Industry Committee on Sept. 28th, 2016

[Chandra Arya, Liberal, Nepean, ON]

Mr. Navarro, as you know, we have great programs for innovation, whether it be SR and ED or IRAP and other things, of course, which your members are quite aware of, but there's a big gap in the commercialization side of it, in the funding. Do you have any thoughts on that?

[Yuri Navarro]

We've asked our members about it. We collect a lot of data from our members. One of the points that we actually collect from them is about what government programs out there actually have an impact on the decision to invest.

Some programs like IRAP and SR and ED actually have had a leverage effect on our members in terms of encouraging them to take the risk. But that works almost in the opposite direction, as maybe it should, in that the government will come in and invest first, before they know whether they have a “venture backable” business, and the venture investors will come in and invest afterwards. I think there could probably be a bit stronger alignment between what the private sector is willing to invest in growing and where some of those dollars are going in terms of making the leverage numbers better.

Generally speaking, people are very positive about those programs. Even when we talked to foreign investors, they named them.

[Chandra Arya, Liberal, Nepean, ON]

Do you think we should tweak any of the current programs? Or is a totally new program warranted here?

[Yuri Navarro]

I think the community generally is very supportive of those programs. There are some programs that could be more effective.

We're currently conducting a bit of a study of our own on which programs are having a great impact with respect to the investor community in terms of attracting investment. I think many of the programs are effective. Those that you've named definitely are at the top of the list not only for our own members but also for foreign investors who have started to invest in Canada. When we talk to them about why they're starting to keep those companies in Canada, those programs come up.

There's always room for improvement, but generally speaking I think they've done a good job.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We're going to move to Mr. Dreeshen for seven minutes.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you very much, Mr. Chair.

Thank you, gentlemen, for being here today.

Mr. Hilchie, I wanted to address some of the things that you've spoken of. I was a high school math and physics teacher for 34 years, but I also started in computing science. At that time, the key point was your ability to manage machine languages and so on. Of course, in the school system during that time, everyone had a black Apple, and they were trying to find ways to do the programming. That seems to have gotten lost, because now all of a sudden it's a lot easier to use an app and set things up rather than to go through it and develop things.

I'm going to ask you for your opinion. If we could get back into the elementary schools—or we could probably go back further than that, because kids have an amazing ability to grasp the skills that are needed—I think we'd find that this is what we're missing and what is part of what we need to look at.

If we're trying to find ways of getting 1,400 jobs filled, yes, we can fill them from other countries, but the point is that the other countries are doing that and we're not making the effort, or we don't realize how important it is to make that particular effort. For any way that you could encourage school systems to get the juices going, whether it be in contests or whatever, I'm sure you would see a benefit.

That's the first comment I wanted to make in that regard.

Since we have the two of you together, do you get angel investors who are engaged in your industry?

[Jayson Hilchie]

Can I quickly address the first question?

On your first comment, what's happening is that because the school system across the country is not picking up on this as fast as necessary, there are organizations filling the gaps. There are extracurricular organizations, things that aren't necessarily associated with the school system. In Montreal, we work with one called “Kids Code Jeunesse”. They teach teachers how to teach basic computer codes. They do what are almost like junior achievement days, where they make small apps and things like that.

We're also hosting a breakfast next week, an event where we're bringing in my counterpart from the United Kingdom, who was very successful in lobbying the Government of the United Kingdom to get rid of what you're talking about—the consumption technology courses in the school system, things that teach you how to use computer programs—and then replace those with technology programs that teach you how to create computer programs. There are a number of things. We're on this. It's a huge issue for us. We need to tackle it.

Second, just quickly, and then I'll let Yuri answer, our industry does take advantage of private angel capital for smaller companies that are looking for investors. The problem is, though, that we're a hit-driven industry. Video games are very risky investments. They're not necessarily a linear product that you can take from an early-stage life cycle to an exit. You have an entertainment product that gets released and gets adapted to the market, but it's either popular or it's not. It's very risky, and it's difficult, when you're dealing with angel investors, to convince them to invest in video games. It happens, but it's challenging.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Yes.

The Canadian Music Publishers Association spoke with some of us earlier. They had a concern about patent protection and trying to tie it to the way it was with the EU and the U.S. I don't expect there to be a 50-year to 70-year rollout on some of the games we have right now, but when you talk about intellectual property and how you hang on to that when you have so many actors coming from different parts of the world, do you have a strategy that you use in order to ensure that those investors actually can protect those investments rather than have others take advantage of you?

[Jayson Hilchie]

Every company would have their own strategy in regard to intellectual property, but of course all of them are very interested in protecting the rights to that property for as long as they can. In fact, we advocated on behalf of an extension of copyright protection like the music industry received. I do believe that we would get that under the TPP, if the TPP is ever ratified.

In short, every company sets their own arrangements contractually with investors. Keep in mind that a lot of the very big companies that have global IP are the ones that wouldn't need an angel investment anyway, right? It would be the smaller companies, on a smaller scale.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Mr. Navarro, you mentioned that it's rare to invest in Canadian companies, or that there are some issues associated with that.

