Monday, April 06, 2009
An existing shortage of tech R&D spending will fuel future opportunities for today's small startups. What's needed is risk takers
GORDON PITTS: Globe and Mail Update
If Kitchener-Waterloo, Ont., is Canada's high-tech hothouse, Tim Jackson is one of the head gardeners. He helped build one of the region's success stories, PixStream, which was sold to U.S. giant Cisco Systems for $550-million in 2000. He has since turned his hand to venture capital, mentoring and directorships. Mr. Jackson, 41, is a partner at Tech Capital Partners, a venture capital firm with interests in about 15 companies - and he continues to battle the Canadian orthodoxy that encourages saving face, instead of taking risks.
One of Canada's so-called deficiencies is the very area where you work - venture capital. What's wrong?
I think venture capital is sleeping - the best way to describe it. There is a shortage of venture capital today, but we think it will ultimately come back and people will reinvest in this space. It is not the best time to be raising money, but it is one of best times to be starting a company.
At the Top: Tim Jackson In conversation with Gordon Pitts
What do you mean?
Think about the large technology companies, which are cutting costs and trying to improve the bottom line. One thing they are doing is cutting research and development. So two or three years from now, when their customers are saying they need the next-generation product, how are these companies going to get it? They are going to buy some of the entrepreneurial activities that are starting now.
The reality is that most early-stage companies don't require venture capital - they just need to build organically. And downturns are great times for people to start their own businesses.
But we need to celebrate that spirit of entrepreneurship, and understand that failure is okay. You can't innovate without failure. That doesn't mean you reward incompetence, but to get from here to there the path winds, it goes up and down, but that's okay.
Think about all the four-year olds who go into Timbits hockey, put on the skates and have this goal to be an NHL player. We know almost all of them are never going to be NHL players but we say, 'That's okay, you did your best and that was the goal.'
We need the same sort of notion around entrepreneurship: Go start a company, it may not work but you are going to learn a lot from what didn't work, so the next time you do it you are going to be successful.
So if you are laid off from your job and have a business idea, what do you do?
You beg, borrow, steal and you get it going - and you find a customer.
I know that sounds overly simplistic and there are certain companies where you need a venture-backed business because it will take three or four years to develop the technology. But traditionally, businesses have been started by designing something or creating a service or a product.
Then you went and sold it, and you used the revenue from the first customer to get your second customer and improve the product slightly. The revenue from the second customer was used to improve it again and you get the third customer.
We saw 300 companies last year [and funded two] and the vast majority should never have been looking for venture capital. Our advice is just go and start the company. Go and sell this. If you have something people will buy, they will partner with you and you can build a business.
But don't you need bankers to fund you through the startup period? They're not lending as much.
In Canada, we have a great community of angels [individuals who fund startups]. One of the good things about wealth that has been generated in the tech community is many of those people in turn become investors.
And the notion of needing $4-million, $5-million or $10-million of venture capital, I would argue, is the exception. More likely, you are needing a quarter of a million dollars, and getting some angels to provide financial support, and help you with advice, is probably the way to go.
Where do I find an angel?
You work your community. You've got to get through the networking opportunities, such as chambers of commerce and organizations like Communitech in the Waterloo region, Ottawa Centre for Research and Innovation (OCRI) or MaRS in Toronto. The reality is the entrepreneur has to be out and working at the business events in his or her community.
Another thing that happens is Canadian companies get to a certain size and they get sold, often to the U.S., like PixStream. Doesn't that bother you?
The reality is most technology companies are exporters. It is not unusual that you will get a foreign entity that will want to buy it. The key is that wealth generated stays with Canadians and those Canadians reinvest it in new businesses, whether it is as angel investors or venture capitalists. The key is not who buys the company, but where the wealth is generated and where does it gets distributed.
Your views on risk sound un-Canadian.
They are un-Canadian. The Canadian notion is 'I'm going to give you a million dollars, so don't make a mistake.' But if we [at Tech Capital] have someone who comes to us with a business plan and says, 'I need a million dollars to get from point A to B,' we will give them $1.5-million or $2-million because we know the only way they are going to do it properly is to make mistakes along the way.
It is the good management teams who recognize the mistakes early, re-correct and get back on the right path. I have no idea what Research In Motion's business plan looked like 25 years ago. But one thing I can guarantee is it didn't say that in 2009, we will have a device that looks like the BlackBerry looks like today.
But Mike Lazaridis and his team figured out how to get from 25 years ago to being the major technology company in Canada. Along the way, I'm sure they took detours but they always got back to the right path. You can't saddle someone with not enough resources to allow them to be creative and try new things.
What made you so risk-tolerant?
Jay Hennick, the CEO of First Service Corp., hired me almost right out of accounting school. I had been working at a major accounting firm for just a year and realized I didn't want to do public accounting.
Then he let me make mistakes - and I did it in situations where he knew I wouldn't screw things up too much. I realized afterward that's where I learned - going into a situation not knowing exactly how to go about it, being given a little bit of rope. Looking back, I realized that early on I was given very little rope and then I was given more and more rope.
It's just human nature - you learn from your mistakes. The only way you can encourage innovation is say 'Go out and try it.' And you can't punish them if things don't work out exactly.
Will the recession usher in an era of conservatism when young people won't be given any rope?
I am concerned, because it is the wrong approach. We Canadians already don't have strong risk-tolerance. There will be a period over the next couple of years when people won't be risk-takers. But I would argue this is exactly the time when we should be taking risks - in business, arts and culture or not-for-profits. This is the time to say: 'Go try new things and see if they work.'
TITLE: Partner, Tech Capital Partners, Waterloo, Ont.
BORN: York, England, Nov. 19, 1967
EDUCATION: BA in accounting, University of Waterloo. Chartered Accountant.
Out of school, worked a year for Coopers & Lybrand, chartered accountants.
Became chief financial officer at PixStream, a Waterloo company that distributed and managed digital video across broadband networks.
2000: negotiated the sale of the company to Cisco Systems.
2001: joined with partner Andrew Abouchar to create Tech Capital.