THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, March 9, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I am the chair of this committee.
I’d like to introduce members of our committee. We have our Deputy Chair Senator Deacon, Senator Bellemare, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Massicotte, Senator Ringuette, Senator Smith, Senator Yussuff, and joining us today, Senator Marwah.
We are here to continue our study on business investment in Canada. We had some important testimony yesterday on the issues facing this country, and we have gathered a panel today that I think will continue to provide us with some answers.
Let me welcome Jim Balsillie, Chair of the Council of Canadian Innovators, and with us virtually, Hamid Arabzadeh, Chairman and Chief Executive Officer of Ranovus. We are glad to have you here to continue our discussions. Mr. Balsillie, please being with your opening remarks.
Jim Balsillie, Chair, Council of Canadian Innovators, as an individual: Madam Chair, Deputy Chair and senators, I appreciate the opportunity to present today. I am Jim Balsillie, chair of the Council of Canadian Innovators and an investor in six Canadian tech companies. Your study on business investment in Canada is timely as the House of Commons Industry and Technology Committee is currently reviewing an updated Investment Canada Act, and their proposed amendments reveal a serious lack of understanding how the contemporary economy functions.
The transformation of the economy into a knowledge-based and data-driven model has reshaped the international competitive and investment landscape. Today’s economy is different from the traditional, production-based economy in nature and structure. Its most valuable assets — intellectual property, or IP, and data — have reshaped markets, creating equipment-light and worker-lean companies operating at global scale and pulling in massive profits.
In today’s markets, investors look for companies that own valuable IP and have control over data assets which allow them to control markets and capture superior economic rents. Policymakers in advanced countries understood that the sources of prosperity and the vectors of risks have changed. This is why the EU and our Five Eyes partners have updated rules for foreign direct investment. But not in Canada.
Through various institutions such as Invest in Canada and countless innovation programs and research granting agencies, Canada’s approach to investment remains stuck in a tangible production economy model where inward business investment brings advanced production technology and skilled personnel into an underdeveloped economy and where foreign multinationals undertake more R&D than local firms and generate domestic supply chains and grow the tax base. In the IP and data-intensive economy, foreign direct investment, or FDI, targets and expatriates local high-growth firms that are critical to the future dynamism of local economies or exfiltrates taxpayer-funded IP, eroding Canada’s prosperity and security.
Canada is on the sidelines in the global ownership of IP and data, contributing to their creation but not contesting their ownership and ensuing benefits. We see the exfiltration of knowledge and assets out of Canada on a regular basis. Foundational IP for AI that Canadian taxpayers funded for two decades is transferred from U of T to Google, who thanked Canada for it and said, “We now use it throughout our entire business and it’s a major driver of our corporate success.” Huawei creates 17 research partnerships with Canadian universities on equally valuable 6G infrastructure. There are many other examples, such as Facebook’s AI partnership with McGill University, Tesla taking foundational battery IP for electric vehicles from Dalhousie University and more.
Canada has a low and declining rate of business enterprise research and development, or BERD, which pundits and innovation enthusiasts have labelled as the central issue explaining the country’s low innovation outputs. This narrative has unfortunately resonated with policymakers. The “low BERD equals low innovation” thesis does not account for the preconditional need of ownership of IP and control of data required to give firms the necessary freedom to operate. FTO, to ensure their BERD investments turn to new revenue.
I have provided an annex to my remarks which explains in detail why FTO is a precondition to increasing BERD. If a company lacks sufficient FTO, it cannot be assured of capturing the high returns from their individual BERD investments. By the same token, public subsidies for research or innovation bring little or no benefits to the local innovation economy because the economic rents ultimately flow to the owners of the IP and data that are in a position to extract the economic benefit.
A recent report from IRPP shows that a majority of IP created by Canadians is owned by foreign entities and that the trend is accelerating. By ignoring the intangible asset ownership prerequisite to build the runway where their business investment turns into profitable returns, policymakers are asking firms to make investments that are neither logical nor prudent for their operations.
Thank you.
The Chair: Thank you very much for those remarks. I know you’ve spurred a lot of questions. We will try to go through this relatively quickly. We can keep our questions short and to the point. We don’t need a lot of introduction. The man knows what he’s talking about.
Senator C. Deacon: Thank you, Mr. Balsillie and Mr. Arabzadeh, for being with us today.
Can you help us a little bit just in as plain language as possible, because you know the issues in such detail. The reality is we have to own the intellectual property even to operate in the space, quite often, the way the complexity of the world is growing. We can’t grow a business unless we have access to the IP, and if we don’t control access to the IP, then those businesses may ultimately flow elsewhere no matter what we created. Can you give us an example of a public policy difference that you can propose for us about how government could be responding quite differently in the way we control our assets that we are inventing in Canada but are being exploited elsewhere? How can we change that? The status quo is one thing, but where have you seen the change that can be done?
Mr. Balsillie: Thank you for that, Senator Deacon.
I’ve chaired panels on this internationally, nationally and subnationally, both on IP and in data files. I’m deeply aware of what other nations do.
We fund billions every year, but we have no ownership strategy. We invented the fundamental IP for mRNA for vaccines, and yet we pay to use it. We invented the fundamental AI IP, but we pay billions to Google and Microsoft and others to use it. We invent fundamental telecommunications IP, but we pay billions to Huawei and others to use it. Very simply, you need an ownership strategy.
Senator C. Deacon: What does it look like?
Mr. Balsillie: It’s very simple. It’s not about money. One, you put conditions in the research funding, which other nations do. Two, you have centralized resources to manage the ownership function. Germany has the Fraunhofer Institute with 72 research centres and 30,000 employees, one centralized tech transfer office.
We don’t teach for it, we don’t govern for it, we don’t service for it, and because it’s technical, we lose it. It moves non-linear. So small mistakes, you lose it all.
The very simple thing is ownership strategies that are technical. It’s an institutional approach. It’s a policy approach. It’s a capacity-building approach. It’s categorically absent from our public policy for the 35 years since the knowledge-based economy turned on, and it’s been absent from the data-driven economy in its last 15 years.
The Chair: Yesterday we heard from witnesses who said we subsidize and see business and projects for their own sake without even an issue that we’re trying to solve. It’s just a product. One of the witnesses said there is no productivity or price requirement — and he meant legislatively as we see in the U.S. — around these projects. There has to be a purpose to them and they’ve got to meet some kind of goals. In answer to Senator Deacon’s question, is there a legislative answer in any way?
Mr. Balsillie: I think yes, there are other downstream things. There is a place for talent and a place for these kinds of procurement things, but if you don’t own it, you have nothing. The issue I have is that it’s a two-legged race and all of our public policy has been on one leg. I don’t want you to think that because I’m focusing on the atrophied leg, that I don’t think the other leg matters. But if you don’t have two legs, you’re hopping, not running. Our innovation policy is a hopping policy, not a running policy.
I agree with all the things they talk about, but I could spend all day explaining to you how sophisticated the U.S. is in the ownership strategies of their ideas well before they get to these downstream-challenge type things. If you don’t own it, you have nothing to ask for money. If you don’t ask for money, you don’t get capital and you don’t drive economic prosperity.
Senator C. Deacon: Could I just hear Mr. Arabzadeh’s perspective, chair? Just as a founder, I think it’s really important.
Hamid Arabzadeh, Chairman and Chief Executive Officer, Ranovus, as an individual: Thank you for the invitation to this forum. I had some opening remarks that I thought I was going to go through before getting into a question and answer.
The Chair: Go ahead.
Mr. Arabzadeh: I think my remarks might bring the discussion into that practical perspective in terms of the perspective of an entrepreneur and how to build companies.
First of all, again, thank you for inviting me to this session. I apologize to be calling you remotely from San Diego. We had a major conference here in semiconductors, and I couldn’t get away to be there in person.
In my opening remarks, I want to explore a topic that is very close to my heart, which is about how to build companies with “world’s first” products. This is a very unique category of companies. Building a company that has the “world’s first” products requires a certain DNA in the company, in the country where it is built and in how it’s operating. Of course, when you build the first one, you then have to scale it. Then comes the question of how to keep these companies in Canada and keep them Canadian.
By way of background, I spent half of my 35-year career in systems and semiconductors in the U.K. and Germany and the other half between the U.S. and Canada. I’ve led teams in a Canadian multinational company abroad, and I was brought in as CEO for a semiconductor start-up in Germany that was bought by a U.S. multinational company. I came back to Canada in 2010 to start Ranovus and invest in two other start-ups in health care and security.