I had the opportunity to be with the Minister of Science in Germany last week. We were talking to research organizations. What they were talking about was how you get business engaged in research.

Of course, if you're in Germany, that's where everybody wants to go. If you're in the U.S., that's where the critical mass is. How does a country such as Canada manage to deal with this when we have obstacles such as our geography, where you're looking at six hours to fly from one side to the other; the jurisdictional aspects, when you have provincial regulations that all have to be dealt with; and, of course, the proximity to a larger market? Even though Canadians and the Canadian government over the years have invested in research for universities at the same rate the Germans have, these are some of the reasons why we don't get the overall dollars: because companies aren't prepared to engage.

I'm wondering if angel investors have that same sort of concern: are we really going to put it into the Canadian market? Will they do that if they know they can move it to places outside of Canada?

[Yuri Navarro]

I think it's less of an issue than it used to be in Canada. Just for clarity's sake, I would say that in Canada, in a typically Canadian fashion, we don't celebrate our successes enough. I think we're actually doing quite well. If you look at the global rankings, you'll see that ours is high—we're up there—and that we have four or five ecosystems that are on the top 20 list of tech ecosystems in the world right now. I think we are the only country other than the U.S. that has more than one.

I think we are doing quite well. The proximity to the U.S. helps us, but also, in the digital economy, the realities of geography don't affect us as much. Where we are really strong is in having a great cultural.... I look at our culture as an asset, in that we are seen globally by the tech community as a great way to test products before going to a larger market. We also have a great talent pool—even though obviously it can always be improved—and not as much competition for that talent as they might have in Boston or the Silicon Valley, for example, which actually attracts a lot of companies to come here. That's part of the reversal of the brain drain we've been seeing.

There is still a lot of room to grow. Where we have challenges in building global companies is mainly in some of the more senior executives or sales—things that we haven't had a long history of doing and where we need to improve.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We are going to move on to Mr. Masse. You have seven minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for appearing here today.

Mr. Hilchie, I have witnessed this industry grow quite a bit, because I've been playing on everything from Intellivision—Pong and Sega—to Xbox. PlayStation is what I use now with my son, who unfortunately is coming to the age where he is starting to beat me, so those days will soon be gone....

What is really interesting is not only the value of what we are getting here, but also the other industry that you create. I was doing research for another bill, one on e-sports, which unfortunately didn't get to the committee. In South Korea, for example, they have a minister of e-sports, and in the United States it's a billion-dollar industry.

For those who aren't familiar with e-sports, you'll see this at a theatre. They'll rent a theatre and play video games online. It's to the point where there are actually teams that live together. They play together for years. They train. At the end of the day, all this is done through the video game products.

Maybe you can talk a little about that in terms of its potential beyond just the game you're playing at home with somebody. Also, with that is CGI and the skills that overlap with the movie-making industry. My nephew recently graduated from Sheridan, and he did part of the chariot scene in Ben-Hur as part of that. I want to say that it's extra value added. People think about it as just playing around, either at home or in your basement, but the reality is that other things are leading to more jobs.

[Jayson Hilchie]

I'll address the second part, and then I'll get to the e-sports.

Absolutely, there is crossover between our industry and computer graphics. This is probably one of the more natural crossovers; they're very similar skill sets. In addition to that, as I said in my opening remarks, we're also responsible for simulations that are training military personnel all over the world. Through virtual reality, they're learning to fly helicopters and airplanes and also learning tactical combat and inner-city urban warfare. Doctors are learning how to become better surgeons through virtual reality, and police officers are learning to do their jobs better through motion detection and things like that, which were invented through the video game industry. A number of spinoffs from the technology we develop end up in the mainstream economy.

In terms of e-sports, it is a growing segment of the video game industry. I will be honest that our interactions with e-sports have been limited up until this point. It is outside of the main video game industry. Operators like Cineplex have signed deals with Sony and PlayStation to provide e-sports competitions in the theatres within Cineplex, as you were were saying. That's a huge opportunity. We have organizations that have started their own Canadian League of Gamers. There was a competition at the Air Canada Centre in Toronto a few weeks ago, League of Legends, that sold out the ACC for people to watch video games. It is a growing subculture of the video game industry, absolutely.

[Brian Masse, NDP, Windsor West, ON]

I would even argue that it's almost past that, because now people play for a living.

[Jayson Hilchie]

People are making a living playing video games, absolutely. CBC has done a number of profiles of young Canadian gamers who are making in the six figures playing video games.

[Brian Masse, NDP, Windsor West, ON]

We could go on for a long time with this, but I want to give Mr. Navarro a little time here.

It was interesting, because these are the things that I always puzzle over, and it's good to hear about some good work with venture capital and about a number of things that are happening. It always seems that there are others who are doing the work that the banks refuse to do, but the banks come in later on to clean up when there's a success story.

I'm not sure that's the best strategy. I don't know what's happening with your organizations in terms of risk and reward. I look at that through other institutions. It always seems that they're not interested until the risk is diminished, and then they come in and get the spoils, for the most part. They obviously do take some risk, but there certainly isn't the same reward. I'm just wondering if the reward element is there.

