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What's wrong with Canada's tech sector?

Technology entrepreneurs are locked behind bars of asset ignorance

Everybody has a story or two about an exciting new technology that was going to change the world; but was never heard from again.

What happens to these great ideas? It’s all very puzzling. But, it does raise a serious question: what’s wrong with Canada’s tech sector? Is there a structural flaw?

The short answer is yes. Our committed technology entrepreneurs are locked in a financial prison of our own making; call it Technology Jail. We should do ourselves a favour, unlock the prison doors, and let them flourish.

Governments in Canada are clearly committed to supporting the knowledge economy. They spend taxpayer dollars on foundational R&D, support technology research parks and fund technology ‘incubators’ to help young companies develop into successful businesses.

Regrettably, it’s not enough. Most technology ventures fail, often taking our best innovation with them to the grave.

A technology success story in Canada is not much better; it generally involves ‘selling-out’ to an American company and moving the whole operation to Silicon Valley. There is precious little return for Canada in this bargain.

The reality is, we need successful tech companies; they’re a critical part of the economic development strategy for Canada today.

Consider that most of Canada’s tech potential lies in small-to medium-sized enterprises (SME). SMEs deliver 60 per cent of the nation’s economic output and generate 80 per cent of all employment; importantly, SMEs are Canada’s employment future, responsible for 85 per cent of all new jobs.

However, according to one report, SMEs suffer from some predictable problems including poor management, lack of economies of scale and inadequate capitalization. The truth is, most of Canada’s technology-rich SME’s are trapped in Technology Jail.

Technology jail is a lethal combination of asset ignorance, institutional neglect, and lack of balance sheet strength that produces strategic weaknesses in knowledge-rich SMEs.

As a rule, business gains access to capital and other resources by leveraging their assets, which storehouse the accumulating value in a business. This value is capitalized on the balance sheet of the company, and grows with the business. Critically, assets are the accounting key that unlocks the bank vault or investors wallets.

The root source of Canada’s tech problem lies in the fact that a tech company’s assets are invisible. And this weakness creates a host of other problems.

Everyone knows the economy today is not the economy of our grandfathers. In the post-industrial world, businesses are underpinned by intangibles, software or patentable innovations; many are re-inventing our workplaces and our lives with novel business processes, systems and (increasingly today) network applications that deliver real value.

Regrettably these ‘softer’ assets (which today make up 80 per cent of our economy) don’t get much attention from management, certainly not the disciplined treatment that is showered on traditional assets.

The problem is compounded by the practice of accounting. Accountants today prepare financial statements for tax purposes, and (almost) never capitalize non-traditional assets on company balance sheets.

According to accounting guru Joseph Batty, the problem is systemic and nearly fatal to start-up technology companies. According to Batty, if you were to review the financial statements of almost any emerging technology company today, there will be literally no assets listed on the balance sheet and (by not capitalizing allowable expenses) years of accumulated accounting losses.

Furthermore, according to established valuation techniques, which measure assets minus liabilities, the companies have little (or negative) net worth.

The problem doesn’t end there. Banks secure loan principal on assets, which forms the collateral for lending purposes. Regrettably, lacking formal assets, bankers are unable to provide traditional bank financing to Canada’s technology sector.

That leaves tech entrepreneurs with few options; it’s really angel investors or venture capital. But at this point Joe’s balance sheet dilemma strikes hard: how do you ‘fit’ the large scale investments needed to properly commercialize these businesses into a company with NO legitimate assets and probably a negative net worth? The answer is, you don’t, or if you do, that capital (if available at all) comes at a very high cost.

Unlocking the prison doors of Technology Jail means thinking differently and then doing things differently. It starts with education. Tech entrepreneurs need knowledge and support in order to identify their intangible assets and capitalize them on their company balance sheets.

As for the rest of us, we need to support this initiative by changing our standard operating procedures, repurposing professional services such as accounting, banking and then getting lawyers and securities regulators on board.

There is no escape from Technology Jail without commitment; the prize for doing so, however, is a tech sector firing on all cylinders and a near miraculous rebirth of the Canadian economy.

Robert McGarvey is chief strategist for Troy Media Digital Solutions Ltd., an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave

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