In all of my adventures, I’ve been fortunate to be part of several “world’s first” ventures with different outcomes. One of them was at scale, which was Nortel, and one of them I scaled for eight years in Germany, which was bought by Cisco. Now I’ve been scaling Ranovus for 11 years with very large U.S. semiconductor and data centre customers. By way of background, we move a massive amount of data inside data centres with “world’s first” semiconductor and compound semiconductor technology that is designed and manufactured in Canada for AI and machine learning workloads.
Having worked in various countries with various governments and corporations, I find the German approach to the development of their mid-sized companies to be a perfect yardstick for us to measure our progress in Canada — from a vibrant start-up ecosystem to a credible scale-up economy. Mid-sized companies with around €500 million plus revenue set their targets to be number one in Europe and among the top three worldwide, so our objective in Canada should be to have mid-sized companies that are number one in North America and top three globally.
Now, developing a “world’s first” product in semiconductors, health care, automotive — any industry — has three critical elements. IP intensity — which Mr. Balsillie eloquently explained, and he has a lot of material and background on this topic — is a key element. I don’t want to cover that element because it’s been well addressed. The other two key elements are technology risk and market risk. Typically, these two elements are addressed by the judgment of the management team and the level of financing you get. The reason I’m bringing these two topics up here is that I see there’s a major gap in Canada on how things have transpired in these areas.
The management judgment that is developed over the years of global experience running at-scale companies in Canada today resides in multinational branch offices. This is a very subtle point, but if you think about it, by providing disproportionate support for the multinationals in Canada, we will continue this legacy of having all of our top talent, who can build companies at scale, residing in branch offices in multinationals and creating IP — generating it — and the benefits of it not being fully realized for Canada.
I have some comments for the question and answer section, perhaps, in this area.
The Chair: Thank you. I’ll just carry on, Senator Deacon, unless you have a quick point here.
Senator Marshall: I’d be interested in hearing your views on participation by the business community in things that the government is doing. We’ve got the Canada Growth Fund. I saw your comments on the Canada Innovation Corporation. We have the Canada Infrastructure Bank. Government is out there hoping to leverage private investment, but it never materializes.
What is your perception? Is it that the bureaucracy is controlling all of these programs and the role of the business community is sort of in the background? It seems to me — I’m biased — that the business community should have a bigger role in participating in these items. I’d be interested in hearing both of your views as to whether you provide consultation or participation or — what exactly is the role of the business community in these programs and in legislation? Billions of dollars are invested in these programs, and government keeps doing the same thing over and over with the same non-result. I would be very interested in hearing your views.
Mr. Balsillie: For the recently announced one, it’s consultation theatre. They do consultation, and then they do what they decided to do at the beginning. I wrote them and told them that they completely ignored all my input. Again, I have given it in the comments. There is nothing in this new fund that deals with the upstream ownership. It’s just superclusters 3.0. You get a private sector CEO — which they have in superclusters — and a private sector board. You’re outcomes oriented, and you’re quick to make decisions. That’s all the same thing, but nothing deals with the types of things Hamid is talking about.
We don’t do the ownership game, and you don’t even see the words “freedom to operate” in the multi-page document for this new thing. I have extensively consulted with them and explained it, but it’s just a granting program, which is what we’ve done for decades. If you don’t have a sophisticated ownership strategy, then the benefits will flow to those who play the ownership game. I’m not saying it’s everything, but in its absence, it is everything because it means you cannot capture it. I mean, whatever Hamid is talking about, I assure you his IP management is very tight, and then he does complementary pieces. Again, I say it very carefully. It’s a multi-legged race. I’ll say, too, that I’m not saying the one leg isn’t important, but if you atrophy the other leg, you’re disabled in the game of contesting for economic grants.
Senator Marshall: I would be interested in hearing our other witness, and I would like to know something else. Government is always trying to leverage private investment. Is the impediment to private investment the fact that government is controlling it?
Mr. Arabzadeh: I think there are different strategies adopted by different companies. As Jim said, the foundation of building something that doesn’t exist in the world, that puts Canada in a leadership position to be able to build a sizable company and have multiple of these sizable companies, is really IP. How do you create it and defend it? You’re the first one who arrives at the door that is locked. You spend years and years unlocking this door, and you want to make sure that when you’re on the other side of it, you lock it behind you and make sure no one gets through that first door while you start working on the second door. It’s very sophisticated warfare out there, and you start with that.
That knowledge and training IP is relevant for your freedom to operate, because you could have something and you think that you’re okay to sell this product anywhere in the world, but then someone from China comes up and they have some IP that you didn’t know about. Then, all of a sudden, your complete business is dismantled. It takes the entire blood out of your system. It’s an end game if you don’t have the freedom to operate. What Jim said is absolutely instrumental. It’s critical that, up front, all these programs have that in place and be able to move that forward.
Also, I was going to make a remark on our financial institutions. You were talking about participation of corporations. When we started Ranovus, my first strategic investor was Deutsch Telecom. The company was based here in Canada. The strategic investors here in Canada — banks, for example, and all the large oligopolies we have here — don’t participate in bringing money to the table. Also pension funds — there are a lot of opportunities for them. Their calculus is very different than the calculus of the new economy, which is IP and data, so they find opportunities overseas where they can deploy their funds.
I hope that addresses some of your question there.
The Chair: Thank you. That’s very insightful.
Senator Gignac: Welcome to our witnesses. In fact, as a former Quebec minister responsible for innovation, I had the opportunity to visit the Centre of Innovation at Waterloo. I want to thank you on behalf of Canadians for what you have done.
I will just talk about the pension funds. Yesterday, we spent a lot of time on the pension funds, especially the public Canadian pension fund and their role in the ecosystem. Could you elaborate a little bit more about that? In Quebec, as you know, we have the Caisse de dépôt et placement du Québec, which has two mandates: maximize returns and economic development. This is not what we have for CPPIB, for example. Do you have any thoughts about the participation of pension funds in this?
Mr. Balsillie: To the credit of Quebec, they have a sense of destiny on those issues. The strategic role of the caisse is to take an anchor position in those companies and its permanent capital. Many countries around the world do that. It happens in Germany, which Hamid mentioned, and other places around the world. So yes, there is a place for strategic permanent capital. These are industrial-type strategies that have economic and non-economic effects.
Quebec does understand that you get tremendous spillovers from the headquarters of the companies as opposed to the branch plants. They are a bit too in love with branch plants, though, because they give them 37% tax credit on hiring people. They take the taxes paid by the local companies and give it to foreign companies to hire their people, and those foreign companies don’t pay taxes in Canada and you don’t get the wealth effect. I would say we do one step forward, one step back. Maybe Quebec is two steps forward and one step back. Others are one forward, one back, but the rest of the world is two steps forward and no steps back.
There is a lot to look at that is smart in Quebec, but we need to have a clear, updated approach in everything. The tech game and the innovation game that permeates all aspects of society are punishing for incompleteness. If you get 90% right, you get 10% of the benefit. In the tangible game, if you get 90% right, you get 90% of the benefits. So it’s very punishing on incompleteness.
Mr. Arabzadeh: That 90%/10% is spot on. It’s very elusive — that last 10%.
On the pension funds, we have been the beneficiary of one of the pension funds in Canada — their venture arm that has participated in our company. As a matter of fact, I think we were the only deep-tech company they invested in when they started their journey. What I was more interested in was the banking system. We give this, let’s say, oligopoly-type of status, and they naturally benefit significantly from the wealth creation and things of that nature.
It’s a very interesting piece of information. When we first started, I went to different banks in Canada and talked to some of them I had relationships with. As I said, the IP and data concepts are very new, even to pension funds. There was a series of moves we had to make to educate people and talk about how this economy is developing with hyper scalers, data, AI — all of these elements — coming together. Finally, we got our banking relationship in Silicon Valley. It was rare, because the Silicon Valley people had to find a banking partner in Canada because they didn’t have a banking licence. All of a sudden, I’m thinking, “Why are we doing this? We have people who have banking licences in Canada.” Silicon Valley approves that this is an entity that should be financed. How did we miss this boat?
I’m not just saying this with respect to Ranovus; I’m making a general statement. That’s some insight of where the bets should be placed. I think that element has to be nurtured in these pension funds.
The Chair: We’re going to move on. Everybody has a question, and our time is short. Let’s everybody try and keep this as much on point as we can.
Senator Bellemare: I’m going to pursue a bit on the line that you just raised. Why don’t we have everything that we need to build our wealth with our own money and our own discovery?
First, you talk about an ownership strategy. Would it also be important to have an impact strategy about where we put the public money — an impact strategy on the funds? Is the federal-provincial dimension of our issue a consequence on the area and problem that we are studying?
