As the world moves toward globalization of trade, Canada's continuing prosperity depends on its ability to create and commercialize new technologies. Economists agree that work done in research labs today will be critical to future job growth and to Canadian business' ability to compete in the knowledge-based economy.
Over the last decade, Canada has increased investments in university research and infrastructure which are now producing many innovative technologies with strong commercial potential. But successfully moving promising research out of the lab and into the marketplace requires an understanding of the key challenges, strong business know-how and cooperation between the business and research communities.
"The three biggest challenges start-ups face are a lack of business expertise, funding for further product development and a go-to-market strategy. Transforming a technology into a product that customers need requires a very clear understanding of the industry and the market," says Jacques Simoneau, executive vice president Investments at the Business Development Bank of Canada (BDC).
Many Canadian success stories – just think "BlackBerry®"– started as research projects in universities. Of the 42 seed-stage companies BDC has invested in over the past five years, 24 began in a university or government research laboratory. The 40 still in business today collectively generate about $25 million in annual revenue and employ approximately 700 people.
Yet the challenges involved in research commercialization represent a higher degree of risk than other types of start-ups. Entrepreneurs must determine a commercial application for their innovation, create and manage a company well, do market research, build a prototype, produce, distribute and sell – as well as attract venture capital to finance the solutions to these challenges. The elevated risk means many venture capitalists keep their distance until a company begins earning money.
"The capital sources for early-stage companies in Canada are limited," says Darrell Pinto, director, Global Private Equity Performance at Thomson Financial. "A typical venture capital firm wants to see a return within 10 years. From an investor perspective, the much higher degree of risk involved in research commercialization is a function of the potential timeline for a success to materialize, and the realization of an actual return. To counter the risk, investors in this space tend to have a greater degree of specialization, including both domain knowledge, and professional networks that add great value to entrepreneurs and act as a positive spur towards commercialization. BDC is an important facilitator in the Canadian commercialization ecosystem."
It's not just the money
BDC typically invests between $1-2 million in new companies in sectors ranging from biotechnology and new materials to information technology, telecommunications and, more recently, nanotechnology. As equity partners, BDC experts also sit on the company's board of directors, providing advice on product development, demonstrating the product to potential customers, attracting experienced business and management people and raising additional financing.
This type of partnership helps entrepreneurs avoid some of the typical pitfalls of many small businesses, such as spending too much time and money on research and development, waiting too long to focus on sales, and having a scientist or engineer lead the company instead of an experienced business person. "This kind of involvement helps to make companies more venture capital-ready," says Pinto.
Simoneau adds that innovation is a valuable natural resource for Canada, but it takes more than venture capital to successfully expand markets and generate sales. "There's a lot of handholding needed to nurture these companies during their early days. If Canada continues to make that kind of investment, we will be able to create new jobs and contribute to the growth of our economy."
