Innovation station

Waterloo's deeply embedded culture of entrepreneurship could show the rest of Canada how it’s done.

If there is a ground zero for entrepreneurship in Canada, it may well be Larry Smith’s office. It might just be the academic sanctum of an adjunct associate professor of economics at the University of Waterloo, but its modesty belies Smith’s real influence. For 25 years, Smith has often been the first adviser and confidant to scores of students intent on launching a new business. In the safe and secretive confines of his small office, he grills would-be entrepreneurs — some of them just barely old enough to drink and vote — on all the basics: market research, strategic competitive analysis, attaining legal advice. “They’re not theoretical; this isn’t kicking-tires conversation,” Smith says.

Smith is in high demand, and for good reason. After all, a young Mike Lazaridis once came to Smith for advice. And who knows, perhaps one of Smith’s current crop of proteges will follow in Lazaridis’s footsteps and start up the next Research In Motion Ltd. (TSX: RIM), one of the few Canadian leaders in any field. Lord knows, the country could use a few more of them. Many of the fresh-faced entrepreneurs’ ventures will fail, but getting them thinking about commercializing their ideas is at least the start of what must happen more often if Canada is to thrive in the future.

Canada cannot harvest natural resources forever, and greater economic growth and a sustainable competitive advantage needs to be attained through the innovative commercialization of new ideas and technologies. But Canada seems able to only haltingly climb higher on the value chain. Pick a statistic: our poor performance on the World Economic Forum’s National Innovative Capacity Index, especially how Canadian companies find competitive advantage through cost-cutting rather than innovation; or our corporate spending on research and development as a percentage of GDP — just 1.03%, and falling, versus the United States at 1.88%; or the fact that Canadian universities are behind their U.S. counterparts when it comes to the number of invention disclosures, patent applications, patents granted, licenses executed, licensing income and startups, according to 2004 stats from the Milken Institute, an economic think-tank in California. Whatever the metric, Canada appears to trail the U.S. and many European nations in commercializing innovations.

The source of this innovation gap has received no shortage of examination, nor has the well of proposed solutions run dry. Academics have researched the dynamics of Canadian industrial clusters. Governments have convened national summits and struck advisory groups, such as the Expert Panel on Commercialization, and stacked them with high-powered corporate and academic elite. Think-tanks like the Conference Board of Canada, C. D. Howe Institute and the University of Toronto’s Institute for Competitiveness and Prosperity have published strongly worded reports sounding the alarm that Canada is falling behind. As for solutions, the federal government formulates various plans that generally involve how and to whom it should dole out money before it studies the problem again. The most recent is laid out in a report called Mobilizing Science and Technology to Canada’s Advantage. And in June, then–industry minister Maxime Bernier announced the Science, Technology and Innovation Council.

What does seem clear is that Canada has an ample supply of academic researchers, and funds them well — in 2004, only Sweden provided more funding as a percentage of GDP. The problem is that not much of that research makes its way into business. According to the Organisation for Economic Co-operation and Development (OECD), industry finances just 8.4% of higher education in this country, eighth best in the world. And Canada has only two of the Top 25 schools — University of British Columbia (8th) and McGill (23rd) — in North America when it comes to technology transfer and commercialization, reports the Milken Institute. But fixating on any statistical measure when analyzing something as abstract as innovation obscures the larger picture. Generating new ideas and, ultimately, commercializing them doesn’t run a fixed path through a university’s technology transfer office. And it takes more than government funding or tax incentives to build regional clusters of high-tech businesses that drive the knowledge economy.

Nowhere is this more true than in the Waterloo region, which includes neighbouring cities Kitchener, Cambridge and Guelph. Home to less than 500,000 people, but famous as the corporate headquarters of RIM, it can legitimately be called Silicon Valley North. Ottawa first laid claim to the title during the late 1990s, and it continues to foster many promising high-tech startups, as does Vancouver, Montreal and Toronto. But Waterloo, more than any other region in Canada, has defined itself as one that will rely on innovation and entrepreneurialism to underpin its future prosperity. The region’s relatively small economic impact, however, makes it disingenuous to compare it to northern California’s famed Silicon Valley — fertile ground that spawned the likes of Intel, Hewlett-Packard, Google and other tech giants. But the disproportionate concentration on how to commercialize new technology by Waterloo’s corporate, academic and community leaders gives it a unique expertise. If Canada is to develop a self-sustaining capacity through innovation, little Waterloo may show the way.

