21st Century Wealth and Value Creation about Innovation – not Extraction

Lightning Round . . . Who is the world’s richest person? What is the world’s most valuable company?

The answers are Microsoft founder Bill Gates, and Apple. What do these two things have in common? They are both technology stories that started from zero less than 40 years ago. The $744 Billion dollar collective wealth of the world’s richest person ($81 Billion) and the world’s most valuable company ($663 Billion) have been created in a single generation, our generation, in less than the past four decades. The majority of this wealth, in fact, has been created within the past twenty years – the past eight years in Apple’s case (since the launch of the world’s most popular computer- the iPhone).

TECH ENERGY VALUE CREATION Screen Shot 2015-01-25 at 4.52.06 PMOil, Gold, Real-Estate, Pharmaceuticals . . . nothing even comes close to the wealth creation generated by technology innovation – and here’s the kicker, it’s just beginning, and it’s accelerating.

Valuations placed on tech startups world-wide stretched to record heights in 2014 and accelerated at an exceptional pace, even when compared with the late 1990s dot-com boom.  Wall Street Journal Dec 29, 2014

Why? How? Fundamentally because technology innovation disrupts pre-existing industries by improving products and services, expanding markets, and dramatically reducing costs of production and customer acquisition. Think Facebook and Google in advertising, Netflix in media content, Skype in telecom and Uber in transportation as a few examples.

How is Canada faring in the new economy?  Not Well, according to the data and Canadian CEOs.

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“The reality is that we’ve become overly reliant on the resource industry,” said David MacDonald, chief executive officer of Softchoice Corp., a Toronto-based technology services firm. “I think we’ve gone backward in the last 20 years in diversifying the economy.

The Poll below is from March 2014 when Oil was over $100 Barrel. What would it look like now?

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What’s the Solution? How do Canadians Participate in this value and wealth creation?

Sophisticated, high-net worth Canadian investors already participate in wealth creation of the 21st century simply by owning US technology stocks. But this does not address any of the important questions Canadians need to answer in order to begin to increasingly diversify the Canadian economy beyond extraction industries.

Extensive research and writing exists about the “Silicon Valley” phenomenon. There is general consensus about the core ingredients required to initiate and sustain successful growth of the kind of healthy technology sector exemplified by Silicon Valley and San Francisco. These ingredients typically include:

  • basic infrastructure requirements including high-speed broadband access
  • access to an educated labour pool, with an emphasis on engineering, math, science and coding
  • successful experience, in the form of success stories and mentor entrepreneurs that “have done this before”
  • access to capital at all the critical stages of growth; startup, validation, scale and competition

Canada has been making a kind of fragmented, varied progress on all four of these fronts. Public policy has been hit and miss as there appears to be neither the knowledge, experience, capability or understanding of how to consistently, effectively support these ingredients from a public policy perspective. The technology industry itself needs to take responsibility and increasingly educate, support and collaborate with the public sector to effect successful public initiatives.

On the critical final ingredient, access to capital, it appears that Canadian capital markets have not yet evolved or matured to the same extent as the specialized robust US capital markets that fuel the world’s most successful economy. US capital markets have developed highly specialized, well defined capital segments to support and grow worthy new ideas from inception through to blockbuster IPO. These dynamic tracks for capital formation, so well defined in America, are merely formative, very early stage, in the less mature, smaller Canadian capital markets.

There is the cultural question as well; Canadians are generally considered to be more risk averse than Americans. Technology investments rank fairly high up the scale on the risk / reward ratio curve. The question of whether a majority of Canadians will demonstrate the risk tolerance necessary to participate in technology innovation investments remains to be seen.

What are we doing to address these issues?

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There are some bright lights in terms of policy wins. BC’s Technology Investment Tax Credit has been a shining example creating over $9 billion in new technology investments over the past nine years, returning close to $2 in tax revenues for every $1 in credits. Vancouver is now home to Canada’s most vibrant tech startup community including multiple billion dollar startups like Hootsuite, Trulioo and Slack.

We’re also beginning to see innovation in the capital markets themselves as regulators progress to support crowdfunding initiatives. Two recent examples include SeedUps Canada and ECN Capital. ECN is featured here in recent Techvibes article: New Crowdfinancing Platform for Investors.Screen Shot 2015-01-25 at 7.28.21 PM

 

These kind of capital market innovations may hold some of the keys to helping accelerate diversification of the Canadian economy and enabling more Canadians meaningful participation in wealth and value creation. These platforms do this by enabling emerging technology companies to raise capital from Canadian investors without going through the often arduous, expensive, complex task of obtaining the support of a Canadian investment dealer. Perhaps most importantly, it provides Canadian investors opportunities to invest directly in emerging Canadian technology companies. Risky? Certainly. But the sooner Canadians become more literate and comfortable with investing in technology, the sooner we can all benefit by participating in the real value and wealth creation opportunities of the 21st century.

 

 

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