The bedrock of any nation’s innovation economy is our startups, and in light of the current global pandemic we are being gravely exposed to the vulnerabilities of entrepreneurship.
Startups are important to moving our economy forward as they provide a pipeline for job creation, disposable income, taxation, and ultimately are part of the engine that fuels our communities, cities and countries. In light of this unprecedented, total economic and social shutdown, our technology ecosystem has been engaging in urgent dialogue around the vehicles we need in place to help move us forward in a meaningful way.
This certainly isn’t the first crisis to impact global economies and it won’t be the last, in fact it has proven to be cyclical. Each time, we are forced to examine our resiliency as a society, and collectively find solutions to systemic problems that we hope will be our shield to thwart the next cycle.
As we emerged from the 2008 recession, we bore witness to the strength of technology ecosystems such as Silicon Valley, where the likes of Airbnb, Facebook, Uber, WhatsApp and Instagram were launched. The fortitude of venture capital firms such as Sequoia Capital, Greylock Ventures, Kleiner Perkins, Bessemer Ventures were the first to back these disruptors.
But yet, this time things are different. With a total global shut down of travel, public gatherings, schools, and retail, every corner of commerce has been impacted. Sequoia coined the Coronavirus ‘The Black Swan of 2020‘, a macabre message penned to forewarn the technology sector that those who are most readily able to adapt to this new normal will survive, but not without casualties. Will lessons learned from earlier crises help us to navigate the plight we are facing today?
“In 2005, with the bottoming out of the post-dotcom crisis, Canada hit rock-bottom, our tech sector was crushed” notes John Ruffolo, Founder and former CEO of OMERS Ventures, now Co-Founder and Vice-Chair of the Council of Canadian Innovators. A strong advocate of public policy, his tenured career has him now asking: will we repeat ourselves?
In the early days of Ruffolo’s work with OMERS Ventures, he recognized that Canada seriously lacked in technology venture creation, and that in order to support the growth of the technology industry there needed to be levers to access capital, talent and market opportunities. “Access to capital is most acute when you are at the earliest stages of the life-cycle of a business,” he adds. “The formation of companies is a continuous chain of interlinked financings, and each chain relies on its supply of opportunity”.
Now if we are to learn from the lessons of Silicon Valley, do we find ourselves in a position of only fuelling software innovation “winners”? Do we continue to judge the merit of startups by conventional benchmarks in times of economic crisis, and by doing so, do we miss a new class of disruptive innovators? Ninety per cent of entrepreneurs have been negatively impacted by COVID-19, per BDC’s most recent survey. It’s quite possible that established companies and later stage seed ventures will emerge in a Darwinian fashion, but what about the early stage “disruptors”?
The majority of financial support coming from all levels of government are targeting businesses who are bleeding revenues, causing them to make drastic overhead cuts, laying off people to the tune of one million unemployed as a direct result of COVID-19. Early stage pre-revenue startups, such as research intensive ventures particularly in the Cleantech and Life Science industries, are left out in the cold when we use these standard metrics.
Canada’s support for its tech sector has historically been a tumultuous ride. The Canadian Accelerator Incubator Program (CAIP), launched in 2013 through the National Research Council of Canada (NRC), funded organizations that were providing much needed programs and access to capital for technology upstarts. Hubs of incubators, accelerators, and other supporting organizations began popping up across the country servicing the needs of what was quickly becoming a dynamic, Canadian innovation ecosystem. Additional federal and regional funds were being deployed through organizations such as IRAP, WED, ACOA and Innovate BC, with the intention to support innovation at its earliest incarnations.
But then the CAIP funding came to a close and under a new federal regime, ISED launched the Supercluster initiative in 2017. This $950 million matching fund program was designed to focus on scaling up Canada’s innovation economy. The strategy of the program was to build public/private partnerships around high-growth industries, whereby research universities, SMEs/later stage startups and enterprise-level companies would collaborate on projects that would lead to job creation and access to new markets. While still early days, the Superclusters rely heavily on a pipeline of startup innovation. So while there continues to be energy going towards the innovation economy, the focus is on a different stage of company.
Public funds have been the driving force behind accelerating the growth of our startup ecosystem. That support has become a spark for the private injection of capital into the market through Angel investors, Seed Funds, and Venture Capital funds – institutional lenders who, like banks, provide capital to companies who are in-market with customers, revenues and significant team growth. Angel investors and Seed funds, with the help of IRAP and SR&ED, are left to fill the gap of liquidity for high-risk, disruptive, early-stage startups. Obtaining funding is generally most challenging at this stage as companies often need cash before lending institutions consider them viable.
Over the past several weeks governments have been rapidly injecting capital into virtually every layer of society. There are numerous programs addressing the profound hemorrhaging of the tech sector, such as BDC’s fund matching, wage subsidies, emergency loans, rent relief, and most recently an increase of $250 million to IRAP through the innovation assistance fund intended to help pre-revenue startups and others not qualifying for some the above noted economic responses. While more can and should be done across all levels of government, the question remains, “will this be enough to once again spark private capital injections into the market?” It can’t be overstated, public funding (including tax credits) gives confidence to Angel and Seed investors that take the risk at the beginning of the innovation pipeline.
With some of our most promising companies not yet backed by banks or VC’s, these ventures can’t afford to take their foot off the gas as they work tirelessly to commercialize their disruptive innovations. The UBC Seed Fund, established in 2013, is one such fund that writes “first checks” into companies tied to UBC ventures. It is the first of its kind in Canada, making UBC a vanguard in unlocking a university as a breeding ground for high potential ventures that are primarily technology focused, potentially deep technology and that can grow to become anchor tenants for the BC tech sector.
The idea of the UBC Seed Fund came from outside of the university, with a handful of executives who had been successful in the tech sector. They recognized that the tech sectors that were flourishing the most have world class universities at their core, such as MIT, Stanford and Oxford University. UBC, recognizing the importance of mobilizing knowledge into commercially viable entities, doubled down to fuel its leading-edge innovators.
D-Wave, the world’s first quantum computing company, is one of our province’s anchor tenants, and the one that inspired Todd Farrell, an early investor, to live at the intersection of commercializing university-based innovations.
Farrell, President of the UBC Seed Fund, operates at the forefront of disruption. “Scientists develop their research in the lab, but they are not experienced in turning their innovations into a business,” and further emphasizes that the importance of attracting talent to high-risk opportunities is intrinsically linked to having the capital incentive.
The UBC Seed fund helps mitigate these risks, acting as a source to syndicate other Angel investors into the pipeline of deal flow. And to UBC’s credit as a globally leading research university, the entrepreneurship@UBC incubator-accelerator was also launched in 2013 to bring research-led and high-potential ventures to a commercially investable stage by providing them with industry expertise through practical business training and mentorship.
The UBC Seed Fund has invested capital and extensive mentorship into 22 UBC startups including Aspect Biosystems, a 3-D printing company that can print human tissue for medical research, Acuva, a UV-LED disinfection system and Terramera, an agritech company whose patented technology replaces synthetic pesticides for clean food production. To date UBC Seed Funded companies have gone on to raise over $180 million in follow-on financing, created 400 new jobs and generated more than $20 million in combined revenues.
“One of the key differentiators [of research-based ventures] is the competitive advantage of intellectual property, which is often part of a development cycle that could be a two to three year process before there is something even remotely commercial,” Farrell explains. “Financing for longer horizon investments needs to be put in place because as research funding comes to an end, commercialization can still be a long time away,” referring to the gap in access to risk capital that the UBC Seed Fund aims to address.
For Todd Farrell, he wonders what support will be made available to stimulate Angel syndicates he can tap into as the urgency to grow the UBC Seed Fund is now even greater. With the current uncertainties, will people retreat and hold their capital or move towards investing in later-stage (that is less-risky) startups? “We can’t put a halt on creating the next generation of ventures, they take a long time, making their access to capital needs even more imminent”. He concludes, “this is about building a province, a tech sector and the right kind of jobs that will continue to have global impact well into the future”.