Mr. Balsillie: You can do an impact assessment, and Canada has lasted the OECD for the last 40 years in the GDP per capita. We’re forecasted for the next 40 years. We keep doing the same thing, and we’ll find with the impact studies that we’re still last place in 5 or 10 years. So yes, you very much want outcomes. I chaired STDC. It was a big effort to create that. We have a fantastic CEO. We worked on governance. It was a troubled organization that became a top organization. There’s a huge place for governance in things like outcomes.
However, I would still go back to the issue: Do we even have an education strategy for the civil service on the digital world? Although the Canada School is doing excellent work, I think it needs to be supercharged. I also know that places like the Bank of Canada have expert research arms, but then when we go and set up these new very consequential data and IP things, do we have expert research capability in the civil service? That’s why I’ve advocated for an economic council. If we don’t have capacity in expertise, if we don’t think in terms of strategic policies and institutions, then do you even know how to do governance and ongoing management?
That being said, I absolutely agree that there is an important place for governance, managing outcomes and all of that. You just need governance. Governance is really everything, I’ve learned, in these public funds.
Senator Loffreda: I offer a warm welcome to Jim and Hamid for being here.
You just mentioned that the OECD report is worrisome. They recently projected that Canada’s economy will be the worst performing over 2020 and 2030 and three decades after that. To reverse that trend, focus is key. Wealth is always created by the entrepreneur. What would you prioritize with respect to policies or incentives for entrepreneurs? How can government support those incentives? Which solutions would you bring to the table quickly to reverse that trend?
Mr. Balsillie: I will go very quickly.
One, put IP responsibility in the granting agencies just like every other country in the world has been doing for decades. Two, enhance IP collective stewardship that is at a pilot level, which every country around the world has been doing for decades. Three, start to think of data as a strategic asset where you actually pool it because it’s an emergent thing. Four, you have to have enhanced capacity building, both in education to civil service and in research. None of these are really about money. They’re all about expertise into where we’re currently flowing the money.
Again, I will say the S&P 500 is 92% intangibles. This is where all the prosperity and security are. You have to have controlling strategies, and you have to have the institutions and the education to support that. It’s absolutely doable. We could be materially turning this ship within a year if there was a commitment of reorientation.
Mr. Arabzadeh: Education is really the key part because there’s no silver bullet. Sometimes when I talk to my government colleagues, they say, “Can you give us just one proposal that can solve it all?” It’s more this dialogue that Jim was referring to and education on both sides. It is very, very fixable very quickly. It’s not something we have to have years of committees around, understanding this role of the multinationals in Canada, understanding their needs and then understanding how we want to trade — what for what? This is really important, as Jim mentioned. That’s a key element.
Most of our IP talent in universities is already locked in with multinationals. When I came back to Canada, I went to various universities, and all of the professors at big universities were all taken by Huawei and other multinationals. They already had multi-year commitments. I think this element of multinationals in Canada is something we need to look at and have a quick dialogue on and ask, “What do they pay back in return apart from the salaries of the labour they have here?”
Senator Smith: We’ve heard a lot about the federal government and what it can do to boost investment in Canada — procurement at the federal level has been mentioned as one solution, and fast-tracking foreign credential recognition visa applications for high-skilled workers is another one. Are there things the federal government shouldn’t be doing? I’m thinking of regulatory burden in Canada, which has been an issue in Canada for decades, it seems. Are there areas where the government is impeding business investment by being overly involved? In other words, what should they get out of?
Mr. Balsillie: One thing they should get out of it is this embrace of foreign tech, because it has negative spillovers. The wealth effects aren’t here. Microsoft is public, an Irish corporation, so you don’t get the tax base and the wealth effects. The management is centralized abroad. The IP is not here. The data is not here. We have negative unemployment in this. So they have to revisit. Their attention has to be to the Hamids, not whatever semi company that’s big and attractive because they’re big and attractive. That creates negative spillovers. Even if they say we’re doing a $1 billion of cap X, $950 million of that is specialized foreign machinery. You get a few jobs, you give huge subsidies, you don’t get the tax or wealth effects, and someone like Hamid and his peers create enormous spillovers. The reason we’re at the bottom of the OECD is because we focused on the foreign tech, thinking it’s like the branch plant automotive or pulp and paper mill rather than the Hamids of our economy. That’s what I would say you’ve got to stop. I don’t call it a regulatory burden. I call it a strategic orientation that is outdated for a changed world.
Mr. Arabzadeh: To complement that, it’s not about a phobia. This is nothing at all to do with multinationals. Multinationals are great. They serve a certain purpose and they take advantage of various places they are at, and that’s fine. It’s just trying to understand the economics of it and trying to put policy in place that shows them that we understand what they’re doing and that they have to pay something on the other side of the balance. It could be investment in Canada or other things they have to do.
Senator Ringuette: First of all, I certainly agree with you that we as Canadians, from the workers to the politicians and the bureaucracy, are risk-averse. We’re a society of risk-averse.
For three decades, we are hearing that research money going commercial, going to market, is not happening in Canada, or to a very small extent. You come to this idea of ownership, an ownership strategy. What you’re saying to us is that whatever amount of dollars the federal government, on behalf of Canadians, is investing in research, that we should have shares. Canadians should have shares in that research and thus have the stimulus to bring those shares to market and create dividends for Canadians down the road to further invest. Is that your strategy of ownership?
Mr. Balsillie: There’s more than one way to do it. First of all, I don’t think Canadians are risk-averse. They’re properly adaptive. If a dollar is going to turn into 10 cents, which was my last sentence in my testimony, you’re asking them to do something irrational. They’re smart enough not to be irrational. The issue is it’s a failure of public policy to make it an opportunity to turn a dollar into $10. Those are the kinds of things Hamid was talking about. If you don’t have an ownership strategy, you’re asking somebody to turn a dollar into 10 cents. I assure you, if you show somebody a reasonable plan to turn a dollar into $10, the money is infinite. I would argue the public policy has failed to create the conditions for the commercialization on this, and that’s why you don’t do it.
Now, for how you manage the ownership strategy, certainly you need a pool for freedom to operate, as other nations have done, because that needs to be a collective benefit. Now, do you take an ownership stake in that or an ongoing royalty? Certainly Fraunhofer does that. Do you take an investment stake, like Quebec Inc. has done? I think those are sophisticated and thoughtful things to look at, but you have to begin with the principle that owning matters.
It’s a remarkable thing that we’re having this conversation. I commend your committee, but it’s remarkable that we’re having this in 2023, not 1993. This is why we’ve been at the bottom for 40 years.
Mr. Arabzadeh: If you look at Canada in general, we have a very good start-up nation section in our economy, which is fuelled by these government supports and various entities. But really moving to scale, what happens in between there is the foreign multinationals recognize the value of the IP that is being generated with the ground forces we’ve put in place and then they purchase the company and its IP. That’s the end of that tree. It never grows to be a real tree.
I think that’s the critical inflection point when you’re trying to scale up the companies. We have a lot of conversations around that topic. That part of it is really the missing element, because let’s assume we have the IP, we’ve owned it at the start-up level, the start-ups have done a good job, and now trying to continue and have the full benefit of this IP seen over a scale-up, owned by Canadians so the wealth is generated here and the taxes are paid here, and providing government incentives for these Canadian companies to stay Canadian.
This would also attract Canadian executives to come back to Canada because they will see that the DNA is now injected into policy, into the government, as well as the ecosystem. Nobody would want to come here and make 10 cents on a dollar. We won’t attract the talent that we need, which I mentioned in my opening remarks. That is the key element to build these mid-sized companies. It’s executive management talent. You have to attract these people to come out of multinationals if they see the environment is ready for them to build a Canadian company and scale it. They don’t see that right now. They see the multinational companies getting funding, and they can continue working with universities and propagate this legacy.
Senator Massicotte: Thank you to both of you for being with us today.
The whole issue is ownership of data and basically considering it highly. Having said that, if you look at us as a country, we’ve had these discussions with deputy ministers where they acknowledge the importance of data. What do they do? Here we have strong laws on privacy. We’re a small population, relatively speaking, yet you have countries like China which have an immense population. They have low privacy laws so they can cap a lot of information against what we would consider being acceptable. How do Americans and Canadians compete with that when you have so much data in China — immensely so — and they have a strong strategic advantage which is pro loss? What do you do with that?
Mr. Balsillie: That’s an excellent question. Thank you for asking it. In a sense, there are also medical applications that put a camera in you, and your body is a universe of data. Not all data needs a billion people. Sometimes you just need one.
There’s no trade-off between privacy and innovation. They, in fact, reinforce one another, particularly for small businesses. Foreign tech monopolists try to propagate that there’s a trade-off between privacy and innovation, but they actually reinforce one another.
I’m chairing a panel for one of our provinces on creating a data authority. This is one of the things that I encouraged on this new Canadian innovation agency. You don’t see the words “data economy” in the whole paper, when it’s the most powerful force. How can you do innovation if you don’t think of data? You have to think of institutions. As an example, Uber made the price of a taxi medallion almost worthless. Quite frankly, foreign ag tech companies can do the same to our farms. Halliburton says the future of oil is data, that the future of energy is data.
We need institutions on data. I think we should be looking at collectives. I’m working actively now to finish a report in a month at the subnational level. I’ve tried many times with them to say this has to be done at a national level. I would encourage that to be part of what you’re doing. We should use that to protect our cities and not give it away to Google, like Sidewalk Labs, which was great folly. We can do it for our ag, for our fisheries and for mining. You can do it sectorally. Hamid is in the data centre business. He can talk day and night about this. Nobody that I have met in Canada knows more about AI and data centres than Hamid. We could grow our own data centres and run our own data sets. It’s a massive strategic asset for prosperity and security. If we don’t do that, then we lose the economic control of our sectors and we don’t have sovereignty. If somebody chooses to turn the switch, it’s like not having your own police force or military.
Yes, I’ve been very active in calling for data strategies, including in this new agency, with people like Hamid. I’ve turned much more attention to the province and the subnational because of the inattention at the federal level, for reasons I can’t understand.
The Chair: Give us your definition of a data authority.
Mr. Balsillie: It’s like a co-op. Canada was built through co-ops. We had equipment co-ops, we had credit unions, we had trust companies, we had butteries and we had grain. Canada was built by community co-ops. We know the playbook in the tangible economy. Just apply that for the assets of today, which are IP and data. We know the co-op. We did that to build this nation out of wild lands and to resist the north-south pull. We need that kind of nation building now. Nobody knows this better than Hamid when it comes to data sets.
Mr. Arabzadeh: We talk a lot about diversity as a foundational piece of our society in Canada. Data is the same thing. The China data that you mentioned is a uniform data. Uniform data has low value in it; diverse data has significant value in it. I don’t know if this analogy makes sense. Look at the value we have, and let’s say the value of our health care data. I’m also involved with the Ontario government on health data IP and looking at all these different places. We have all this data that aren’t connected. They don’t talk to each other and they can’t be shared. If you put them together, there’s significant innovation that can come by looking at patterns using AI and machine learning on that data. It is true that China has all those other things you mentioned, but we have diversity on our side. It’s just that our systems don’t work together, which is an unfortunate outcome.
Senator Marwah: Thank you to both our witnesses.
Mr. Balsillie, I couldn’t agree with you more that the foundation of wealth creation in the new economy is the control and management of IP. Frankly speaking, I’ve never quite understood why our policymakers don’t deal with it and why we do a terrible job at it.
Leaving that issue aside, can I talk a bit about scaling up companies? Mr. Arabzadeh, you mentioned it a bit. How many times have we heard about companies that are great? We can provide hundreds of millions of capital, but when it comes to large pools of capital, we lose them to the U.S. and eventually lose control. You mentioned a couple of things. Senator Gignac mentioned pension plans and getting them a mandate to invest. We talked about mandating banks to invest, but that’s not really their role. Do we create IP as collateral that they can lend against in a more formal way? What are the other solutions to provide the pools of capital that allow these companies to have better access to pools of capital in Canada?
Mr. Balsillie: I’m sure you’ve heard this old expression that the U.S. talks Jeffersonian but rules Hamiltonian. I say Canada talks Hamiltonian but rules Jeffersonian. We need more Hamiltonian in our companies. In my experience, key companies are national treasures around the world, and the state stays with it. You’ve heard procurement, investment, IP and data. You’ve heard Hamid talking, and you’ve heard about talent. Ultimately, it’s about what side your bread is buttered on. Our bread is buttered on people like him, on Ranovus becoming big, and not on TSMC — and I’m not picking on them — putting another $100 billion on their market cap. That makes Taiwan a lot richer. I’m not trying to pick on anyone, but they want to make their countries rich so they can pay for hospitals, social programs and education. Their job is not to make Canada prosperous. I think what you’re saying is once you realize what side your bread is buttered on, everything kicks into gear. You control the IP and data, and it has to be oriented to domestic businesses. We have not had that as a public policy.
Mr. Arabzadeh: One important thing that we’ve been looking at more recently is how to leverage the IP that the companies have. Instead of being bought, could you take some part of that IP and create a joint venture with a multinational, but a Canadian owned and operated joint venture? China does that very well. I think they’re exceptional at it. When you go there and try to sell anything, the first question they ask is, “Here’s a building for you. Here’s $40 million. Could you have an office here?” They know you’re going to hire local talent and, once you’re gone, that local talent could reproduce what you were doing. In Canada, we don’t have that thinking in terms of what to ask from multinationals when they come here. What do we need from them? That’s an important element for us to consider.
This joint venture type of idea is a nice way to take part of the seeds you’ve created in one company and plant them and put some water from the multinationals on it, but give them small ownership of that and try to grow that as a joint venture, as a Canadian-owned company. Sure, TSMC may have shares in it, or GlobalFoundries or other people, but they are not driving the decisions for that. These models are the ones that I and some of my colleagues are looking into and making proposals of that nature to the government to say, “How would this look? Instead of having multinationals come and take our talent and then the revenue goes there and everything goes back, how about we get them to invest into a Canadian entity but have very small ownership?” This will grow our $500 million companies quite rapidly.
The Chair: This would be the core of what you would call an FDI strategy, a foreign direct investment strategy?
Mr. Arabzadeh: Exactly.
Mr. Balsillie: Yes. Locate the spillovers and understand the spillovers and design appropriate pluses and minuses.
Senator Yussuff: Thank you, witnesses, for being here.
Both of you are saying very practical things. I’m a very simple person. If it’s that practical, why we can’t get it done? IP is the future of any economy. This is not rocket science. We get it. The world is changing, and it’s changing at a rapid rate. We have incredible talent in this country in developing IP and marketing it and then eventually selling it off to a multinational. We’re seeing it happen every single day. You’re saying if Canada truly wants to generate wealth in the future of this country, we should own that. I don’t understand, for the life of me, based on what you’ve told this committee so far, why we can’t seem to accomplish that. I’m going to ask you again to repeat, because it’s not just for my edification but for people who are watching. If we’re going to recommend as a Senate committee how we can get there, it’s critical for the country to appreciate what you’re saying. I appreciate what you’re saying, and it doesn’t seem to me that difficult. We can accomplish this because it’s a simple shift in public policy to get there.
Mr. Balsillie: There are two simple but foundational shifts.
One, there is a gulf of knowledge in how it works. They don’t understand the spillovers. They used a model from the 1960s when the world changed.
Two, we have to be honest about the degree of foreign capture of our economic policy in this country, where foreign interests are equated with Canada’s interests. They’re not. I was very public, on the front page of The Globe and Mail, five years ago — you can search it — on the concern with foreign researchers with Huawei in Canada. I’m well aware in my activities in Washington that they’re not happy with the footsies we play. We have 17 research partnerships, and it’s lawless. It’s on the front page of the newspaper.
The rest of the world has done it. Yes, I marvel. I’ve seen the provinces move, but I think there’s something in the capture, and there’s something in the refusal to update thinking. It’s something in the water table. I will say that there is Canadian complacency in the policy community, not in the business community. The complacency is in the policy community.
Senator Yussuff: Is it the bureaucracy that’s lacking in understanding the changes happening in the economy and in not being prepared to respond to it?
Mr. Balsillie: You have a good committee. I would encourage you to invite some witnesses and explain to them what’s going on here. Let them answer. It’s not like they haven’t had front page op-eds and front-page engagement. What made them think Google’s Sidewalk Labs was a good idea when the rest of the world thought it was a global scandal of folly?
Mr. Arabzadeh: I’m afraid I will be repeating some of the things I said before, so I apologize for that. In trying to find this relationship, again, I’m not saying that we should shy away from the multinational foreign direct investments in Canada or their branch plants and all these things. We are measuring opportunities in Canada based on employment numbers, and that’s the only measure we have. “How many more employees do you have?” That’s the headline news, right? That metric, by itself, is very important, but are these people shovelling the ground? Are they working as labour for other companies? Or do they have that spillover effect that Jim was speaking about? It’s a metric discussion. We have to change our metric. If you want to measure the height of a person in kilograms, of course you will get the wrong answer. Nobody will understand what you’re saying.
The Chair: We have heard that yesterday and again today — the education. We’re talking at two very different levels here in terms of even understanding the language to communicate on this.
Senator C. Deacon: Again, thank you very much to our witnesses. This is such an important session.
I want to get a sense of the timeline, because you alluded to this, Mr. Balsillie. If we start to make some of these changes, I see the potential for a turnaround that could accelerate quite rapidly. Could both of you speak to that for a few minutes, based on the suggestions you have been making to us?
Mr. Balsillie: Sure. I think the Canada School of Public Service is doing a great job, trying to educate digitally. They’ve created online tools. It should be supercharged. Have them come and explain what they’re doing. We need an expert research function. It could be bringing together ad hoc experts. We could revive the old Economic Council, the Hamiltonian that we took away when the rest of the world doubled Hamiltonian. Resuscitate it. It’s, what, $5 million a year? It could be started now. The Patent Collective has been a pilot, and it’s an incredible success. It cost $30 million. Turn it on. Get going on data. Put in place these metrics that Hamid is talking about as a lens for our granting agencies and our programs. These are all chiropractic orientation; they’re not about money. I don’t see why these couldn’t all be activated this year, and with nothing other than modest administrative burden.
Senator C. Deacon: With returns, it would start to accelerate quite rapidly, one would expect.
Mr. Balsillie: If Canada had maintained the pace of growth that it was at 30 years ago in terms of productivity, when it started to diverge, had we just sustained the pace we had been at with the U.S., that would be $200 billion of pure revenue per year to Canada. When you lose a per cent per year over 20 or 30 years, the amount of money is really big money.
Mr. Arabzadeh: I sometimes find it’s easier to accept comments about your country from people from other countries. You can speak to the Germans. Maybe bring witnesses from Fraunhofer HHI or other institutions that are partners and have them testify here. The things that I’m going over are very well-known facts around the world. People are operating with that. They have projects that they’ve built on this fact. We are still in that phase when we’re trying to understand and have a uniform view of the fact. We’re not moving into the next stage of saying, “Given that this is the fact, what do we build and how do we support the companies?” We need to get over this first phase quickly and maybe consult with other people. Maybe their words will bring some other dimensions to this discussion, because we’re talking about our experiences working globally. Other CEOs, other Canadian-owned companies, have similar types of understanding. It just seems that when we talk about it, it has more weight if someone comes from another country and talks about it.
Senator Bellemare: I want to make the point that you stressed the idea that we should have an economic council in Canada and have more social dialogue, as other countries do. Could you help us to do that and convince the government to —
The Chair: I think he said he was trying.
Mr. Balsillie: I’ve written op-eds on it. I’ve put it in my submissions. I’ve shown that we used to do it. I’m happy to help.
Senator Gignac: Mr. Balsillie, the point is that we have great universities funded by public money. You gave the example of Google with the University of Toronto. Are we changing the rules of the game such that a lot of IP is owned by universities, which they cannot sell to foreigners, so they have to force joint ventures with some Canadian participation? Is this an area that we need to think about?
Mr. Balsillie: Yes. Hamid gave us some good insights on that. We have to play the owning game. I chaired a panel on IP for Ontario. We have between 30 and 40 tech transfer offices, and we’re a small fraction of the size of the front offer who has one. We’re two orders of magnitude of fragmentation. Now, Ontario has created an agency that’s trying to bring that together. You have to generate it and then license it. But most of it, we don’t even generate in the first place, and the bit we do, it goes abroad, and we don’t get rent on it, so we’re at the bottom of the productivity. Yes, there are ways to do it. It’s happening. There’s a federal pilot. There are activities sub-nationally, but it’s a little bit over there.
Mr. Arabzadeh: We have fantastic research organizations, and we have professors who are working in that area. The conversion from that research into the next step sometimes happens with professors becoming first-time CEOs. The experience level at that interface, in the sittings I’ve had with many of my colleagues, is missing in a significant way in Canada. People think that once they have created something that doesn’t exist, then they can actually commercialize it and get money and move it forward, but there is a lot of tough warfare out there for IP, and you may not know that you’ve been played as you’re in it. That’s really an element of conversion which I think is also missing in our system.
The Chair: Thank you both very much. I think you’ve really laid out the issues for us. If you have any other thoughts that you want to add later, please send it on to the committee.
We’ll carry on with our discussion on business investment. Everybody is all revved up, so we’re ready to continue with John Ruffolo, Co-Founder and Managing Partner at Maverix Private Equity, and Mathew Micheli, Chief Executive Officer and Co-Founder of Viral Nation. We’ll begin with a brief opening statement from Mr. Ruffolo. Please go ahead.
John Ruffolo, Co-Founder, Managing Partner, Maverix Private Equity, as an individual: Thank you, everyone, for providing myself and Mr. Micheli with the time to testify. I have just a few brief opening remarks, and then I’m happy to take questions.
Just as the introduction had stated, for a little bit of context, I’m the founder of Maverix Private Equity. It’s a new fund that raised all of its money — $500 million — from Canadian sources. I was previously the founder of OMERS Ventures and, lastly, the co-founder of the Council of Canadian Innovators with Jim Balsillie. A lot of my comments resonate the same as Jim’s, you will find.
In terms of the ambition for this latest fund and, frankly, the ambition that I’ve had since I’ve spent the last 30-plus years in the innovation sector, it is really to support the growth and prosperity of Canada by supporting the growth and prosperity of Canadian-based scale-ups. This is where my bias is. The Maverix fund is designed to specifically support these scale-ups in Canada.
How do we really do this? Maverix and I are focused on providing the necessary significant risk capital to those Canadian-based scale-ups. As an investor, my bias is to strongly prefer to leave the selection of the potential winners and losers to the private sector, but we do rely on the public sector and, particularly, public policy to help lay the groundwork.
The analogy that I like to use from a public policy perspective is a farmer’s field. We think that the role of public policy is to enable the ground to grow the right crops or vegetables, and the role of government is to remove the weeds or the impediments that might inhibit the growth, or it might provide the infrastructure to enable the water to come and irrigate the lands, but it’s really at that building block level. It is then up to the farmer — in this case, the entrepreneur — who decides which crop is to be planted and when, and they are ultimately responsible for the success of that crop. For the ecosystem around it — and let’s just use capital sources, like ourselves — view us as the sun and the rain, and our job is to just help it grow that much faster. If you use that principle, I think this is where we get our public policy aligned.
What does this really mean? There are three core tenets of public policy that we look for both in my role at CCI, the Council of Canadian Innovators, but also, in particular, in my role as an investor. As the previous testimony had eloquently stated, the world has moved to an IP and data-based value chain to create economic growth and value. Unfortunately, Canada really seems stuck in the past. We seem stuck in the same post-industrial economy with physical, economic value chains and multiplier effects, and it’s written right through all of our new policies. It’s very frustrating to not see or recognize that the world has moved on into different value drivers. As it relates to IP and data, both ownership and protection are absolutely critical in this new economy.
The second thing is that Canada will only thrive and survive if we use our resources to grow and scale our own Canadian-headquartered companies. Employment without value creation does not lead to long-term prosperity. Basically, stop giving money and resources away, particularly to foreign actors and especially to bad actors.
The last thing I would say is security, privacy and the securing of sensitive industries is vital to our long-term interests, and COVID has proven that that’s the case. It exposed massive weaknesses and sensitivities that we take for granted in Canada and left them exposed.
I heard some of the senators ask this question, so this is kind of a bonus idea. As we’re crafting this public policy, an area of frustration is when we see this policy crafted in a vacuum without relying on the folks who will be the ones executing the public policy — ultimately, the farmers — and if the farmers are not fundamentally part of the process of determining what it is that they actually need, we end up just simply handing over billions of dollars of money to initiatives that really don’t help the farmer at the end of the day. I would say that is one of the biggest things that I would love to see on a go-forward basis.
The Chair: Okay. We’ll pursue that in questions.
Mathew Micheli, Chief Executive Officer and Co-Founder, Viral Nation Inc., as an individual: It is a pleasure to meet you all, and thank you for having me. I am a 31-year-old entrepreneur from Toronto, and a lot of this really resonates with me because, as a young person starting my first company at 16 years old, I had to work three jobs in order to sustain what I wanted to do. My partner and I, in 2014, started this company called Viral Nation, and Viral Nation is a Canadian success story that often gets overlooked because we haven’t really been public with what we’ve been able to do. In just eight years, we’ve grown from two — and I’m going to use John’s analogy — farmers/entrepreneurs, and literally our first office was in a barn on a farm — to today, where we have over 400 employees. We’ll do $250 million in revenue globally, and almost 85% of our staff is based in Canada.
I’ve gone through these pain points first-hand because a number of years ago, we really looked to how we can really accelerate ourselves as an organization. Now, keep in mind we’ve been EBITDA positive since day one. We’ve been contributing valuable tax dollars to the Canadian economy and didn’t even know where we could possibly get a grant. Our entire business, from zero to almost $100 million in revenue, was completely organic, and we didn’t raise any capital whatsoever in order to do that. Raising capital as a Canadian-based company is incredibly difficult because the landscape in Canada doesn’t support the growth that some of these other organizations that naturally go down to the United States do. Luckily, we were able to have the best of both worlds and have a leading Canadian investor, with a leading U.S. investor, for us to help our growth plans. I’ve seen this first-hand, where we want to be a market leader and we want to be the next Shopify, but Canada doesn’t make it very easy to do that, and since day one, we haven’t had one dollar come in the organization that has helped us with growth.
Those are just points that I’ve experienced first-hand and continue to experience. It’s with the work of the CCI and newly founded programs from the government where this is the first time we’re able to access these necessary resources in order to help facilitate that growth. Those are some of the important points to me.
The Chair: That’s an interesting perspective, which is you build the company and then go and get the funds from government. What we’re doing with this study here, to give you the context, when we do our report, it is first and foremost direction and advice to government, but we do want to situate it, so you will get questions throughout here about what policy prescriptives you have, what accounts for the inability of people in Ottawa to hear you and then have something reflect that back. That’s the context of this.
Senator C. Deacon: Thank you very much, Mr. Ruffolo and Mr. Micheli, for being with us and for your initial insights.
I’d love you just to focus in on what isn’t being done or what is being done wrong very specifically. Until we understand what we need to change, it’s hard to then layer on the opportunities for change. We’ve certainly heard a lot of great ideas, and you were probably listening. Don’t fear repeating things, because that’s helpful for brains like mine to get things embedded, but let’s focus in on the things that aren’t helping or aren’t working or taking us down the wrong road, and be very explicit, if you could. Can we start with you, Mr. Ruffolo?
Mr. Ruffolo: Let me just try to divide it into three broad categories: access to capital, access to talent, and then access to customers and markets. Those are the three macro policy areas.
When you look at the access to capital agenda, I’d say start off with the premise that the public sector shouldn’t be picking winners and losers, yet we keep on trying. We’ve had a number of very large public programs with billions of dollars in them trying to manufacture what would otherwise be more efficiently created through private actors. We also have a lot of capital that’s now coming out on the public side that’s actually competing with private dollars, which is, frankly, ridiculous, in my view, and it’s causing lots of market confusion. It’s ending up overpaying for assets, or probably assets that are being invested in are probably not the right assets for private market players. So use the capital that you have very judiciously. What problem are you actually trying to solve? It’s very confusing, as an industry player watching it from the sidelines.
On the talent agenda, I’m going to skip over that, because I actually think public policy in Canada has been doing a pretty good job on the access to talent, bringing them in, immigration policies, et cetera.
I’m going to jump to the hardest area, and it’s access to customers and markets. This is where Canada, frankly, plays like Boy Scouts and Girl Scouts as opposed to understanding the game that’s being played by the U.S., China, et cetera, and using public policy standard setting and protecting sensitive industries. It’s not about putting up tariff barriers, but it is a problem when the rest of the world is protecting their own and the Canadian companies are coming in and getting slaughtered because there really is no protection around them. I’m not looking for protectionist policies, but rules on data protection and IP protection and things like that will go a long way.
Before I turn it over to Mr. Micheli, there is one program that has been started which I co-chaired, the Global Hypergrowth Project. It’s a fascinating program. It’s focused in on Canadian scale-ups, having the government open its resources to proudly support Canadian-based companies without the fear that they’re going to offend some big company outside of Canada, which is ridiculous, and we need to proudly do that. The United States has no issues with announcing their big incentives that they’ve recently announced under Biden that proudly support American enterprises. Frankly, I agree with it. It’s U.S. taxpayer money, and it’s going to very specific purposes. I think Canada needs to be proudly supporting it in the same way.
Mr. Micheli: One point I’d love to dovetail off John is access to customers and markets. It’s interesting, because Viral Nation, being a largely Canadian-based organization and having largely Canadian-based staff, has 98% of our revenue derived from corporations outside of Canada. We’ve seen large multinationals where their budgets in Canada are a fraction, a microfraction, of what they are in other regions. We’ve seen that first-hand. Even large multinationals that are Canadian companies — for instance, you have Tim Hortons, Burger King — as an organization will spend heavily in other regions instead of their own region, right here on their home soil. We’ve seen that first-hand.
The Global Hypergrowth Program was something that I think was a godsend for organizations like ours, but something that we truly specialize in is marketing. Marketing of government programs, marketing of what is available to entrepreneurs and marketing of what us as Canadians have access to with regards to our government is nonexistent. I consider myself a savvy technologist, and we have to go to consultants in order to understand the government grant landscape. Something as simple as presentation and understanding the way technology can be laid out to make it much more user-friendly, where we would know what is available to us as entrepreneurs and business owners, would go a long way and has been largely overlooked.
Senator Marwah: Thank you to our witnesses for being here.
I had a question on the capital available for scaling up our start-ups. How do we create the large pools of capital that we need? I’m not talking about the millions or hundreds of millions. I’m talking about the billions that you need to eventually get scale. I’ve heard you say, Mr. Micheli, that you do not believe we should have more private-public partnerships of any kind because they provide a distortion in the markets. How do we create these large pools of capital so we don’t lose our companies to south of the border?
Mr. Micheli: The incentives for organizations are one thing, but I ultimately think, as an entrepreneur, that it starts at the top. Ultimately, it’s individuals running these organizations, and speaking as an individual, there is incredible disincentive to generate large amounts of money as a person in Canada. We’ve seen that time and again where there are multiple levels of tax. You can talk to any entrepreneur in the world. No one is afraid of tax dollars, and everybody believes in paying their fair share, but you’ve seen it in the pandemic — flocks and flocks of entrepreneurs. I think the largest exodus of Canadians happened during the pandemic because there are other regions that are much more favourable to entrepreneurs.
I think if you started at the top and looked at how we can incentivize entrepreneurs, business owners and people who have generated hundreds of millions or billions of dollars of wealth to keep their wealth in Canada, that would go a very long way. I’ve seen it first-hand with a number of people in technology circles and in circles with large growth and scaled up companies where they’ve moved south of the border to other regions because it was much more favourable to them as business owners. I think that it would be incredibly impactful to keep that wealth in Canada.
Mr. Ruffolo: In fact, funny enough, I just had a meeting this morning with the CEO of perhaps, Canada’s leading generative AI company, one which I’m personally very interested in to make a significant investment. If any of you are following the whole generative AI space, which, by the way, is an overnight success of 30 years, there are two different components to it. There is an infrastructure level component, and then there is an application layer on top.
We are a significant capital pool that is designed to fund the application layer. The private sector can do that, but you have to raise a certain minimum amount of money.
When it comes to the infrastructure side, it is financing almost basic infrastructure. Private capital pools have a lot of difficulty financing that. In Canada, we have a couple of infrastructure-level generative AI companies that are getting lots of attention right now. If I was still in my pension fund days, I would do what I did when I built OMERS Ventures. I had companies that I put a long-term bet on, like Xanadu, the leading quantum company in Canada. OMERS Ventures was the first cheque in there, and I knew it was going to be a 10- to 15-year period, but it could be transformational. Because it was a long-term capital pool, it is the best place to do that.
The problem is there is a misalignment in a lot of these pension funds in terms of long-term holding of assets and short-term compensatory behaviour. I don’t know what the magic is in there, but we’ve given these great pension funds a strong tax advantage. They are leading capital pools in the world, and I do think that there is a strategic advantage in encouraging them to invest in these long-term assets.
I can tell you right now, in terms of our two backers, BCI and CAAT in the province of Ontario, we wanted them as our two co-anchors so that if we do have some long-term assets, we have asked them, “Would you back that and be patient?” Their answer is yes. We look for it. We determine whether it’s worthy of a long-term investment, but it’s a great partnership.
I think I heard you earlier. I think pension funds do play a very good role in trying to help mitigate some of these issues.
The Chair: We’re going to try to keep the questions and answers a little bit shorter so that we can get around the table to all the members of the committee.
Senator Marshall: You both said a couple of really interesting things. Mr. Ruffolo, you said that government should stop giving money away. I really like that. They’ve given away billions, and every time we see a new budget, there’s a new fund with billions of dollars in it. Mr. Micheli, you said you didn’t even know where to get a grant. I really like that because there is a lot of money going out the door which I feel doesn’t meet what we’re looking for.
You also said, Mr. Ruffolo, that governments should remove the impediments. What are the impediments? Is it taxation? Is it tariffs? Give us some idea as to what those impediments are.
Mr. Ruffolo: You spoke about a couple of them. It’s anything getting in the way.
Let me give you a basic example, and one they did very well: the foreign visas to get these great talents coming in, but making the process a ridiculous 9 months or 12 months. Through CCI, we worked with them very closely to reduce that. It still hasn’t become frictionless, but it certainly has decreased quite dramatically. That is one example of the private sector not being able to fix that problem — period. So find the problems where the private sector has no role to play, and there’s a great example. If it’s in standard setting, make that process very easy. If it’s IP protection — I think it was talked about earlier — do the education and provide the support so that even small companies can get through the friction of filing for patent protection. It’s those sorts of weeds that I was referring to.
Senator Marshall: Mr. Micheli, you were mentioning that you couldn’t even find out the types of programs that government provides to support entrepreneurs and start-ups. Could you elaborate on that?
One of you also mentioned tariffs. I’d be interested in any comments on that. It’s the first time I’ve heard that one.
Mr. Micheli: If anyone in the room or anyone around has ever been on one of our government websites, I think we could all agree to the same effect. It’s not exactly the easiest to navigate.
Senator Marshall: It’s a challenge.
Mr. Micheli: Yes. I think ultimately that’s the biggest pain that impedes us. There could be fantastic programs out there. There could be access to grants. There could be a lot of really interesting things that would obviously increase an entrepreneur’s or business owner’s desire to keep everything in Canada, but the problem is that it’s not marketed. It’s not visible. The government doesn’t do any marketing associated to what these programs are. Literally, it got to the point that I said I had to have and be part of outside programs and engage external consultants to be able to truly navigate the government landscape of what’s available to us already.
Technology has rapidly changed over the years, and that’s an area that, with presentation alone, could do wonders for the government’s ability to showcase what’s out there, and an area that, obviously, we’re very familiar with, because our bread and butter is around the use of social media. Naturally, virtually the entire ecosystem of people is engaged on social on a daily basis, and the government hasn’t been able to use social to its advantage to really tell Canadians about what’s available to them as Canadians. That’s something we obviously could help with, but it’s really difficult to get to the right people to institute this type of change and institute this type of behaviour.
Senator Loffreda: Thank you, John and Mathew, for being here this afternoon.
I’d like to continue on the key issue of capital. John, you mention in one of your articles that you find perplexing the number of entrepreneurs you meet that jump to the need to seek venture capital or private equity capital in priority to most other sources of capital despite it being, by far, the most expensive form of capital. Is it because of the degree of difficulty in obtaining financing from other sources? How can that be corrected?
How do you relate that dilemma to the fact that once our start-ups do scale up, we have a very difficult time in keeping them in Canada? Most entrepreneurs, I think globally, prefer selling their companies rather than growing their companies. Mathew, you’ve said many of our entrepreneurs move south of the border because it’s more favourable to business owners. Which policies can reverse that, and what role does tax play in that?
Mr. Ruffolo: The comment I was trying to make is that a lot of these businesses that perhaps should operate maybe not with a focus on hyper-growth but actually growing profitably may not require capital in their early formation. Viral Nation, which Mat and his partner Joe founded when they were 24 years old, didn’t require a penny of capital for its first seven years, and they got to $100 million of revenue profitably. Why can they do that? When they made the decision and said, “We want to go forward on a global basis,” there are plenty of capital sources that wanted to chase Viral Nation. As soon as we discovered it, we found this diamond in the rough. From Joe’s and Mat’s perspective, the issue to them was they were surprised that there was actually someone in Canada that was willing to invest that much capital at this stage of formation.
The problem would have been that if Viral Nation was funded 100% by U.S. sources, perhaps the temptation for Viral Nation to slowly move their headquarters down to the U.S., or to eventually be pressured to sell, increased. The reason why we’re also there is to alleviate that stress point. Basically, the first question we asked Joe and Mat was, “Do you want to stay in Canada and build your company in Canada?” If the answer was no, I’m not sure we would have made an investment. But the answer was a resounding yes. There is capital here, but I do wish that there were larger pools and that Joe and Mat don’t get forced into only having to negotiate with U.S. or other foreign-based sources.
Mr. Micheli: To dovetail off that, senator, two points, one tying back to John: We as entrepreneurs obviously want access to any sort of capital through that journey. We’re farmers/entrepreneurs by trade. I had no idea what raising money was. Joe’s and my brain operate on a simple principle, which is, revenue minus expenses should be positive. That’s something they don’t teach anymore. We see it now with that level of capital. We look at acquisitions on a daily basis. Nine out of ten are, “I’m going to raise $5 million before I generate a dollar in revenue. I’m going to raise $100 million before I get to $1 million in revenue.” That’s much more prevalent in the U.S. than in Canada.
I can’t even stress how difficult it was for us to get a line of credit to help fund our receivables when we were at $20 million in revenue. Thankfully, we didn’t have to get to that point, but they wanted personal guarantees in order to do this, and we’re talking a $1 million line of credit. It’s ingrained in the banking system. It’s ingrained everywhere. It was impossible for us to do it.
On the topic of taxation and what makes people want to go to the U.S., as entrepreneurs, your goal is obviously to generate wealth, opportunity and a meaningful legacy. I’m going to use two states as an example, Florida and Texas, which have seen the biggest influx of entrepreneurs. On a blended basis, if someone earns $1 million a year in income in one of those jurisdictions, their blended tax rate might be 33% max. On $500,000 Canadian, our blended tax rate is almost 51%. Right there, on a yearly basis, those are generational amounts of wealth being put into taxation. That is one of the impediments. In general, we have to do a better job as a country of blending the fact that entrepreneurs pay both corporate tax and personal tax at both levels, and it’s excessive when you think 26 and then ultimately 53. No matter which way you look at it, you’re losing half of everything you do in taxation.
There’s a disincentive there, but ultimately, Canada being the country I was born in and the country I will continue to live in for the rest of my life, I want to think of not just for me, even though I’m 31, but I want to think of when my son maybe one day wants to start a business or whatnot and what we can do for that generation and thinking of making our country a much better place to want to do business and want to be Facebook, Google, these large organizations, and stay in Canada and be Canadian and not face the temptation to be an American-based organization.
Senator Gignac: My question will be to Mr. Ruffolo, who I’ve had the privilege of meeting more than a decade ago as a minister to understand what would be the winning conditions to stimulate innovation, entrepreneurship and wealth creation in Quebec.
John, as a founder of OMERS Ventures, you described very well in your exchange with Senator Marwah that you need more than 10 or 15 years’ time when you invest and start a company than, really, the short-term, medium-term of a portfolio manager or even a CEO. Do you believe that with CPPIB, we have to recommend, as a Senate committee, to revisit the mandate and be inspired from Quebec's Caisse de dépôt? Quebec’s Caisse de dépôt’s performance is recognized worldwide. More disturbing for me is the fact that a percentage of assets of Caisse de dépôt is more important in Canada than CPPIB in Canada. At the end of the day, are we heading to that? The time horizon to cash in on venture capital is more of a mandate.
Mr. Ruffolo: That’s a detailed response. Let me try to overly simplify it.
I think when suggestions are being made to pension funds about looking to invest in Canada, they automatically turned to, “Oh, there’s the political pressure.” I call nonsense on that. You do need to keep the political aspirations separate from the economic mandate of the pension funds, absolutely, but being in the pension fund, you are given a multitude of investment choices. Being in the pension fund, I was surprised by the implicit bias that assets outside of Canada are worth more than Canadian assets. It’s fascinating. I think that bias remains.
One of the things about investing, especially on private assets, is that there is an advantage of proximity to the investment and to the management team, because that’s who you’re ultimately betting on. When I started OMERS Ventures, I did start off by saying that I am only investing in Canada will worry about the rest of the world later. I did that eight years later. The advantage was not because I was waving the Canadian flag but because who is better positioned to know the great opportunities? It’s better to work with government, academia, et cetera, in our country to try to make a company more successful. Once I cross a border, my ability to influence the success of a company gets muted.
What I would like to see — and you talked about CPPIB — is understanding their level of commitment of investing in Canada. By the way, when we invest in Canada — this is the part I never understood — there’s a circular benefit in that more money and more success being paid back as a dividend from gains of these investments is more employment, more wealthy folks and more money going back into CPPIB, et cetera. It’s the same thing with the pension funds. If we support Canadian growth and employment, they end up becoming bigger and bigger capital pools. I love the international allocation of capital, but sometimes Canada is just left behind for no reason at all.
The Chair: I want to pick up on something from when you were talking about a “Canada first” strategy, Mr. Ruffolo. Everybody is engaged in that conversation now: What do we do about Joe Biden’s positioning? Is it the end of globalization? What does it mean for free trade agreements? Can you put that in context? There are a lot of upsides to “Canada first,” but we are, population-wise, a smaller country and a trading nation. Context and concerns.
Mr. Ruffolo: Yes. When I say “Canada first,” there are two things at play. I’m doing this with our own portfolio. The world will become a much more expensive and scarier place, no question. In fact, I think that refocusing our external markets on the Americas — not just North America but also South America — and reverting back to the Monroe Doctrine will end up being something we’ll have to refocus our attention to, no question. However, even though our portfolio companies typically have no more than 10% of their local market in Canada, that doesn’t mean that we don’t do the right things to set them up from an export perspective.
Let me give you a very good example. In my previous role, we had a great portfolio company that was involved in the education space. They were a leading provider in Canada of providing an LMS, a learning management system. There was a variety of players in the world — about five — and one of them is in Canada. The U.S. leading player was able to secure, in a variety of Midwestern states, the exclusive right that only a U.S.-based company could be the supplier. I thought that was kind of ridiculous, but that’s what they did.
What I was trying to do with the federal government was enable our Canadian company to be the standard setting for Canada so that when you get into bilateral trade negotiations and everyone is trying to exchange their various favourite toys with countries, you could help this company say, “Hey, here is the Canadian standard. We would like our Canadian standard in Colombia, Peru,” what have you, and exchange it back. The Americans do this exceptionally well — I’ve been on the other end of this — but we somehow feel afraid to do that. So it’s embracing trade but also saying, “Hey, we want to help our folks first.”
Where I saw this unbelievable expertise was during the Trans-Pacific Partnership. When you start reading the various provisions, you could pick off all of the U.S. companies that were being protected. They were never named. Canada was absolutely silent that whole time. That’s kind of what I’m referring to.
Senator Bellemare: Mr. Ruffolo, you said in your opening remarks that the public policy in Canada is in a vacuum. You said that in the context that we have to change our approach and way of thinking to have the stakeholder within public policy. How would you do that? Can you comment a bit more to give us some flesh on that bone?
Mr. Ruffolo: Sure. Previously, Jim Balsillie had talked about it in his testimony. When you look at our industrial and taxation policies, it’s still predicated on post-World War II economic multiplier effects. It’s based on physical equipment and employment. Let me give you one small example.
Senator Bellemare: But the question is how to put the actors within the public policy. I understand the old ways, but how do you change that?
Mr. Ruffolo: I see. Great question. It is through education. I have been invited now on two occasions. There’s training required for all the assistant deputy ministers. They do this — I don’t know if it’s on a monthly or quarterly basis — but I’ve slowly been invited to educate them to start to shift them to understanding the movement of industrial policy. I think it’s all throughout the bureaucracy. They’re trying really hard, but when you grew up in government and learned a certain type of policy, it’s hard for them to, all of a sudden, make the switch. There is a big re-education required from the bureaucratic perspective, starting from the deputy ministers down. There are lots of folks in Canada who would be willing to provide that. Again, I have already on two occasions.
The Chair: That is if people didn’t change jobs every 18 months and then you have to start again with the education process.
Mr. Ruffolo: You have to keep on going. It has improved, but it’s just moving at a snail’s pace.
Senator C. Deacon: Thank you very much to both of you.
I think about you, Mr. Ruffolo, and keeping Shopify in Canada with a key investment at a key moment and your support of Mr. Micheli and Viral Nation — 85% of the talent in Canada and 98% of the revenue outside of Canada. That’s what we need a lot more of in this country if we are going to be competitive and if our social programs are going to be paid for in the future without taxing it at a 98% rate.
Looking back on what we heard from the previous witnesses and yourselves, I have a feeling that if we start to make some of these strategic changes and have recommendations in our report that are strong, clear and precise enough that they start to get implemented, we can start to see a fair amount of progress quite quickly, because it really is a changing of course, and it will accelerate through time. Could you give us some sense of your view of how quickly Canada could start to turn the corner? This isn’t depressing news we’re hearing. If we don’t act on it, it’s very depressing. But give us the optimistic side of how quickly we could see results.
Mr. Ruffolo: I think we’re in an inflection moment. The last 12 years, no matter what you did, all boats rose because of the excess amount of cheap capital largely driven by the U.S. I’ve been waiting for this moment. For any of you who have been following some of the statements that I’ve been making, I knew this was coming. I have not been so excited since the days of investing in Shopify. The opportunity is to find the Viral Nations. While everyone else is licking their wounds, this is the time that we could make the identification of our Canadian potential winners who can be globally relevant and supporting them while everyone else is trying to cut costs and doesn’t know what to do because their valuations are through the moon. I can’t think of a better time for Canada to make its move, but we don’t have a lot of time to do that.
Senator C. Deacon: What I’m hearing is an echoing of what we heard yesterday, that Canada has to stop being lambs and start being lions. We have to stop investing in branch plants and start investing in head offices.
The Chair: We have a minute or two left, and I’d like to hear from both of you on this inflection point idea that you have raised, that there’s somehow a window here, but then politics and reality intervene. We’re wrestling with the China question on a very big front now, and that’s going to impact security questions and the kinds of businesses. I was at a meeting last night where we were discussing doing business with China. We actually have to wrestle with that question as very much part of this if we’re going to talk about a foreign direct investment strategy. It has to have China in the mix. Have you a few thoughts on that?
Mr. Ruffolo: Again, I would say that those two questions are not necessarily opposite questions. I think they’re actually complementary. Let me give you an example.
Whether it’s China or whatever country, ignoring the security and privacy issue, which is unique to a few actors in the world, we saw this back when Nortel was suffering and we had a player, Huawei at the time — again, ignoring the security privacy issues — that came and dumped cheap product. What happened was, whether it was government or big customers in Canada, they went to the lowest denominator all the time. People do that because they’re afraid that’s the one metric that they’re viewed on without looking at anything else.
When we’re looking at the China question on certain sensitive industries, what’s frustrating is that there are some Canadian players in those very industries that are competing against the Chinese players but can’t reduce their costs because there is no government support for that. When there’s government procurement in our country that supports the lowest-cost bidder, we lose out. Especially in those sensitive industries, we may have to deal with the China question, but at the same time that means our Canadian-based competitors get embraced as the standard, and all of a sudden you start to see those Canadian ones shoot up. Watch closely over the next nine months the activities of Maverix. I’m watching that as well, and I am prepared to invest in those Canadian companies that perhaps were being unfairly treated in Canada while their biggest competitors were folks that perhaps were questioning them. I think both things can happen at the exact same time.
The Chair: Mathew I’ll go to you on that one, because we’ve heard for two days about the question of procurement, which is one way for the government to put its money where its mouth is, quite literally. Would that affect how you are seen in your intent to stay and operate at least based in Canada?
Mr. Micheli: Absolutely. These programs that we’ve become part of are something that is really helping us to form the foundation of what we’re going to double and triple down. Ultimately, we took in capital to invest in international corporations, including Canadian companies, but we really wanted to do as much for Canada as humanly possible. We made the strategic initiative to hire in Canada and grow our entire operation in Canada while serving a global landscape.
We do business with Chinese-based organizations, and we’ve seen over the last couple of years that there’s been a heavy crackdown. For instance, our receivables are insured through EDC, and EDC basically said any Chinese-based organization is almost off any type of receivable coverage. That part has impeded our ability to insure our receivables.
But really, we want to be able to scale in Canada. We have products that are incredibly complementary to the Canadian government, as I said. We’re marketers by trade. We could put a campaign together that could hit every entrepreneur in Canada and tell them what’s available to them, and that’s something we can do over a weekend. It’s access to the right people and the right organizations within government, to even talk to them and tell them, “Hey, we’re here to help.” That’s what we want to do. We want to help the government to help us.
The Chair: Thank you both very much, John Ruffolo, Co-Founder, Managing Partner, Maverix, and we will be watching over the next eight or nine months to see where you’re putting your money, too, and Mathew Micheli, Chief Executive Officer and Co-Founder, Viral Nation.
That concludes our look today at the question of business investment in Canada and the general government environment. We’ll be back at this issue in another week.
(The committee adjourned.)