The term “innovation” is often closely associated with new technology. But Waterloo’s defining moment may have been an innovation of a different sort — education. Nearly 52 years ago, a group of local businessmen met at Waterloo College — an arts college and seminary that would later become Wilfrid Laurier University — to spearhead a drive to expand its curriculum into the technical fields of science, math and engineering. The Waterloo College Associate Faculties, as it was called, was partly in response to Cold War concerns by the government and corporate Canada that the country’s higher-education institutions were not producing the technological skills the economy needed to compete. Sound familiar? A National Conference on Engineering, Scientific and Technical Manpower was even held in 1956. The Associate Faculties, which became the University of Waterloo in 1959 when it split from Wilfrid Laurier, was designed to supply engineers and technicians to local businesses such as BFGoodrich and Electrohome, which competed with companies in Toronto for talent. But the school’s founders went a step further, instituting a curriculum of co-operative education that incorporated stints in the local workforce.

Like many ideas that seem benign at first, the co-op program proved to be a big competitive advantage for the university and industry. Today, every four months, one cohort of students takes what they’ve learned in lecture halls and labs out into the business world, and another cohort takes what they’ve learned in commercial settings and applies it in class. Students become the pipeline by which knowledge is shared. Businesses get cheap labour, but, more importantly, access to new ideas; while students get a taste of the real world. Over the course of their five-year degree, students might work inside as many as four different companies.

“To some extent, co-op is giving students an accelerated set of diverse experiences,” says Smith. “We end up putting 17-year-olds out in often technological workplaces, and, if they’re alert, they see what their employers are not doing as well as they might.” As a result, a problem-solving culture has sprung up in the region — a necessary prerequisite for research commercialization.

If that exchange of ideas with industry leads to a breakthrough in a university lab, the developers get much more out of it than at other schools, because of UW’s innovative intellectual-property rights policy. “It’s known as Policy 73,” says Tom Corr, associate vice-president of commercialization at UW’s technology transfer office. “It basically says, ‘If you make it, you own it, end of story.’ It’s an easy read.” The policy has been in place for decades, and the result is that the school attracts researchers who, like the students, tend to have an interest in new ventures and commercialization.

Corr joined UW in February, after three years at the University of Toronto’s technology transfer office as director of commercialization for IT and communications. His job at U of T was much like it would be at any university: he worked with researchers to find good intellectual property, patent it and then find ways to get it to market through licensing deals with industry, or creating a spinoff company. As with most institutions, U of T owns 50% of the invention. Once the researcher formally discloses it, the university grants them control, but still takes 40% of the income the patent generates whether the researcher uses the tech transfer office or not. The position universities commonly take is that they should get something back if they provide researchers with the facilities and students that contribute to research products.

For Corr, joining UW was a bit of a cultural shift. “From Toronto’s perspective, Waterloo has always been viewed as sort of the Wild West: the researchers can do whatever they want, and there’s no control over what they do,” says Corr. “And they’re exactly right. The researchers go out the door and some of them succeed, some of them fail, but, God bless them, they’re all trying.”

That’s not to say UW doesn’t commercialize intellectual property itself, but Corr figures historically about 10% of all the IP generated at the university uses the tech transfer office’s services (which takes 25% of royalties if used). And, like nearly all universities in Canada, UW has hired more staff in its tech transfer office to adjust to increasing demands from funding bodies — such as the National Sciences and Engineering and Research Council of Canada (NSERC) — that research be tied to commercialization plans. For example, NSERC’s Idea to Innovation program, which was introduced earlier this year, is supposed to accelerate promising technology and promote its transfer to Canadian companies — essentially, it stipulates that researchers work through university tech transfer offices. (This is more in line with the Bayh-Dole Act passed in the U.S. in 1980, which granted researchers control over inventions borne out of federally funded research, but mandates that they actively pursue commercialization.)

The result, says Corr, is that venture capitalists, accountants and lawyers have sprung up near U.S. universities to help academics start businesses. “There’s just so much focus now on the commercialization of IP,” says Corr, “that a lot of the universities are beefing up these areas, because they have to or their later-stage research money is going to dry up.”

But technology transfer is a narrow view of what it means to commercialize innovation, and no one is a better example than the co-founder of RIM who came to Larry Smith for advice back in the early 1980s. RIM was not a direct spinoff from Waterloo — Lazaridis dropped out of school just months before graduating — but he gives some credit for his company’s success to his early experiences when he arrived as an undergraduate in 1980.

Back then Lazaridis was able to work with e-mail on an internal network, an early graphical browsing technology, and ARPANET, the academic researchers’ precursor to the Internet. “These are all things that over the years were very influential in the market we pursued and the products that we produced,” says Lazaridis, who is also UW’s chancellor. “It wasn’t the university actually commercializing these technologies, but those of us that were exposed to this technology and could learn to use it and understand it, were in a position to actually take advantage of those market trends when they became apparent. But it’s a 10-to-20-year process.”

RIM continues to take advantage of its close relationship with UW — its headquarters are physically adjacent to the school — by employing about 575 co-op students and routinely hiring graduates full-time. In a few instances, RIM has worked directly with university researchers, but, even so, it’s more often recently hired grads who connect the company to campus laboratories.

