Suzie Dingwall Williams is a Techvibes Guest Contributor and this post was published yesterday on Venture Law Lines.
According to Techcrunch, a whopping $69 billion was spent on tech mergers and acquisitions in 2009. For me, the most interesting part of this data is the almost complete absence of Canadian acquirers.
If there is one common element in recent press about successful start-up exits, it’s this: the acquirer’s residence is almost always anywhere but Canada. Large Canadian companies don’t share the same appetite for Canada’s start-ups as their foreign counterparts. Bumptop’s patents? You can visit them at Google. 6N Silicon‘s silicon purification technology? Send your royalty payments to California. For all the tax dollars we allocate to fostering new discoveries and patents, it would seem that we rarely retain any ability to reap long-term rewards. This doesn’t make a lot of sense to me: when I pay for a facial, for example, I don’t expect to see the blackheads disappear from my neighbour’s face. Which leads me to ask, is Canada the worst consumer of its own innovation?
A long-standing complaint of many in the venture capital sector is that the corporate culture at Canada’s leading tech companies is too conservative to successfully implement a growth strategy based on M&A. Their engineering departments remain dominated by developers who swear by the “not invented here” school of thinking. The result? Often, it’s a deal focussed on acquiring patent rights, together with some transitional services from the inventors. Not surprisingly, this kind of deal: (a) is lower-priced, and (b) tends to drive deal flow away from the acquirer into the arms of a competitor with a more entrepreneurial corporate culture – usually, someone outside of Canada.
This mindset is also often reflected in corporate structure: because some Canadian tech stars do not view M&A as a cornerstone of their growth strategy, they have no real infrastructure to get deals done, or to properly integrate acquired staff into their businesses. In an environment where Google, Cisco and other competitors have entire departments focussed on mergers and acquisitions, this kind of ad hoc approach is a competitive disadvantage. And it shows: a US VC (and client) recently told me that he strongly discourages any of his portfolio companies from speaking about acquisitions with one Canadian tech giant, because it is a well-known “price bottom-feeder” who cannot complete a deal.
Conservatism is hardly a flaw, but is it an approach that Canada’s tech leaders can afford in the current climate, where tech M&A is at an all-time high? As any VC knows, future growth and profit is all about the quality of investment opportunities, or deal flow, that one can generate. I worry that poor access to great acquisition targets will be the long term price to be paid for the current approach to M&A that many Canadian tech companies take.
Beyond that, I worry about the return on my investment as a taxpayer. When we sell a start-up that turns out to have the next billion dollar discovery to a US acquiror, we lose the tax we could have collected from that business. Tax that could have paid for funding for more discoveries.
A common question in the world of Canadian innovation is: when? When will we see the next Nortel? With all the money being deployed (and tax credits awarded) for research and innovation over the last 12 years, why aren’t there more emerging tech/biotech/clean tech giants? If we do not focus on improving the more mature parts of the value chain, then Canada’s innovation economy may well become an export industry. This would be wrong. Innovation is not like oil; there isn’t an infinite supply which can be extracted and shipped offshore for profit. How can we incent more Canadian acquisitions of Canadian tech? And beyond this, how do we create tech acquisition leaders?