Opinion: Written by Gary Bartholomew
Date: August 25, 2015
The last technology based capital market formation we saw in Canada was in the late ‘90s, followed by a massive collapse starting in March 2000. The Dotcom tech bubble was over, wiping out investors that funded the Web 1.0 experiment. The excitement around a web browser and server, combined with Java created a mass injection of capital from all over the world. Capital inflow went in one direction into the USA (and some to Canada) to participate in this frenzy, which only produced a few winners in search and ecommerce.
So where did all the capital go? We spent the next 8 years giving it all back to China and Middle East, acquiring consumer products and oil.
So much so, we leveraged our homes to 110% on inflated valuations to keep the buying frenzy of consumer goods and oil going. The capital outflows to China and the Middle East showed record numbers between 2000 and 2008.
Then the collapse of the real estate market happened in 2008. The governments started printing money to save the economy, this cash continued to flow to China to purchase consumer goods and to the Middle East for oil while foreign cash supplies of US dollars set record levels.
That brings us to today; commodities have been wiped out, countries overbuilt their infrastructure and don’t need Canada’s resource sector. Piles of cash are sitting in China and Middle East and they are buying assets globally at 10 cent on the dollar. Canada is heading into a recession, because of its national dependency on the resource sector, which has no recovery in sight. Our country has no strategy but to tighten fiscal policy, raise taxes, and wait out the resource sectors recovery. This is not a strategy and will result in a sell off our prized technology assets at 10 cents on the dollar.
We know that the world comes to Canada for its technology, 70% of the worlds GDP runs on technology developed in Waterloo.
We lead with amazing funding into the University system and start up eco system, producing the world’s top innovations. Yet we have no capital market to support our companies to build into global leaders who stay at home, create high paying jobs and drive cash back to Canada to purchase this innovation. Instead, when these companies need to raise $3-5M Series A or a $20-40M Series B round, there is no capital support anywhere to be found in Canada and the American’s come in and take control of the innovation.
If you are a profitable high growth company, there may be funding available in Canada, but this Internet 3.0 technology is all in the development stage and these start ups cannot raise capital. Their ask is beyond the Angel networks ability to fund, there are hardly any VC’s left in Canada making large funding decisions. Our mutual and hedge fund markets now avoid private companies due to accounting and frequent valuation rules. So where do we go to fund our innovative technology companies in Canada? As I see, we have two major problems that need to be solved.
First, there is no capital market infrastructure left in this country for technology. Where are the professional VC’s that can bring that expertise on how to scale and grow from idea generation to public markets? Where are the bankers, analysts, brokers, debt providers, public markets, traders, and angels with the deep experience in technology within Canada? They are very limited in Canada with only a few providing VC support for private equity.
This has led to a group of forward thinking entrepreneurs, like Rob Caldwell and Ned Goodman, to create the CSE (Canadian Securities Exchange), dubbed the Entrepreneurs Exchange which allows entrepreneurs to list their development stage companies quickly and affordably. Once you are listed on the exchange however, it’s a no mans land of support and companies are left are on their own.
So we have no capital market for technology whether we are public or private. We continue to sell off our tech at pennies on the dollar to the USA companies like Google, Facebook, Amazon, Microsoft, eBay and Cisco, after our tax paying contributions go to the University and our start up ecosystem steps up to fund the innovative ideas.
It is clear that disruption is needed in the Canadian capital market and it needs to be led by the individual investor and consumer. The old guard isn’t going to do anything, the banks are amassing what’s left in the way of capital and moving it to managed product controlled strictly by the banks themselves. Any of the mid sized brokers that have survived the margins calls are not placing their clients back into risky investments; they are trying to preserve what’s left and the consumer has no say in this. Even if they wanted to invest in tech, their advisor is blocking them every time.
The only solution is to empower the investor/consumer to break that capital out of their managed accounts and incent them to invest in tech directly. Today there is no incentive for this to happen so we need to create a tax benefit for taking the risk.
This is how the USA venture capital market got started 30 years ago and they created a powerhouse. The USA did it again recently with the Jobs Act in 2013, which empowered the retail investor and start up company to take control which attempts to disintermediate Wall Street. As a result their start ups are succeeding and the capital flowing.
If the establishment had their way, they will wait out the resource sector recovery and resume to their old ways again, standing by while we sell of tech at pennies on the dollar. The world is undergoing a massive retooling of technology, skipping generations of technology and jumping right to the latest and greatest versions. This isn’t isolated to Silicon Valley or the USA; it’s the entire world creating this demand. There has been little to no tech investing in Canada for 15 years and we already missed the Internet 2.0 investment opportunity (Facebook, Twitter, Linkedin). It’s starting to look like we will miss the Internet 3.0 opportunity as well; a wealth creation opportunity on a scale never seen before. Canada could benefit from this by taking advantage of its vibrant and innovation new entrepreneurial culture that is flourishing out of its Universities and support networks. Consumers are intrigued with this technology and opportunity while the antiquated capital market in Canada is not. So I say let the consumer decide and empower them to invest, take the risk and enjoy the success.