Tuesday, September 30, 2008

Alberta: Can Government Funding Actually Kill High Tech?

Even with the current influx of oil and gas money, many Alberta companies complain that local investor interest in high tech businesses is non-existant. Inovia Capital's office in Edmonton is one bright development. Last June, there appeared to be a second shot in the arm announced by the Alberta Government: a three-year strategic plan to deploy $178 million of government funds into Alberta's high tech sector (sorry; make that "knowledge-based sector"; let's not scare away the cattlemen). $100 million of this will be used by a new Crown corporation, the Alberta Enterprise Corporation. Sounds promising, doesn't it?

That is, until you read the call for applications for the Chair and Independent Board members to serve on the corporation. What becomes clear is that the AEC is no lifeline to the high tech community; instead, it's a nicely-sized government subsidy for venture capital funds who will agree to invest in Alberta.

Here's what the notice says (available on Ray & Berndtson's Canadian website): "$100 million has been allocated to the fund by the Province of Alberta to co-invest in a number of early stage capital funds. Through its activities, matching private investment will be attracted, and a number of new venture funds will launch operations in Alberta, directed by experienced fund managers. "

A government led fund of funds? Those of us who have endured this in Ontario can tell you what that means (p.s. it's not good). Anyone trying to raise a fund in or related to Alberta will have a very tough time convincing any other LP to participate until this whole AEC scheme is worked out. Ask any Ontario VC how much they have enjoyed having their fundraising efforts brought to a complete standstill by the Ontario government's fund of funds, which struggled for over a year to select a manager and to start operations.

It's also a colossal mistake to assume that a share of a $100 million is appealing enough to attract top tier venture fund managers to the region. Which will further delay deployment of capital to new funds. Which in turn means there's even less (not more) near term cash floating around for Alberta companies. I won't itemize the other woes this approach creates, but those of you nearby know what I'm talking about. Those of you in Alberta who want more details, buy me a shot of scotch and we'll talk.

I'm all for job creation, but job creation for fund managers and VCs is not going to boost the growth of the Alberta high tech community. It's important to note that the Alberta high tech community is hardly in its infancy. Companies abound, many of them led by second and third time successful entrepreneurs. I can start in Edmonton with Semanti, run by the ex-Intuit team and keep going south until I hit the US border. What it is is cash-starved and as emaciated as the Olsen twins.

I'm going to say what every Albertan as been waiting for a Torontonian to say: don't follow our example on this one.

Monday, September 22, 2008

Hiring Outside Developers: Doing it Right

Increasingly, start-ups are outsourcing the basic coding work for a product to others – either to one or two consultants who might join the business if the project advances, or to a larger business. I know many of you like to do these yourself,using some precedent from your last start-up, but if you could humour me and consider some of the subtleties below, it would really help things down the line. Whether you've outsourced to a guy working from his guest bedroom or a larger code shop, make sure you've considered the following basic protections:

1. Chain of Title: make sure the assignment of deliverables language is broad and encompasses all aspects of the work(the specifications, the documentation as well as the code) and all categories of intellectual property rights.

2. Tax Credits: Ask your developer to assign all rights to SR&ED and similar tax credits so that there is no dispute as to who can claim them.

3. Source Code Drops: To avoid the captive supplier syndrome, make sure you are receiving regular source code drops during the development phase – don’t wait until the last deliverable has arrived and there’s a dispute about acceptance and payment. Source code drops every two weeks during the development phase are desirable on core projects. You should make sure that the drops include linking, compiling and building instructions and any embedded programmer notes, if applicable.

More later.

Friday, September 19, 2008

The Canadian Patent Landscape:

Many high tech companies forego filing patents in Canada, opting instead to begin with an application in the US. One reason? The US is their primary customer market, so enforceability there is of paramount interest. Whether one begins with a first filing in the US, or a subsequent filing, Canadian activity in the US Patent and Trademark Office should be an interesting indicator of Canadian innovation. Or so you would think.

Bill Heinze reports on the recent statistics published by the World Intellectual Property Organization's "World Patent Report: A Statistical Review (2008). They don't paint a pretty picture about invention creation in Canada:

1. Canadian activity at the US PTO is relatively light: "Of the approximately 6.1 million patents were in force in 2006, the largest number of patents in force were in the United States of America (1.8 million in 2006). However, the majority of patents in force were owned by applicants from Japan.Applicants from Japan, the United States of America, the Republic of Korea and Germany received 73% of total patent grants worldwide. Between 2000 and 2006, the number of patents granted to applicants from China and the Republic of Korea grew by 26.5% and 23.2% a year, respectively (average annual growth rate)."

2. When measured against other economic indicators of growth, Canadian patent filings place us relatively low on the world ladder: Norway, Iceland and Ireland had more patent filings per resident GDP than Canada.

3. Actual local patent activity is alarmingly light: by 2006, the number of patent applications awaiting examination at the Canadian Patent office (205,776), was relatively small (compared to the USPTO and the JPO) and has been stable over time.Only approximately 12% of those Canadian patent office filings in 2006 were made by Canadians; the rest were registrations of patents issued in other countries by non-residents.) By contrast, the number of patent applications awaiting examination at the USPTO was 1,051,502.

Patents are only one form of intellectual property creation, but none of these figures seem to support our positioning of Canada as a country of innovators. Food for thought.