The ties that have been forged between area businesses such as RIM and the university will continue to generate new commercial innovations and economic growth, often in ways too subtle to measure. But perhaps what is most striking about UW is what happens when students are done meeting with Larry Smith and strike out on their own, or when researchers decide to take their IP out the school’s back door and start their own companies. Any region that calls itself a technology cluster will have a network of entrepreneurs who know and support one another, but Waterloo’s is exceptionally dedicated to the growth of other startups.

One of the people at the centre of it is, in fact, Corr, who in addition to his job at the university is also the president of the new Accelerator Centre, a not-for-profit initially financed by four levels of government to serve UW and the other post-secondary institutions in the area, the University of Guelph, Wilfrid Laurier University and Conestoga College. Corr splits his time evenly between the two jobs, a flesh-and-blood symbol of formal commercialization efforts. Accelerator, which sits in a building in UW’s Research and Technology Park, opened in May 2006 and is home to 20 carefully selected startup companies, with about 150 employees in all, as well as government agencies such as the federal Industrial Research Assistance Program (IRAP), and the Ontario Centres of Excellence. The centre provides basic administration services, shares boardrooms, offers training programs in sales and marketing, and HR services for companies. A second Accelerator building is under construction across the road, which will provide room for companies with more than 15 employees and have outgrown the first facility.

The companies are selected by Corr and one or two members of the Entrepreneur’s Council, a group of local business luminaries. Communitech, the local technology industry association, plays a similar role, and together they organize frequent events for entrepreneurs to network and learn from local business people. Communitech also has offices in the Accelerator Centre, and employs two in-residence entrepreneurs — former exectives of successful startups who now impart advice. “We see a lot more volunteer community involvement, where the successful people want to see more successful people created by virtue of how they move their companies along,” says Corr.

One person everyone knows is Tim Jackson. As a partner and co-founder of Tech Capital Partners, the city’s only homegrown venture-capital firm, his name appears on all the pillars of the tech community. He’s a director at the Accelerator Centre and Communitech, and sits on UW’s board of governors. “If a startup CEO in the Accelerator Centre called Jim Balsillie [co-CEO] at RIM, Jim would return his phone call, and help him,” says Jackson. “We don’t spend a lot of time dealing with each other’s assistants and secretaries. Whether someone needs help, needs some guidance, needs to do a reference on somebody, everyone in the community just sorts of helps each other. There’s this acknowledgement that everything is for the greater good.”

The region’s diverse industrial base contributes to this camaraderie. It certainly makes the region more stable in the face of downturns — Waterloo remained relatively unscathed when the tech bubble burst in 2001, but Ottawa’s cluster, which is largely focused on the telecom market, got blasted. And, it turns out, very few local companies in Waterloo compete with one another in the same industry, or jockey to supply the same major supplier down the street. It is still too small to warrant more than one VC to be on the ground — institutional financiers prefer to use Tech Capital as their eyes and ears.

When Tech Capital opened its first fund in 2001, Jackson says there was a sense of entitlement from the locals that they’d get venture capital. Now, there is more of a willingness to bootstrap along until the business is ready for financial backing. Entrepreneurs are also becoming more savvy, and it shows in the quality of opportunities Jackson says he’s seeing. While the total number of inquiries has grown a little bit each year, Tech Capital has performed due diligence on twice as many companies in the past year as the previous 12 months. Still, the VC isnot huge. Its first fund was $30 million, and that has financed six companies. So far, the $60-million Tech Capital II fund has backed three companies, and Jackson and his two partners are active on four deals — an unusually high number.

Financing is still a big challenge facing Waterloo as a growing technology cluster. Much of that has to do with the relatively early stage of growth that many of the local companies are in. Outside venture capitalists resist doing much seed financing like Tech Capital, so local startups have to rely on an underground network of angel investors, and show growth before they’ll attract much attention. “I’d love there to be three or four venture-capital firms with headquarters here, with folks on the ground,” says Jackson. “Some of them are active and in town all the time, but it would be nice to have them here, so when I walk into the Accelerator Centre, I’m not the only guy with a chequebook.”

Waterloo is slowly building up its entrepreneurial caluses. But perhaps the most promise lies decades in the future. A new era of high-tech research is already being seeded by Lazaridis, who has poured $150 million into the UW’s Institute for Quantum Computing and the Perimeter Institute for Theoretical Physics. “We spent a great deal of time trying to analyze what this region’s strengths were and what it would take to have a meaningful investment that would crystallize success in that particular direction,” he says. “I believed that we had the largest math faculty, we were very strong in cryptography, and that gave us an opportunity to really start focusing on what we are considering the next wave, which is the quantum age.”

If all goes well, the business community will be ready to take any breakthroughs to market. The rest of corporate Canada ought to pay heed.