[Yuri Navarro]

I think the risk-to-reward equation is the same for anybody who gets involved in this space, but I think what makes it difficult for institutional capital to get into this space as early as the angel investors do is simply the uncertainty. that's related to this. Obviously, institutional capital is usually based on certain formulas and theories that are followed in order to determine how it will be invested. Angel investing oftentimes is a lot more of a gut feeling. It's much more about investing in the person, the individual, rather than the technology. It's not as clear cut.

If you ask seasoned investors about their portfolio and they have 40 companies in their portfolio, they'll often tell you that they had no idea that the five that ended up being the big successes were going to be the big successes, while the ones that they thought were going to be really successful ended up being dogs and not going anywhere. When people are looking at this honestly, they'll admit that there's really no way—or that it's very difficult—to know how to predict what's going to happen in this space, because there are so many variables.

Often, angel investors are actually looking at this as investing in the person. Sometimes they'll invest in an entrepreneur with a great idea even if they don't believe in the idea, because they see it as investment in that person. Even if that business fails they might be able to invest in the next one, and maybe that one will succeed. It's a kind of skills development.

I think there's a certain aspect of almost philanthropy that our members are undertaking. If you really look at them, you'll see that they are really nation builders. It's probably only 10% of the accredited investor class that has the stomach for this kind of thing. That's why I think we need to encourage them to do more of this.

I don't think there are any easy answers in terms of how we get institutional capital to do this. As long as you're responding to a shareholder or somebody else.... Even our members have a hard time sometimes in dealing with their families and trying to explain to them how they're taking these risks.

[Brian Masse, NDP, Windsor West, ON]

Right—

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

[Brian Masse, NDP, Windsor West, ON]

—and I would like to see more reward go to that.

[The Chair, Liberal, Dan Ruimy]

Your time is up.

Mr. Sheehan, you have seven minutes.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

Thank you very much.

Thank you to both of our presenters.

My first question is for you, Yuri. I noted that some of your funding partners are the Western Economic Diversification fund, FedDev, and the Business Development Bank. What is their share? What does their investment look like for your group?

[Yuri Navarro]

In many cases, the investment our community gets from those organizations is actually about building. They give a small amount of capital up front to help leverage these organizations to build, essentially.

In the case of Western Economic Diversification, for example, we have a program whereby we identify nascent angel networks. We have a group of 10 or 15 people who are doing investments regularly and are coordinating, and we help them to grow into a network of 50 people or maybe 100 people, and actually beyond that, to collaborate more with other networks, because these networks are social networks, and not everybody is always going to get along with each other.

It's important to make sure that when the opportunity comes to collaborate beyond the means of your own network, you have an easy way to tap into those other pools of capital to help these companies grow. Otherwise, these companies are left to themselves to figure this out. They usually provide some kind of base support that helps certain initiatives, like recruitment drives, marketing, or research, in many cases, to help these people do a better job collecting their own data. They usually do a horrible job of doing this, as angel investors.

In our case, it's the same. The project funding we've received has often helped to support some of the research initiatives and some of our data, creating resources for our members to become more educated. We recently launched an education program for the angel investor community based on some of that support that we've had.

The challenge, if any, has been that it's sometimes regionally focused because of the nature of these organizations. That does limit our hand in terms of where we can grow and develop.

I have a graphic I'll show you of what our membership looks like in terms of dollars invested in members. If you look at this, what you'll notice is that a lot of the growth in this community has happened in Ontario and Quebec. Quebec gets a tremendous amount of support from the local government and institutional capital. They've had a tremendous amount of success and, in many cases, have best practices to share with the rest of the country. Ontario is the same because of FedDev. We've had four or five years to build this community in Ontario, and that's resulted in fantastic success. In western Canada, we've only been working on this for two years now, and in eastern Canada it's very nascent.

This is where you can see the direct impact of some of the funding that has been received by those communities. In terms of turning it into investment for entrepreneurs, we've actually been able to measure this funding and have come up with a statistic which suggests that for every dollar the government has invested—whether directly to the networks or to us—into this community, into building the infrastructure to really facilitate these transactions to happen, we've been able to track about $37 of investment going to entrepreneurs and companies from those investors that we engage.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

That's great. I have a supplemental question on that. Back in the day, I used to be the general manager of an entrepreneurship centre for the region. It's amazing how complex the angel investors have become. There was a list my boss gave me of people he knew of who were angel investors, and we added and deleted, and started having breakfast pitches and things of that nature.

Currently, in northern Ontario, in Sault Ste. Marie, there's a Northern Ontario Angels group that's supported by FedNor. There have a really interesting model, whereby they will get one third from the angel, one third from the Northern Ontario Heritage Fund, and one third from FedNor. The job of their staff is to help them do the paperwork and navigate the “red tape bureaucracy”, if you will. It's really successful. It has been amazing. That number you gave doesn't really surprise me, at least in my area.

My question is—noting that northern Ontario is 90% of the land mass of all of Ontario, so it's pretty rural—what other innovative kinds of deals has government gotten into, say in Quebec or some other areas, to spur on manufacturing everywhere, but in particular in rural areas as well?