Thursday, April 03, 2008

Canada Needs Gazelles If It's Going to Survive

Canada Needs Gazelles If It's Going to Survive
(Embassy – David Crane)

Some years ago an American researcher interested in the role of entrepreneurs divided the business world into his own version of the animal kingdom.

There are the elephants, David Birch said. These are the big businesses, the corporate giants. They have much strength, but may often lack the agility to quickly adjust to change or generate big new ideas that challenge their existing activities. The best managed can be innovators, but elephants can also disappear.

At the other end are mice. These are small companies that, once they have been launched, usually cease to grow. They can include pizza parlours, neighbourhood dry cleaners, shops of all kinds, restaurants, and trades such as plumbers and electricians. They obviously are important but do not drive innovation and growth.

What a dynamic economy really needed, Birch said, was gazelles – companies that start small but, fuelled by an innovative idea, go on to become new world-beaters.

Research in Motion, with its BlackBerry, is a good example.

Started as a tiny company in 1984, today it has some 7,500 employees and annual revenues of more than $3 billion.

Gazelles are the companies that create new jobs and activity. They are the positive side of what Joseph Schumpeter referred to as "creative destruction" – the need for an economy to generate new ideas and activities to replace old ones.

So an important economic strategy for Canada should be to make the country a fertile breeding ground for gazelles.

There are many factors that help encourage gazelles, starting with a country's culture as well as its openness to competition, a lack of red tape to launch and grow businesses, good schools, colleges and universities, a serious commitment to research and development, government support programs to share risk, and a tax system that helps gazelles grow.

But a key factor is the availability of money to finance risk.

Active angel investors and a healthy venture capital industry typically provide this money.

And this is a significant weakness in Canada. It means many of our promising new enterprises are likely to be gobbled up by multinationals looking for new ideas.

How to change this is one of the challenges facing the Competition Policy Review Panel, chaired by Red Wilson.

In a submission to the panel, the Canadian Venture Capital and Private Equity Association warned that Canada's private capital industry is seriously short of capital to support innovation, adding that "we need strong Canadian investors if we want to build strong Canadian companies."

Banks, insurance companies and pension funds are not providing this kind of risk capital. Last year, 41% of venture capital invested in Canada – and 53% in Ontario – came from the U.S., making our potential gazelles increasingly dependent on foreign capital.

The danger is that "company leadership and new business growth frequently migrate to their sources of capital" so that the activities of potential Canadian gazelles could end up being moved to the U.S. or sold to U.S. enterprises.

In its submission, BIOTECanada, which represents Canada's biotechnology industry, warned that "an increasingly large gap has emerged between funds needed to commercialize products and the actual investment provided."

Unless the funding system can be improved we "risk losing the biotechnology industry to competing jurisdictions."

Likewise, the Information Technology Association of Canada warned that Canada is heavily focused on small business start-ups, but much less so on "maximizing the opportunity of our domestic firms to grow into global champions."

It also added that "firms that grow from small to mid to large size contribute most to growth in employment, revenues, R&D and innovation."

If we want Canada to become a fertile ground to grow healthy gazelles and create good jobs, then that must be the focus of our government policies – with financial innovation to ensure our potential gazelles do not starve from a lack of money.

No comments: