Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence - October 20, 2011
OTTAWA, Thursday, October 20, 2011
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:48 a.m. to study the present state of the domestic and international finance system.
Senator Michael A. Meighen (Chair) in the chair.
[Translation]
The Chair: Good morning, honourable senators, and welcome to our second meeting on the present state of the domestic and international finance system. Our topic is financing growth capital for SMEs.
I am Senator Michael Meighen, and I am from Ontario. I have the honour of chairing this committee. To my right, allow me to introduce Senator Hervieux-Payette, deputy chair of the committee, and to her right, Senator Larry Smith from Quebec, Senator David Tkachuk from Saskatchewan, and to my left, Senator Pierrette Ringuette from New Brunswick, Senator Mac Harb from Ontario, Senator Wilfred Moore for Nova Scotia and Senator Stewart Olsen from New Brunswick.
[English]
Today, we continue our study of the financing of growth capital for small- and medium-sized business.
[Translation]
Today we are pleased to welcome two Quebec organizations operating in this field. We have with us Serge Bourassa, President and Chief Operations Officer, Centre d'entreprises et d'innovation de Montréal (CEIM), Alain Coulombe, Chair and Chief Executive Officer, 3d Semantix, Association pour le développement de la recherche et de l'innovation du Québec (ADRIQ) and Jean-Louis Legault, President and Chief Executive Officer of the Association pour le développement de la recherche et de l'innovation du Québec (ADRIQ).
[English]
If our witnesses have opening remarks, we would be pleased to hear them.
[Translation]
Then we will move on to the question period. Mr. Coulombe, will you be starting?
Alain Coulombe, Chair and President, 3d Semantix, Association pour le développement de la recherche et de l'innovation du Québec (ADRIQ): First, the acronym ADRIQ means Association pour le développement de la recherche et de l'innovation du Québec. It represents the innovation ecosystem in our province and is for all industries together. It also represents all stakeholders. Of course, central to ADRIQ are the businesses, the small ones, the start- ups, and also the large ones because the Canadian economy derives many benefits from having large businesses work with small ones and with university research centres, as a result of which, as we have a majority of businesses and partners in successful innovation, when we meet, we are able to exchange and determine the cost of innovation and to reach a consensus on solutions and potential directions that should be taken.
I am going to let my colleague and our CEO go into a little more detail about ADRIQ, but that is what I would like to tell you by way of introduction.
Jean-Louis Legault, President and Chief Executive Officer, Association pour le développement de la recherche et de l'innovation du Québec (ADRIQ): As I have been at the helm of the Association pour le développement de la recherche et de l'innovation du Québec for one year now, I am still in training, but I have been an entrepreneur in the technology field for some 30 years. I have enough personal experience.
The Association pour le développement de la recherche et de l'innovation du Québec has been in existence for more than 30 years and concerns approximately 5,000 players in the innovation field in Quebec. We are involved in all vertical business sectors, aeronautics and other sectors, and we also deal with all matters pertaining to innovation in a horizontal manner, human resources, financing and so on.
We are very pleased to be able to be with you. ADRIQ has four business lines. We organize meetings and events, the most prestigious being the annual ADRIQ gala, which has been held for more than 21 years now and which celebrates Quebec's biggest innovations.
We are working to kindle interest among young people. The next generation of technological-scientific workers is definitely a challenge for us as Quebeckers and Canadians, to ensure a next generation of good technology workers. ADRIQ is therefore working in the field. That is another business line. We now have a business line that is field work; we are going to engage in coaching in businesses, directly in the field. Yesterday, we firmed up an alliance with a group that specifically does this advisory work in the field, and which is now joining ADRIQ. So we are increasing our ability to take action in this area.
The last line, of course, is what we are doing this morning; we are here to represent all innovation members at all levels of government to assist them with budgets, with statutes, to ensure that all legislation is conducive to innovation development in order to create wealth and social and economic enrichment.
I would say that we have an overall vision of the situation. That has been ADRIQ's history for more than 30 years, and I am striving to continue that mission.
The Chair: I believe that overall vision is a very important and crucial aspect of your work.
It is not an aspect we frequently encounter. Perhaps we could go into that question in greater depth during the question period. Now, Mr. Bourassa, is there a connection between your organization and ADRIQ?
Serge Bourassa, President and Chief Operations Officer, Centre d'entreprises et d'innovation de Montréal (CEIM): First, good morning and thank you all for your invitation. I am very honoured to be with you this morning.
I am going to say a few words about CEIM, and then I would like to make a statement, including some observations and recommendations. Then I will answer your questions in the language of your choice.
CEIM is a non-profit organization. We are members of ADRIQ and we cooperate with it on certain special events. I meet quite regularly with Jean-Louis Legault, whose general meeting was held at our CEIM offices late last night. We speak with ADRIQ a lot.
However, we represent a very specific clientele, new technology start-ups. It is important to distinguish government policy needs regarding start-up businesses, particularly in the field of new technologies, SMEs and large corporations.
With your permission, I have prepared some notes. I will read them to you in the hope of not boring you too much, and then I can answer your questions. I have also taken the liberty of suggesting some improvements that we could discuss.
I have been President and Chief Operations Officer of CEIM, the Centre d'entreprises et d'innovation de Montréal, for five years. I have been working at CEIM for 15 years, and CEIM has been in existence for 16 years now, as a private, non-profit business. Our mission is to help new businesses start up and develop. We are located in Montreal, where we serve both Montreal and other regions as well.
We are what is called a specialized business incubator, with coaching and support for businesses that are starting up. We also have rental space for businesses that need it. Before joining CEIM 15 years ago, I started my career in the area of more conventional financing for SMEs. I have also practised as a corporate lawyer and legal advisor.
Innovation, entrepreneurship, financing and economic development are all extremely important factors and are related to our economic wealth. Allow me to read you a few findings.
Finding 1: Business creation is a decisive economic growth factor. This may seem a trivial statement, but it is not. In a 2007 study, the Fraser Institute stated:
New business formation contributes to economic growth not just directly through the jobs created by start- ups, but also by bringing about improvements to overall regional competitiveness. Regions that have higher rates of business creation tend to produce greater innovation, higher productivity, and, as a result, greater economic growth.
Finding 2: Innovation often emerges from the private sector outside university and public research centres. Many entrepreneurs have university science training and private business experience. They have identified a market need, at least in a summary manner. They want to start up a business from concept to commercialization and generally need assistance to validate the commercial potential of their idea, to develop a business model, an action plan and to obtain financing. Among other things, they need a network.
They are ready to risk their jobs, their savings and their families. They constitute the entrepreneurial base of our economy, the next generation. These are people who take risks. Innovating and, even more, converting that innovation into a business opportunity that will contribute to our economic growth require much more than scientific research and development. Innovating involves a creative and entrepreneurial mind, and thus the calculated risk-taking often found outside conventional university and government research centres.
The question that comes to mind is: are all government assistance programs adapted to that state of affairs?
Finding 3: Entrepreneurship is a vector for transforming innovation into economic wealth. It must be effectively supported. A comparative study of technological incubators in Quebec and Canada was commissioned by the Economic Development Agency of Canada and published in July 2008. Texu, the consultants retained to conduct the study emphasized, and I quote:
The creation and start-up of technology enterprises is, in a way, the starting point for renewing the industrial base and for the economic development of a society. Because enterprise incubation is involved in facilitating that process, it plays an important socio-economic role.
I want to emphasize the following words:
However, public effort to support business generally focuses on assisting growth, which generates faster, tangible returns. That assistance is provided at the expense of assisting with start-up.
Finding 4: Start-up financing is an essential input for commercializing innovation. When I was hired at CEIM 15 years ago, it was more specifically to assist businesses in setting up business plans, looking for financing and so on. I know every single stakeholder involved in financing for start-up companies, particularly in Quebec, in both the private and government sectors.
Entrepreneurship is a vector for transforming innovation into economic wealth, but financing is not readily available to enable private sector entrepreneurs to begin and start up their projects. Entrepreneurs' savings and networks of friends are not always enough to finance their start-up. Bootstrapping, a practical technique for starting up businesses with little financing, is not a panacea. It is not a single solution. Angel investors are not enough.
There is a void in Canada and a number of comparable industrialized countries, a need for start-up financing that the private sector will systematically disregard in favour of other less risky investment opportunities. However, from an economic development standpoint, these start-up stages are necessary steps in business creation, particularly in high-tech sectors requiring more investment in research and development and commercialization.
When it comes to financing, private-public partnerships, even with the most brilliant and experienced managers, will never meet market needs if no consideration is given to the structural factors that naturally lead those same managers to minimize risk and increase potential yield. As start-up financing is generally not financially promising for investors, a mere financial partnership with the government does nothing to change highly predictable behaviour.
Entrepreneurs and financiers must join forces to create businesses, but the interests of the two groups are definitely not perfectly aligned.
For example, can anyone believe that a business development strategy can be optimal for a business, and in economic development terms, when the investor imposes a short-term exit strategy dictated by the structure of its financing or its investment policy? How can we compensate for the very low investment rate of venture capital companies, typically less than 1 per cent, in order to build a business project pipeline that is big enough to be economically viable and to encourage entrepreneurship? We are not the only ones in this situation, as may be seen from studies conducted elsewhere, in Great Britain, for example, which emphasized:
The shift among venture capital companies away from the start-up stage to the less risky commercialization and expansion stage is a major problem for entrepreneurs and for the British economy.
The authors identified three factors similar to those at play in Canada:
The high cost of evaluating and managing relatively modest start-up financing, the growth in the size of venture capital funds favour larger investments in more advanced, and therefore less risky, projects and poor performance in terms of returns of British start-up funds.
The same could be said of Canadian start-ups and venture capital funds.
I now come to the end, to finding 5. The needs of start-up businesses for government support are different from those of SMEs. A start-up that has not yet earned any revenue, that is developing its goods and services, cannot be confused with an SME which is already in operating mode.
Start-up entrepreneurs have little time and often no practical experience to successfully complete the formalities involved in government aid programs.
Of course, organizations such as ours, CEIM, can help to a degree, but there is a cost, and the apparent complexity can nevertheless discourage people.
And yet those who prefer not to take steps — the entrepreneurs — for fear of investing too much time and energy are often those who should benefit most from government intervention. We have to find a way to encourage, not discourage, the taking of risks, calculated ones, of course.
Last finding: Canada is facing increasing competition. We have to act now to encourage entrepreneurship and innovation and face growing competition, particularly from emerging countries such as China and India, if not South America. The governments of those countries have major intervention resources to promote innovation and wealth creation.
To tell you a brief anecdote, for the second consecutive year, CEIM hosted a delegation of some 20 Chinese dignitaries who came to draw on our incubation practices.
In the meantime, in Shanghai, they have established incubators that are giants compared to ours, with considerable resources, and we learned this week that the Government of Chile has set up the Start-Up Chile Program to attract entrepreneurs from around the world. So let us be ready to face this growing competition.
In conclusion, I am taking the liberty of suggesting a few improvements to government policies.
The first suggestion would be to facilitate eligibility for the tax credit program for scientific research and experimental development for start-up businesses, by simplifying the process. But, if possible, eligibility for dedicated research and development equipment must be maintained. Second, develop a scientific research and experimental development expense financing program for start-up companies that are not already generating revenue and do not yet have start-up financing.
I should explain. I have previously been asked why I complained that there was not enough financing to assist start- up businesses. There is the R&D tax credit program, one of the most generous on the planet; there is the Industrial Research Assistance Program of the National Research Council of Canada; there is BDC and so on.
I know the reality because I have been working exclusively with start-up businesses for 15 years, but even if you have dedicated R&D jobs, there will be no R&D tax credits until the business has the means and liquidity to pay eligible salaries.
It must be understood that the Industrial Research Assistance Program requires a quid pro quo, among other things. That quid pro quo is lacking, and I believe the Government of Canada, possibly through the intervention of BDC, could develop a program specifically to finance those activities at the outset. When an SME generates revenue and so on, it of course has access to bank financing, which, in Quebec, is sometimes even guaranteed by Investissement Québec, but a start-up business is absolutely not entitled to it. And yet, it is these businesses that should benefit more from government assistance.
A third suggestion: Assess the possibility of a commercialization tax credit program specifically aimed at start-up businesses in their initial stages. Once again, they are the ones most in need of intervention at the outset.
Fourth suggestion: Continue the Canadian Innovation Commercialization Program. It is an excellent initiative, but the application process for start-up businesses must be facilitated as far as possible.
A business that is starting up finds itself, once again, with a few individuals who have numerous duties and do not have the experience to work with public authorities. Entrepreneurs who have a technology and who can take advantage of this program cannot compete on an even technology and innovation playing field with an SME or even a large corporation that is used to engaging in that process and has the means and resources to do so. So there has to be an adjustment in that area as far as possible, but the program is an extraordinary initiative which was taken by the government last fall.
Fifth suggestion: Develop an R&D program for Canadian government departments and agencies meeting actual needs, but whose research contracts would be offered on a priority basis to technology start-ups. That could supplement the Canadian Innovation Commercialization Program.
Sixth suggestion: Develop performance measures — and this is more along the lines of a government policy — develop performance measures for various government programs suited to the actual situation of start-up businesses, which is not a simple thing. We have to measure the actual impact of government intervention, not just the most perceptible impact. Job creation and revenue measures and so on are fine, and that is measured accurately over a long period of time, but it is not necessarily a good or the best indicator for a start-up business. Entrepreneur-style risk- taking has to be encouraged. Consequently, the management of our government assistance programs for start-up businesses must be adapted to that reality.
Last — and I am going to advocate for us and other organizations like ours — incubators duly accredited by Economic Development Canada or the provincial governments should be provided with start-up funds to stimulate creation of technological business funds. That is one of the recommendations of the report commissioned by the Economic Development Agency of Canada.
That study concluded as follows:
These funds allow for rapid action to be taken by the players most familiar with needs and opportunities.
In conclusion, the idea is not to invest more public funds to assist innovation, entrepreneurship and economic development, but rather to allocate and administer some of that financing more effectively by identifying priority needs not being met by the private sector and the market. Thank you.
The Chair: We thank you, Mr. Bourassa. That was very interesting. We have a list of senators who want to ask questions.
First, do Mr. Coulombe or Mr. Legault have any comments to make following Mr. Bourassa's remarks?
Mr. Coulombe: Yes, absolutely. I took some notes. I have to say that I am chair of the Board of ADRIQ, but I am also an entrepreneur. I am starting up my second business. The first was in 1994. The R&D tax credit regime or system enables Canadian businesses — I am proof of this and I have a number of entrepreneur friends — to develop world- class technologies and goods. That much is clear. We have talents and the program. It needs to be improved and we are going to talk about that later, but that much is clear.
For my other business, there were two of us and, at one point, we had 175 employees and we exported 80 per cent of our equipment to Asia, while the other 10 per cent went to Europe and a little to the United States. Yes, we can do it. Yes, we have talent, but there are deficiencies with regard to financing. Profound changes must be made to the way start-up businesses are financed.
I have a few cases to explain and to contribute to what Mr. Bourassa said about this problem because starting up is a problem. I am going through that right now. My second business is one that is just starting up. It was established in July, and this is a technology that was developed in research centres, in particular at the École de technologie supérieure. And now, after 10 years of research and development, we want the Canadian economy to be able to take advantage of this return because this is an investment that we are making in the universities. So now, we are creating jobs, we are exporting goods and so on. And there is not much, a lot questions about venture capital and the funding that is available.
There is a need for venture capital in technology. I am confirming that; I am telling you that is the case. The way the rules are developed in Canada, it is very difficult for businesses to access start-up financing because there is none. Why? Because that is a disadvantage for investors today. I will explain that. When you have a business, you generally create it, and you generally have common shares. Everyone is a shareholder on the same footing; we all have common shares.
Going back to the early 2000s, it used to be that, if BDC invested, it invested; it had common shares like the founders of the business. The objective was the same for everyone, to increase the value of the shares and achieve the collective enrichment of the Canadian economy. Unfortunately, that has deteriorated because there are intrinsic rules in Canada regarding venture capital. One of those rules states that, if you have an initial investment in a business, as the saying goes, you have led the round; if you led the first round, you cannot lead the second. Another institution has to develop the business. The reason for that is that you are considered to be biased. As you led the first round, you will want to show an increase in the value of the business, concealing any problems; I am telling you how things are. Someone else will be allowed to come and lead the second round.
Everyone knows that rule. What do you do if you want to guarantee your return? I know that you cannot lead the second round; so I am going to do it. However, I will not put that in common shares; I will put it in preferred shares, with a guaranteed return because I want to be sure I make money in this business, and I know you do not have the choice to accept it because you will not be leading the next round.
We wind up with an accumulation. Imagine when a third party comes in; it is even worse. So venture capital companies today want to invest in businesses that have already started up. Consequently, the people doing the start-up wind up with a shortage of financing.
That is one of the first problems. Whereas all financiers acknowledge that, when you invest at the outset, the risks are greater, but if the situation works, your compensation should be greater, not the reverse. In a situation such as this, it is the reverse that occurs. So people say, ``I no longer touch start-ups; I will let other people lose their money.'' For those who are here, I will come in and try to make money.
My second observation is that venture capitalists are not in it to build businesses; let us be quite clear about that. They are investors who are in it to make a return; that is all.
Today, that has all changed, but not in the right direction. As Mr. Bourassa said, and I confirm it, the investment document that is presented to you in your business already states: I am coming in today, I am leaving then, and here is how I am going to leave and what my guaranteed return will be. So we have two classes of shares, for those who come in and the founders. If they are no longer appropriate, they will be set aside and others will be introduced that we think are better. These are not favourable rules, and yet there is a need.
When the financing is private, they say, ``This is their money; they can do what they want; they know the ground rules; that is fine.'' But if the Canadian government or the government of a province decides to make funds available in that way, that makes me a little uncomfortable. Since I am a taxpayer, this is my money, and I would like my money to contribute to the enrichment of society, not that of a handful of individuals. I have a problem with that.
That is in reaction to what Mr. Bourassa mentioned. I believe we can remedy this in a positive way, and the government can have a positive impact because the Jenkins report states that BDC could take part and help, and also with regard to rules, not just with regard to the amount of money. Yes, the rules, but they will be sound. Everybody works on the basis of common shares; everyone has the same objective.
Yes, we want a return; private industry, of course, wants a return; the entrepreneur also wants a return; everyone wants a return, but we will all make the same return, or we will do this in an equitable manner. There are issues to address in this area. That is my first reaction to Mr. Bourassa's introduction.
Mr. Legault: There are already quite a few issues on the table, but I could add, if we are considering solutions, that I think that the findings are irrebuttable. Now what can we do?
I was president of an investment fund, FIER, a venture capital fund. It is a Quebec structure with some 10 private investors who invested $1 for every $3 invested. The rest was provided by the Quebec government, and management was left to the entrepreneurs. There were sound management ground rules, but management was left to the entrepreneurs.
And I will tell you that we were able — as president of FIER, I strove to improve the venture capital culture. Since I came from the SME sector, I very clearly understood what the situation of an SME was, and I reined in both sides; I reminded investors that they had to acknowledge the SMEs and to behave properly. You cannot go in thinking that you are immediately going to shove them aside. So you have to behave in such a way that there is a win-win partnership.
Consequently, one potential solution, of course, is that you have to involve entrepreneurs in venture capital because they are the ones most capable not only of behaving reasonably, because they have normally been confronted with this in their past lives, which was my case, but also because they have the skills. If you group together entrepreneurs who invest, they will normally tend to invest in what they know.
Here we are going to resolve another venture capital issue, which is ignorance of the fields in which people invest. A lot of time and money is wasted. There is no reasonable comfort zone. If it is a bank or whatever, if they do not know the field, they have to rely on experts, and they in a way lose the direct relationship, which is absolutely essential in the case of a start-up.
At FIER, we had a score sheet that we had developed. One of the items was the relationship of trust between the entrepreneur and the 10 investors. That was a key factor. So I would say that involving entrepreneurs in venture capital to help BDC would be a good start.
Mr. Coulombe said there was a structural problem. You understood that; it is quite simple to understand. Managers' performance measures, the way in which they are judged, dictates their behaviour, and that behaviour runs counter to common sense.
Consequently, you cannot necessarily influence — the federal government cannot influence everyone, but public money, which is advanced as venture capital, regardless of the form it takes — BDC is definitely the most direct tool that you have, but there is government money involved in venture capital. A good example should be set and inflow and outflow structures should be rebalanced to influence the culture that propagates throughout the rest of the private banking system and so on. Those are our two suggestions.
On that point, it was said that the tax system could perhaps be an inducement. I am an entrepreneur who has worked hard and who is ready to invest privately once again. If there are tax incentives to do that for entrepreneurs who can be good mentors, who can provide financial assistance, if there are tax incentives such as the FTQ's solidarity fund, which provided a tax benefit when people invested in that kind of fund, that would be a good potential solution to change this dynamic because the problem is a cultural problem, and culture is a long-term proposition. That fact cannot be changed quickly, but an effort has to be made to do so.
Mr. Coulombe: In fact, it is very easy to introduce and it produces immediate results because, when an entrepreneur is starting up, he always has a good or an industry; it is quite simple. He cannot do more because he cannot afford to do more.
So there are businesses in every particular industry, in every sector. And if you knock on their door, you validate your market. And in there, there will be an entrepreneur who will say that not only does he believe in your business, but that he is also prepared to invest. And if the entrepreneur also gets a tax credit to reduce his risk slightly, that is a formula that is easy to apply, and everyone will come out a winner. In addition to his money, the entrepreneur will be inclined to advise the entrepreneur who is starting up because he will have expertise in the field.
We all manage to create goods and technologies, but commercializing them involves a considerable effort and one that is risky. Consequently, it is really beneficial to have training.
Mr. Bourassa: I agree with most of my colleagues' comments. I would nevertheless like to draw a subtle distinction regarding the financing stages.
There are already venture capital funds, some with tax benefits, others not, which are managed by entrepreneurs. From the moment those people are part of a structure in which risk is necessarily minimized and return maximized, it is Finance 101; their behaviour as venture capitalists will be the same, whether or not they are entrepreneurs.
With regard to start-ups, you have to look at this part. And when you talk about starting up, it is the whole part that ranges from the proof of concept to the start of commercialization that is the riskiest. It is a known fact that there are studies — I cited one or two studies earlier; there a number of them — showing that, with the exception of the United States, where there is a culture, market depth and well-established expertise, with the exception of Israel, among others, those parts typically are not financially profitable.
For the rest of the financing, I support my colleagues' comments, but, for the first part, it really has to be seen from an economic development perspective.
Mr. Legault: That is the distinction.
Mr. Bourassa: And we see a pronounced decline in the number of businesses established in Quebec; the statistics from last year were quite alarming. I have not seen the recent Canadian statistics. I am always baffled to see our young and not so young entrepreneurs working so hard and taking so many risks but winding up in situations where they have few alternatives.
With regard to solutions, I believe you have to distinguish the start-up part from the subsequent rounds, and I believe that the role of the Canadian government should focus on that part. Subsequently, market forces should normally be able to meet needs.
But as regards market forces, I would add one point to what Mr. Coulombe said earlier, without going into any details, and that is that investment strategies for the first and second rounds may in some cases encourage businesses to pursue their financing round in the United States. That is understandable; we have little depth in Canada. But you have to be careful not to lead vulnerable entrepreneurs, directly or indirectly — at times even through certain government initiatives — to move to the United States. Do business in the United States and around the world, absolutely, but let us be sure we give entrepreneurs a reasonable chance to develop their businesses enough and to obtain acceptable financing conditions so that not only is the next round of financing not done elsewhere — in the United States, for example — but we also do not prevent any increase in value, any commercialization expertise, which we often claim is lacking in Quebec and Canada, from ever being repatriated to Quebec.
Once again, this is an investment strategy issue. It must be understood that the mission of the private sector, and the inflow of venture capital, whether or not it is directed by entrepreneurs, is not to engage in economic development, but government authorities, if they finance some of those initiatives, must really act as watchdogs, to use that expression.
Mr. Coulombe: Mr. Bourassa's point is very interesting. Mr. Legault and I have a recommendation on that subject. At the start-up level, it is true that, if you look at venture capital in Israel, the performance they have, one of the reasons for that is that government assistance and support, in various forms — state corporations, for example — are provided over a much longer period of time before venture capital intervenes. Consequently, the company has had a chance to be developed.
And in that regard, one could imagine a threshold below a certain valuation, $3 million or $5 million, whatever, under which the government would provide assistance, but that above a certain valuation it would no longer be up to the government to work, and it would give way to the private sector. But we have to get to that point. So, in that sense, this is entirely appropriate.
The Chair: I believe you have a lot of work ahead of you. We will now go to the question period.
You said that the role of government — Quebec or Canadian — is mainly exercised at the business start-up level.
Mr. Legault: That is one of the aspects.
Mr. Coulombe: Broadly speaking, we can talk about start-ups, SMEs and large businesses. Those businesses work differently depending on their size. We have talked a lot about start-ups because there is a real problem; that is for sure. But we are also going to talk about large and medium businesses.
The Chair: But at the first level, if I may speak that way, there is obviously a lot of risk.
Mr. Coulombe: Of course, that is a large business. Yes, that is clear.
The Chair: We agree on that point. And the founders of the company do not often have a lot of funds?
Mr. Coulombe: No, correct; they are in debt.
The Chair: Perhaps the government can play an important, crucial role there.
I understood two major principles from the testimony of one witness who appeared before us yesterday. First, governments should not be allowed to play the role of a kind of god that chooses winners in advance, because their record is not very good, and that is difficult.
That witness also emphasized the necessity and validity of matching funds. If an entrepreneur is prepared to invest $100,000, the government will follow. And to follow your line of thinking, the two are on the same footing. Neither of the parties has some sort of preference that the other does not have. All right?
I believe you are all more or less in agreement with that, but, in your responses to the senators, who are all very patient, you may perhaps respond to my observations.
I now give the floor to Senator Ringuette, followed by Senator Stewart Olsen.
Senator Ringuette: I am fascinated by your statements. I took a look at what was going on in Quebec, and with regard to New Brunswick, obviously, in the area of entrepreneurship assistance. You definitely have a head start.
And you are right that a distinction has to be drawn between a start-up business, an SME and a multinational. Federal research and development tax credits really are directed toward large businesses, multinationals, where they generate profits and can really benefit from the research tax credit.
I obviously believe that it is good for start-up businesses to focus on venture capital. Mr. Coulombe, you told us, based on your experience, that it is very difficult, first, to know what the applicable rules are and, second, to identify that capital as a result of the risk, which, according to your testimony today, is not different from what we heard yesterday.
It is the entire ``risk'' factor that comes into play.
However, you added one central point, which is the investor's objective. For a public investor, the levels of government, it will be economic development, whereas the objective for the private investor is definitely return on investment.
How can we get a recommendation from the government that will minimize the private sector's risk in changing its objective? Use a public policy to change the private investor's first objective? How could we do that?
Mr. Coulombe: In Quebec a few years ago, there was a program called the stock savings plan. The idea was to enable businesses to access public funds to finance their growth. People who bought shares in those businesses had to maintain their exemption for three years in order to keep the government tax credit. That was one way to influence the ground rules.
Perhaps we can imagine different rules, but ones that have the same objective. If venture capitalists hear the government say, ``You invest this way; however, if you invest in such and such a way, we will contribute because we believe it is good for the Canadian economy,'' we ensure that there will not just be a return — we should not be opposed to returns; we live in a capitalist society — but also a collective enrichment, so that the government and taxpayers can recover it.
Neither I nor my colleagues claim that we are going to come up with all the solutions today, but you can influence the rules. That is what you can do. At ADRIQ — I am sure the same is true for Mr. Bourassa — we can join a committee and exchange views with people from government. Moreover, ADRIQ has filed a brief on a number of topics because that is important. If we want governments to take the right action, we entrepreneurs have to express ourselves. We are pleased to do so here because we are not as wealthy as the bigger groups, which have lobbyists and can afford them. So we are pleased to have this opportunity today.
Mr. Legault: One of ADRIQ's functions — and what we do every day — is to exercise a positive influence on the ecosystem, that is to say the people who are in the financing sector, in research, and even entrepreneurs. It is an ecosystem; it is a living thing. I would say that ADRIQ is the most attentive observer of the ecosystem. Most players fight for their part of the ecosystem, such as the universities. Our work every day is not only to observe, but also to try to exercise a positive influence. We will definitely be working on that.
The Fonds d'intervention économique régional, which is a mechanism created in Quebec, comprised a number of entrepreneurs who already had an influence and who were not involved just to get rich. Honestly, my investment was an investment in society. My goal was to engage in mentoring, that is to say to find other ``Cirque du Soleils'' under a rock, somewhere in Quebec, and to be able to say, ``I was one of those who gave them a hand.''
The rules set for FIER did not impose that. Personally, since I chaired the board, I somewhat set the tone; I chose the players around me. However, there is nothing that would prevent the government from setting guidelines for the composition of this kind of fund, from also setting guidelines on the return that is expected, or from ensuring that, for the two dollars that the government invests in Quebec, certain conditions must be met that are not just management conditions, but that also provide for a healthy return on investment. That is something that could easily be done.
ADRIQ is doing it, and the government definitely has a lot more power through its involvement and through the legislation regarding certain investments. Technically speaking, for every dollar that comes out of taxpayers' pockets, the government has a mandate to ensure that the return is fair. When the money comes from the private sector, it is more the market that lays down the laws.
It is at this level that action can be taken. There have been a number of examples; I do not know the other provinces. There are also the SPEQs.
Mr. Coulombe: The idea of the SPEQs — the sociétés de placement dans l'entreprise québécoise, or Quebec business investment corporations — was very good. That is why we took the liberty of talking about them again today. Some entrepreneurs have succeeded, have made money and have decided to help other entrepreneurs.
I personally have not tried that arrangement, but why has it not been a success in terms of volume? That is because it was full of administrative red tape, whereas it should be simple. Some entrepreneurs join forces and want to invest in businesses. It is not that complicated to establish rules. That is a form of financing.
Programs are in place and operating very well. Sometimes we should draw on them. I have been working with the Economic Development Agency of Canada for years. They have a program to assist businesses in commercializing. That program is simple. It is not full of red tape and it operates well. It could be improved. That program targets commercialization, and that is very good.
Now, if we are talking about start-up financing, we can imagine the same thing. It is a loan. What Canada Economic Development is doing is making a loan; it is not a grant. So this is not a measure that costs the Canadian government a fortune. In cases where the business fails, it unfortunately cannot recover its loan, but there are businesses that succeed. This is not an automatic grant in all cases. And the entrepreneurs are not always looking for grants. That is not the secret. However, loan guarantees with a banking institution make a difference in financing your working capital. So this is a simple model to manage, and it could be another potential solution.
No one can claim to have found the miracle solution that will satisfy everyone. There are different ways of doing it. In everything we do, it has to be simple to apply. The moment you involve a lot of people like notaries and lawyers, as soon as there are a lot of documents and everyone protects himself, there is a lot of red tape. As Mr. Bourassa said so well, as entrepreneurs, we cannot get involved in that.
Senator Ringuette: It is tiring!
Mr. Coulombe: Yes, starting up a business is a marathon, it is true; so the path has to be cleared.
Senator Ringuette: I have another brief question.
The Chair: With a brief answer.
Senator Ringuette: Is the coaching program you have at ADRIQ for start-up businesses or SMEs?
Mr. Legault: It is for SMEs, and it is mainly intended for businesses that have gone beyond the start-up stage, and thus after there has been proof of concept.
[English]
Senator Stewart Olsen: Forgive me for speaking to you in English. My French is not good enough to get my questions across.
I am very interested in what you are saying and what you do, but the average person watching this on television might wonder what exactly you do. You receive government funding. Are you a think tank? Do you bring together people with private funding?
One of the best comments that I heard was from Mr. Legault, who said that the rules of the game are really difficult. If I was an entrepreneur just starting up, I would be looking at this to say, how do I get started? Do I go to these guys or to the government? Exactly what is my first step?
I think this committee could do some good in our report by offering some of this to entrepreneurs who are saying, how do I start to access and get to know the rules of the game?
Mr. Bourassa: Forgive my accent.
The reason CEIM was put together 16 years ago was exactly for the mission of helping entrepreneurs start up. Initially we were covering all sectors; now we cover essentially the technological sector.
We are a private organization. On one hand, we work as private consultants would work, but we are specialized to serve this particular clientele. At the same time, although we are indirectly a private economic development agency, we have two government partners. Canada Economic Development has been a partner from the very beginning, but we had also the support of the business community.
I was hired 15 years ago by Ms. Desmarais, who is very well connected to the business community, and we had the credibility at that time to put together our program. Our program has evolved because the needs of the entrepreneur evolved.
We work with all other types of organizations, including the IRAP advisers, for example, together with advisers from Canada Economic Development, research centres and so on. However, basically we provide coaching and consulting services to help entrepreneurs go from an idea to commercialization.
Over the years, we have developed specialized coaching programs to go international. For example, we hired, for a six- month period, an American entrepreneur to come and coach entrepreneurs. At CEIM, we have developed sales intelligence services to help entrepreneurs identify lead clients and sell to them.
This is our mission. We have been true to our mission from the very beginning. We still call ourselves an incubator, but I believe we are much more than an incubator; we are also an accelerator.
However, our services are not free; this is very important from a public policy perspective. We sell our services. The entrepreneurs who work with us have to pay out of their pocket. We do not take equity in a company. This is not our business model. We are not a venture capitalist.
We do provide those services for a cost, which is a great discipline. At the same time, government support — both Canadian and Quebec government support — covers approximately 50 per cent of our operating cost. That enables us to provide those services at a lower cost. When entrepreneurs come to us, it is not a business expense account; it is typically their money or the money of their wife or husband or their family.
In a nutshell, this is what we do.
Senator Stewart Olsen: If I were starting up a technological company, how would I know to come to you?
Mr. Bourassa: Other organizations refer clients to us. We have a network through government agencies — Canada Economic Development, the Quebec government — but the best source of references is former successful entrepreneurs.
We also have different kinds of events that we organize. We network through events with ADRIQ. ADRIQ does a wonderful job, not only in terms of suggesting government policies but in organizing major events as well.
We network with other entrepreneurs, but typically there are a number of players in Quebec and eventually they will be referred to us or possibly to other organizations. One of the value-added perks of working with us is not only in terms of coaching services and so on; we know also how to work with government agencies. We know that everything is not on a website.
For example, Foreign Affairs Canada organized a boot camp at CEIM for two years in a row. Through that partnership — and I want to mention that was absolutely great; it was the very first time it was in Montreal — we had the consulate general from San Francisco, Boston and New York. We had successful entrepreneurs from San Francisco, Boston and New York meeting 22 start-up entrepreneurs. This is not consulting as such; this is networking events to help those entrepreneurs who have very little time.
They would not necessarily take the time to go to the consulate general. To bring them to you is very important. Public Works Canada organized an event with us last June for the very first time in Montreal where, thanks to their initiative and our collaboration, they brought four decision makers from four different agencies. That was part of the commercialization program.
At the end of the session, which was half a day, I had one of my former clients who came and said, ``Serge, thank you very much. I have been wanting to meet Mr. Carrier, who is the chief scientist at Valcartier, at Defence Canada.'' We know that Defence Canada has a budget and there may be an opportunity for this agency to buy some of our entrepreneur technology. Through this kind of initiative, he was able to connect personally with Mr. Carrier and then find his way to the decision makers.
It is through this kind of networking, plus specialized coaching, that we assist entrepreneurs. However, it is very important for us to work in collaboration with many other players, including ADRIQ and others.
[Translation]
The Chair: You are as eloquent in English as you are in French. Would you have a brief answer to Senator Stewart Olsen's question?
Mr. Legault: To date, ADRIQ has been entirely financed by its members. It is the events that finance ADRIQ's operations. Only certain projects, such as succession programs for young people, received government support, but ADRIQ's basic operation was self-supporting. As I said yesterday, we have integrated a network that operates mainly on federal money.
The purpose of all that was that there was natural synergy. According to ADRIQ's business plan, we were going into the field to do coaching; those people did it. There is also an interest in Canadian taxpayers; as ADRIQ has an organization in place, it has an organization that delivers action.
Consequently, government money will go directly into the field because ADRIQ has already established its basic operation. We believe this is a kind of strategy. This can perhaps be considered as an example that should be followed; instead of saying that financing will be cut, or whatever, perhaps we could use networking strategies. As Serge said, we already have natural networks, without being forced to integrate something else. In this case, however, it was better to do a real reintegration.
As a taxpayer, I am pleased that was successful; it is not a simple task because we are talking about two organizations that had a membership and it was therefore not an owner-to-owner discussion.
It was a culture match; it took 12 months, but it is done. That is the nature of ADRIQ. I would not want to forget anything. There is a phenomenon occurring now; a lot of attention is being focused on the research and development program, the R&D credits. As we said, this is something very structural for Canada.
We agree, and we have issued a brief with a number of recommendations. We may definitely want to improve it. We have also favourably received the Jenkins report, which has just been tabled, because it contains many aspects that ADRIQ has advocated in the past. Validating projects in advance and moving a little more toward commercialization rather than pure and basic research; that is structural. There is also BDC's involvement in financing where the first buyers will have to be Canadian. The United States has successfully used this arrangement.
If you pay attention to the details, you note some praiseworthy concepts. However, we consider one concept very dangerous and harmful. What we must not do when we amend the legislation is lose gains. We normally want to improve the situation. According to the Jenkins Report, an extremely important sector in Canada, the manufacturing sector, is being entirely overlooked because the plan is to grant the tax credit based solely on salaries. We know that, on average, 50 per cent of research expenses, and of course requests for repayment of the business tax credit, are incurred in the area of investment in equipment and losses. That is approximately 30 per cent for SMEs and about 70 per cent for large businesses. That is enormous.
At first glance, we thought: ``Wow! We have productivity deficits in Canada.'' Productivity depends on access to equipment, to better IT support and better potential equipment, and suddenly now we are being threatened, whereas, on the contrary, we should be stimulated.
We have some serious questions. This will affect finances and, in our view, constitute a serious warning. Without any further explanation, the Jenkins report, in its current form, sends us a major alert. The entire manufacturing sector is concerned. That is what we wanted to submit to you.
We are agents of change; so we are going to work on that. The offer has been made; however, we are very much in favour of establishing a scientific council, as recommended in the Jenkins report. We would be honoured to be able to contribute to that. If invited, we will be pleased to invest with you because I believe we have a good overall vision of innovation. That is our proposal.
[English]
The Chair: Senator Stewart Olsen, I know you have other questions, but we have to get through our list.
Senator Tkachuk: Like Senator Stewart Olsen, I was not aware of your organizations. Just so I am clear, your organizations, Mr. Coulombe and Mr. Legault, are funded by the businesses in the City of Montreal or the Province of Quebec, and Mr. Bourassa, you said that half of your budget comes from the federal and provincial governments. The other half would come from where?
Mr. Bourassa: We sell our coaching and consulting services. We also have office space; but we do offer those services at a lower cost than market to make them accessible.
Senator Tkachuk: What government departments would be involved in your organization?
Mr. Bourassa: Canada Economic Development.
Senator Tkachuk: And provincially?
Mr. Bourassa: Provincially, it is a long title; Ministère du Développement économique, de l'Innovation et de l'Exportation.
Senator Tkachuk: It is so complicated that I have no translation.
Mr. Bourassa: It is MDEIE, and there is a division for science. We are funded partly by the Quebec government.
Mr. Coulombe: The first one is Canadian.
Mr. Bourassa: The first one, Canada Economic Development, is an agency of a government department; I believe it is Industry Canada.
Senator Tkachuk: Is it part of a national program? Do you have a counterpart in Toronto or Vancouver or Saskatoon?
Mr. Bourassa: Your question is very good. We have counterparts but we are quite different from one province to another. For example, there is MaRS in Toronto.
Senator Tkachuk: We heard from them yesterday.
Mr. Bourassa: We have about one tenth of their budget, and we are not structured the same way at all. We were founded 16 years ago, along with other organizations, as a business incubator. The mission has not changed. The type of services has evolved but the clientele is the same, so we are a business incubator.
There are others, like in Waterloo, for example, who are more comparable to what we do. There are several across Canada and elsewhere in the United States, Europe and even in China. As I said, it was very surprising to see a Chinese delegation visit us, but we are not part of a national financing program. Canada Economic Development finances us as part of an entrepreneurship initiative.
Senator Tkachuk: What I am getting at is, how did this happen? Was it because Mr. Desmarais had an idea and then went to the government.
Mr. Bourassa: Ms. Desmarais.
Senator Tkachuk: Mrs.? Well, Ms. Desmarais got an idea. I am not from Montreal so I would not know who got the idea.
They would have gone to the federal government and said we have this idea and we want to start this in Montreal; then they would get the funding from the federal and provincial governments.
What I am trying to say is, is this a good idea for a national program? In other words, once the Government of Canada decides to fund a particular program in Montreal, you would think that particular program would be available in the rest of the country — or is it exclusive to Montreal and not to the rest of the country?
Mr. Bourassa: First, it is not exclusive to CEIM or Montreal. To come back to 1996, before that the CEIM was the centre of entrepreneurship under the YMCA, so we have modest origins. We went from a socio-economic mission to a business mission in 1996 because there was a need. Keep in mind if we go back before the bubble burst in 2000, in 1996- 97, there were many opportunities, so the idea came from a need and an opportunity to help entrepreneurs.
Yes, there could be a national policy for organizations like ours, but there are realities that can be very different from what we have in Montreal and Quebec, or from what you have in Ontario, Manitoba, Vancouver and so on. There are already existing organizations that are financed through different ways; sometimes if it is not provincial government funds or federal government funds, it may be from municipalities.
You would have to be careful to go back and see the need — what is already part of the ecosystem. If so, you may be able to make it work better, but the needs may not be exactly the same everywhere in terms of financing. The need to help aspiring entrepreneurs at the early stage I believe is very important, but we have to keep in mind the existing structure.
I think the idea of initiatives to make those structures work better across Canada is very interesting. This summer, we joined an organization based in Waterloo. I mentioned Waterloo twice because it is not the biggest city but they do a great job in terms of business incubation. I like their business model.
They put together the Canadian Digital Media Network and we are part of that association. The idea is for us to connect with other business incubators — or organizations that can help entrepreneurs commercialize technology outside of Canada — to share best practices. This kind of national initiative costs very little in terms of budget. I suspect their budget is probably not that high. To work together as a Canadian nation is very important for us. We must avoid provinces trying to compete among themselves at all costs.
We have many successful start-up companies in the Montreal gaming industry. We believe that Montreal is number one and Vancouver is number two. Forgive me, I am from Montreal. Our true competition is not Canada. This is why the initiative to connect organizations like ours with our incubators is very important. They may have different names. You have to go through the names and work as a whole to compete against China and other emerging countries.
Senator Tkachuk: Where is the greatest need in venture capital? Venture capital is often used for different parts in a business model. I am just trying to focus in on where the greatest needs are.
A person has an idea. It may be for a product or a service. They have to do research to get that product into a marketable form or a business plan because it is a service organization.
Is it between the drawing board and the research? Is it between the research itself where there has to be tax credits or some other form of investment vehicles? Is it between the fully developed product and the next stage to convince the marketplace they should buy that product or service?
In which of those three areas would the venture capitalists step in, and where is the greatest need in this country?
[Translation]
Mr. Legault: Unfortunately, there is no simple answer, even though I really like simplicity; I love it, and I try to apply it in everything. Sometimes, however, you have to admit that it is not easy. Venture capital does not apply in the early stages. That is quite clear for many reasons that I have already mentioned and that I do not want to repeat.
Now, there are a number of stages after that: there is the start of the commercialization stage, maturity of a certain degree of commercialization, a loss, a certain comfort for businesses in maintaining the $5-million level and going further. There is a growth crisis and a need for capital. There are all kinds of things happening. After that, there is international development. So, unfortunately, as far as venture capital goes, there is no magic recipe at a number of stages in the development of technology businesses; the need for venture capital financing is different.
We should have the ability to adapt the service and offers to that demand. To answer your question, does that apply? Where venture capital should be monitored most, probably at the SME level, in the early commercialization stage and until the jump to $5 million to $10 million. That place is the Valley of Death; that is a concept that many people know; that place is after the approval of concept, between that moment and the mature $10-million to $15- million level where you are really in business; it is in that area where you have to work.
However, it must be divided into two or three areas in order to take proper action, because I would say that the remedy is not the same for those three situations.
[English]
Mr. Coulombe: I would like to add something to what Mr. Bourassa said at the start. At the stage where you have no sales and you still develop the project, you have the technology. You do not sell technology; you sell products. During this stage, entrepreneurs do not have access to the R & D tax credit because they have no cash to pay the salaries. They increase their personal debt. They go to their families.
This could be solved easily, in my view. Let us say we fix this and allow them to have access to the R & D tax credit. Then they come up with a product. Then there is nothing. You get a product and you do not have customers or cash flow and you do not have business. There is no money for this area.
If you generate cash flow — especially if it is positive cash flow — you will find the money. It is easy for them. The market is confirmed. They can work with forecasts.
Senator Tkachuk: Someone likes it.
Mr. Coulombe: Exactly.
Mr. Legault: If someone likes it, the program is great. It is something that started a year ago. It is what the U.S. and Israel are doing. We suggest that you reinforce that. You can keep this program, build on it, and maybe you can stimulate the private sector to do the same. In government you say, ``I will pay the whole bill for this purchase because there is a risk.'' My purchaser will not lose his job because there is a technology risk. It is normal for the government to pay the whole bill.
Let us imagine you offer to pay part of the bill; matching. We believe this is a great potential. This is where we see the Jenkins report as positive. They introduced that notion. We would say, ``Go for it, and go even further than what we are doing today.''
[Traduction]
Senator L. Smith: Mr. Bourassa, you mentioned the six points with your presentation regarding consideration. Mr. Legault, you discussed the various entry points. We also discussed the concept of risk, and it is clear that the more risk there is, the less people want to give because you are going to pay early on.
But for our study, Senator Gerstein asked whether you had two or three recommendations because I know there is not a single solution for all, but where do the greatest weakness and the greatest opportunity for the Government of Canada lie? Is it the starting point of having a fund to stimulate development? Obviously, fewer people want to get in at that point. What impact could we have to assist development?
Mr. Bourassa: With your permission, I will continue in English in order to practise a little.
[English]
Whatever precedes the commercialization of the new technology is really where the market fails. There have been many tentative. Not only in Canada, but in most other countries with very few exceptions. We have to understand that typically we will start maybe 100 companies, and at the end perhaps only 30 of them will be successful. The best venture capital firms in the United States — the ones who have the best track records — will have maybe three winners. Generally speaking, all industries have three successes out of ten. However, if we do not help build those start-ups, we have no chance to succeed.
My impression is that because the Canadian industry has not been able to generate the returns that they were looking for, whoever manages those funds will stay away. They are not alone. The Industrial Research Assistance Program is the same and so are others. This is normal. However, starting to build that plan is absolutely essential. Otherwise we will have very little chance to have enough successful companies to compete in the end. We have to change our perception of risk.
Entrepreneurs, like Mr. Coulombe, are risk takers. They do not take any kind of risk. They first risk their own job, assets and money. Through our government programs we have to develop a culture to encourage and support risk taking. Risk is part of being an entrepreneur. We have to start at the beginning.
I personally know some of the better entrepreneurs who have failed one, two or three times. I will not name names, but they succeeded. They kept going after their third or fourth failure and then they had big successes. They created jobs. I have names in mind. I prefer not to mention them.
[Translation]
Senator L. Smith: Every year for the past 10 years, we have announced allocations to universities in the running totalling $203 billion in Canada, including $62 billion for Quebec. Are you in touch with the presidents responsible for research and development financing? Following a presentation at Concordia University, we met with groups of researchers, one of which had come from the United States to settle in Canada because of the Tier 1 program, with $200,000 a year in financing for some. They developed a product with the students and then established a company. What you say is a timely illustration of the concept we are discussing. Do you have relations with those people and do you think those relations are quite solid? Has that put you on another level?
Mr. Bourassa: My answer would be: yes, but. We have relations, but the majority of entrepreneur clients whom we serve, as an incubator, are people who have scientific training but who developed their technologies outside university research centres. A number of entrepreneurs have done so at those centres together with university researchers. Of course, we want to encourage the use of the expertise found at the universities, but it should not be forgotten that you always need an entrepreneur in order to found a business.
We are very much aware of that. We are developing our relationships with the various university research centres and chairs, but it should not be forgotten that you need the soul of an entrepreneur in order to commercialize a business. There are some good examples of that, one of which concerns a current client of mine by the name of Technologies Expretio. What I say is known and public. The researchers originally came from the École Polytechnique, but when the time came to start up the business, that was done outside the university field with an entrepreneur by the name of Daniel McInnis, who is one of our clients.
That business has developed optimization solutions in the price strategies field. France's major railway is their partner. So yes, there are ways of doing it. Yes, we have clients, but we also have other entrepreneurs who have done their start-ups outside research centres.
I will take the liberty of mentioning André Boulet, who holds a doctorate and is a former member of BioCapital, which is a private venture capital firm that started up PurGenesis outside university research centres because it uses researchers from outside those centres. Why do I mention that? It is because access to start-up financing is not evenly distributed. If you start-up university research, you are entitled to grants. NSERC, which is a Canadian government research centre, will typically make grants directly to university researchers, but there is no access to that kind of assistance for someone who wants to start up on the outside. Yes, we want to encourage entrepreneurs to work with the research centres, but you must know that a lot of technology businesses may emerge and emerge successfully on the outside. There is a kind of financial assistance gap.
Mr. Coulombe: I am currently working with researchers from ETS. The business I established with them grew out of 10 years of ETS research work. This is a case study because, 10 years ago, the researchers were at a business on sabbatical to understand the needs of that industry. Based on that, they conducted research and development to solve a real problem. Ten years later, a technology provided a solution to the problem, but it has not yet been produced. Now they will be making a product, and I stepped in when they had that technology. They had to make a product out of it. Now it has to be commercialized. There is no money. Apart from the Canada Economic Development program, which is a loan, it is extremely difficult to find money at this stage. That is clear.
The role of universities is to conduct research and to do so in all kinds of fields. An observation was made in Quebec a number of years ago. A number of research development companies were established. Since hundreds of millions of dollars are pumped into research, does that produce wealth for Canadians? We will be trying to reuse that instead of leaving it on the shelves. That is not easy because, since research is completely free, there are technologies, but not always a market for what has been developed. The development companies can play a new role because, in the initial years, we look at what is on the shelves and what can be commercialized. Now the role can evolve and we can say: researchers, when you want to undertake research in a field, perhaps it would be a good idea to see whether it can be used in the private sector and perhaps you could even find a partner.
Senator L. Smith: That is why I asked the question, whether we were spending our money in the right place.
Mr. Coulombe: Absolutely. The sooner you combine the research with industry, the sooner you have a chance of making the taxpayer's investment profitable.
The Chair: Our meeting is coming to an end. I want to thank Senator Hervieux-Payette, our deputy chair, for organizing this panel. I am speaking on behalf of all committee members, gentlemen, when I say that this is the best panel we have had in a very long time.
We will no doubt have to reread everything you have said and to reconsider the proposed solutions. As I said earlier, you have put a lot on our plate, and we thank you for that.
Senator Hervieux-Payette: Thank you. I can claim no credit because this is a field in which I have worked. I worked at the centres for excellence for seven years. Senator Smith, your last question was excellent. University researchers were not at all interested in commercializing. They wanted to do research — I have no problem with that, provided they find the funding and taxpayers get value for money. They can do all the research they want. That does not prevent basic research, but we also have to know where we are investing our funds for the future of Canada because we are lagging behind in competitiveness. This is not innovation for innovation's sake, it is innovation to improve Canada's competitiveness.
I only have two or three quite brief questions. First, with regard to the Cité du multimédia in Montreal — as a result of which we have a gaming industry, as you mentioned earlier — what was financed? I remember that there were some buildings, and there were some salaries, and perhaps equipment; I want to know how it was packaged, because I spoke about a success story in that sector yesterday.
Second, since we spend billions of dollars on supply and services every year, do you think we could consider having a division that could establish that, since a particular sector is very expensive, we should occasionally organize a kind of competition and ask entrepreneurs to help solve these problems by financing innovations so that the innovator, the entrepreneur, can ultimately commercialize them?
The government is a major partner, but the solution cannot just be money. We have to find solutions for the federal government so that we can function better. Do you have any recommendations as to where we can find the money, the money we are already spending?
The last point is global marketing. I would say that Germany is the country that does the best job of commercializing its technologies and equipment with everything it sells around the world, considering that there are 90 million Germans and they are ahead of the United States, which has a population of 300 million, and which is considered as having very significant financing for innovation, research and development and all that — venture capital.
What would the model be?
One of the things I know is that Germany has people in Canada, through the chamber of commerce. The Canadian- German Chamber of Industry and Commerce has offices in all of Canada's major cities, and those people work with Germany's department of foreign affairs. Do we have any mechanisms to ensure we market everything we do? There are 34 million Canadians, and our market is not a market of 300 million. How could that be improved? Once we have gone through that, Mr. Bourassa, and we have done our homework and have nice products and you have helped finance subsequent phases, the fact nevertheless remains that our market has to be global; it cannot be just domestic.
Are there any mechanisms? That does not exceed our mandate at that point. In my view, once we have a product that has to be innovated, there has to be an outlet. Even if we finance all the phases and have a local market, we are going to succeed in becoming an exporting country. We have the universities, the labour force and all the infrastructure enabling us to do so.
Give us the information, if you do not have the answers immediately. I just want to ask you to send it to us because you do not have to give us all the answers today.
The Chair: You prefer to send us some answers?
Mr. Bourassa: Do you want a draft response? On the first point, CEIM is in the Cité du multimédia. So I am perfectly familiar with the mechanism. That was the only building for which entrepreneurs were entitled to the tax credit, but that was not part of the consortium. The reason we established a physical incubator as well was to enable our young and not so young start-up entrepreneurs to access the program. It was typically 40 per cent of salary or dedicated equipment for developing positions, up to $15,000 per job.
What did that mean in practice? For a business that was starting up and that had four programmers, it meant $60,000. It was all well and good to say that was a tax credit; indirectly it was a grant because a business that incurred losses nevertheless had money. It was extremely effective for that business niche; it was a form of financing. In some cases, it could be added to the R & D program. The criteria were different; we could engage in application, content, as opposed to scientific or other research. It was an excellent initiative.
However, that initiative was abolished a few years ago, when the government changed. The reasons given at that time were that it was not very effective. The idea was excellent, but you have to be cautious. It is like any kind of program, from a management standpoint; if you find yourself in a situation where medium or large companies move to the Cité du multimédia to obtain tax credits and subsequently leave, are as many jobs being created? Was action taken where it was economically most important? I personally wonder about that. It was effective for the smallest businesses.
So there were economic freeriding problems, but the matter could have been managed differently. Reference was made to Public Works and Government Services Canada earlier. The idea is to have easier terms and conditions. Furthermore, the idea of making service calls is very important for our entrepreneurs as well. So there are ways to refine the program. I will stop there with my initial recommendations.
Mr. Legault: With the OSME's First Buyer Program, the buyer definitely runs a certain risk. We are talking about innovation and risk. You have to take calculated risks in life. However, we are recommending that the government be much more aggressive about it with this model. As I said, other countries have done so successfully, and, to offset the risk, the government ensures it has project management capacity, as it were; the government has to be able to judge the risk. As a taxpayer, I definitely want Canadian innovations to be in Canada, and if that does not work, I am not happy.
We believe that Canada should move more aggressively along that path, but it will have to be understood that we must have a monitoring capability because this is not like a mature purchase, with 25 years' experience.
That is a minor recommendation that we could make to you, but, yes, I believe we have to go ahead.
With regard to the advanced positions of other countries, I may be in a poor position to recommend that you send representatives around the world. Incidentally, when I travel, I sell Canada, and I have fun doing it; I have always done it. What is very good and what you could draw on is a CED loan program which enables businesses to go out and display their wares. They can travel and demonstrate their technology. This type of program can be done in loan form and, and CED already has a program like that. I believe it can be a good idea to work in such a way as to improve things with these programs. And that leads me to tell you that there are a lot of programs; some say there are too many.
We have pointed out a few programs to you; the IRAP, which is identified in the Jenkins Report, is good; that is the unanimous view, NSERC does not meet all needs, but it is very good; ADRIQ is involved with it, in SME-university matching.
With regard to the business commercialization effort, we could look at that at the government level. Perhaps resources are somewhat scattered for certain projects; there is no force of impact, and money could perhaps be redirected to truly effective programs in order to strengthen them. I believe that would increase their impact and the return they generate.
The Chair: Who should conduct that review? A committee consisting of entrepreneurs and representatives?
Mr. Legault: We said we would do it on a volunteer basis. You pay for transportation to here and we will handle —
Mr. Coulombe: We will bring the entrepreneurs.
Mr. Legault: We will bring in the entrepreneurs.
Mr. Coulombe: You will add some, and we will do that; we will work together.
Mr. Legault: If you buy lunch, we will be there!
The Chair: Does Senator Ringuette have a brief final question?
Senator Ringuette: Pardon me, it was for you.
The Chair: Go ahead.
Mr. Coulombe: All the entrepreneurs will tell you. The first reference — but I am talking about a name known outside Canada — is very important for a new product, for an entrepreneur, because when you want to leave home, investors are more attracted by the reference than by the interest of the project. So the sooner we get there, the faster it will go. If you have Bombardier or the Government of Canada or the Department of National Defence, that is great, investors will take the plunge.
Senator Ringuette: It takes a top name.
Mr. Coulombe: The second is that exporting, commercialization, is expensive. That is recognized now; everyone knows it. Even researchers realize that for every research dollar spent to develop the product, you have to spend seven or even more to export and commercialize it.
With the death of Apple's founder, it has been acknowledged that he represented a considerable degree of innovation, but that he was also a formidable marketing machine. And that is expensive. The programs now have to be designed not only to sell in Canada, but to sell outside the country.
I have done it; I have exported. As I said earlier, from anywhere in Canada, it will be difficult to sell in Taiwan without having a presence there, even if you go there three times a year.
I experienced a situation in which the vice-president said, ``I am interested in your equipment; it is expensive, but I am interested. Why don't you install a machine here?'' There is also the technology showcase program, which has a spill-over effect.
Senator Ringuette: The entrepreneurship mega centre in Taiwan is an extraordinary example of that.
Mr. Coulombe: That is why you have to be there. The program must not simply hire Canadians. Of course, we all want to create jobs in Canada, but if I hire a person in Taiwan who constantly sells my product, how many jobs will be created in Canada? That is something that has to be considered.
The Chair: Unfortunately, we will have to bring this meeting to a close. I want to express my sincerest thanks to our panel of witnesses, one of the most interesting the committee has encountered. If you have any comments to add, do not hesitate to send them to us in writing. In the meantime, thank you for being here this morning.
(The committee adjourned.)