and D engineering shop of Google in the Waterloo region. It certainly isn't the case that they gobbled up a start-up, sucked all the talent down to California, and we don't see those engineers anymore. As David said, the worst case is when that kind of thing happens: when a company is acquired too early and hasn't had the opportunity to really exploit what its commercial potential is.

So I think the key to this is really, as David says, to capitalize companies appropriately and give them the opportunity to strengthen their footprint in Canada and grow more jobs in Canada.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

David, I'm going to come back to you, then, and ask what it looks like for you when companies are capitalized properly. You say that we're not funding them well enough. Who's the “we” that you're referring to there?

[David Harris Kolada]

That's a good question. That was the royal “we”—the ecosystem within the Canadian innovation value chain. It ranges from the angel investors to some of the intermediate early-stage, such as SDTC, venture capital, etc. But it's really in those stages.

If you look at the average amount of capital that a U.S. company raises, it's about two or three times what the average Canadian company raises at an equivalent stage and sector, so we're fighting with one hand behind our back.

The question is, how does it look for us within clean technology—

[The Chair, Conservative, David Sweet]

We have to move on. We're going to have to go a little bit over time to make sure we get through our third round, and there's a question that I absolutely want to make sure I ask this panel.

We've had a lot of conversations over the years regarding the gap between the research lab and the shop floor—taking IP and commercializing it. One of the professors I spoke with in the not too distant past said that one of the things they feel is very much a cultural aspect with Canadian universities.... This professor referred to the Ivy League universities, where they pay their professors for nine months, and for three months they have to be in the private sector. They have to start their own business, they have to be involved in emerging technology businesses, etc.

How much of a factor do you think that is here in Canada?

[Rob Annan]

Maybe I'll lead off.

I'm not sure about that model in particular, but I will suggest, both from our experience at Mitacs and my personal experience in academia, that the demands on professors' time tend to preclude a lot of this sort of activity. My background is in biochemistry, and I know a lot of professors who would love to be starting up companies, and even have started companies, but they don't ever really get any traction because they just don't have the time to dedicate to it. Maybe the increased research and teaching requirements at universities have precluded that, I'm not sure. Maybe freeing them up three months a year would actually do something like that.

I think the desire is there.

[Clément Fortin]

I think the Canadian research system in universities is performing well. I'm not sure that going on the nine months out of 12 system that is done in the States in some cases would give.... In the nine months you would work in industry, which would be good, you could find.... But the funding system has to be changed totally. What's happening in the States in this case is that the NSF is funding salaries of professors. In Canada we'd have to raise the NSERC funding by a lot to go to this system.

I've done it myself. I've spun off a company, started it, and spent three years full time, almost five, doing this. There are not that many professors who are ready to do this. Even if you go on a 9-12 system, I don't think you would get a lot. I think it's a cultural thing.

[The Chair, Conservative, David Sweet]

Thank you very much.

Madam Gallant, for five minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

Back to hydrogen, which I mentioned had peaked my curiosity with SDTC. I know that AECL is developing technology for reactors so that in off-peak hours they can use the energy for electrolysis to produce hydrogen—be it for combustible engines.... They're also working on catalysts for the fuel cells. We've heard about the Volt, which is online, and the Prius, and I know that New Flyer bus lines in Arnprior is converting transit buses using fuel cells.

SDTC has pumped a lot of money into the hydrogen economy. When can Canadians reasonably expect to be able to utilize this technology, utilize hydrogen as a fuel? After all, the emission is water, something that is going to be in higher demand.

[David Harris Kolada]

Thank you for the question. I will preface my comments by saying that I'm not an expert in hydrogen, but it is an important part of our portfolio. We have supported several hydrogen technologies.

In terms of when Canadians can benefit, I would say very soon. There's a very good proof point in terms of Mercedes locating their first hydrogen engine manufacturing plant in Vancouver, which is a technology that SDTC funded and helped commercialize. We're also investing in several other hydrogen technologies, mostly in the industrial sector, not in the consumer automotive area. Most of our portfolio is directed in that way—forklifts, buses, etc.

We were actually very pleased last week that SDTC received an award at the global hydrogen conference in Toronto around our work in getting hydrogen to market. So there is some early evidence of success, and we believe more to come.