Introduction: Global Venture Capital in 2006

The next stage of global venture capital is going to focus on the commercialization of new inventive sources and new creative sources which have been fop the last few years increasingly globalized. The commercialization of technology which was the hallmark of European, Silicon Valley and Japanese growth in the 1990s has now become globalized. The challenge is to design an appropriate strategy for Canada in this global mix. World-leading business strategies require that Canadians develop links to new networks of creative talent and inventive sources that are on the threshold of being converted into significant value.

Graduate students in Brazil are capable of innovations in life sciences. Graduate students in Korea are capable of innovations in materials science. The nature of internet driven scientific publishing (see Rechargeable Batteries and Collaborative Knowledge on www.jimdewilde.net) has fundamentally transformed the nature of intellectual property and wealth-creation in knowledge industries. The business models of 2005 are, by definition, not the same business models as those which worked a decade ago.

Just as Copenhagen became the centre of research on educational toys (Lego www.lego.com ), and Vancouver became the global centre for commercially-oriented fuel cell development (Ballard www.ballard.com ), the geographical constraints on innovation have been removed by collaborative knowledge, internet-based scientific publishing and the capacity of world-class scientists to be nomads.

To illustrate these trends, let’s start with some venture capital strategy case studies:

Siemens portfolio of new-growth opportunities differentiates it from companies like GM and Bombardier who have failed to leverage their advantage in key manufacturing sectors to position themselves in next-generation growth activities. My great advocacy of corporate venture capital has been a subject of previous lectures at Rotman (see “The Segway Seeks a Market” on www.jimdewilde.net) and I don’t want to belabor the point today. The point is that without companies like MDS, Siemens, Alcan, Ballard, Nokia, and Intel which can organize their financial and intellectual capital to position themselves in the next generation of commercialization, local economies may stagnate. The task of policy makers and financial decision-makers is to ensure that these “head office” functions continue to exist. The test of B-Schools is to help the next generation of decision-makers to focus on the next generation of commercial opportunities.

In this regard, the potential for nanosciences as discussed in Davis’ piece is a key emerging trend in venture capital investments. The direction of Nestlé’s toward a commercial venture strategy which positions it to lead in the commercialization of the intersection between agricultural sciences and nutrition is another growth-leading trend and the willingness of top global corporations to back someone like Myhrvold who knows how to perform the careful alchemy of turning research into innovation shows the global nature of this kind of activity. The question today is how Canada, and Toronto, fit into these economic projects .

( * ) I strongly recommend the Ann Grimes piece “Where the Bets Are” in the November 21, 2005 Wall Street Journal, available to subscribers at www.wsj.com. Her coverage of the venture capital industry should be recommended reading for MBAs and her analysis of trends is extremely perceptive: (1) The China Strategy; (2) Clean Tech, (3) Digital Living Room; (4) New Kids on the Block (new players); (5) Rock Stars; (6) Web 2.0; (7) Older and Wiser; (8) Adopting orphans); (9) Telecom Comeback; (10) Late Exits) .

Part One: Flywheels and energy storage - the next transformative technology?

A first step for Canadian investors is to ensure that in areas where a global competitive advantage exists, resources are allocated in a manner which creates the preconditions for success. One such area is in the management of knowledge-enhanced energy production and management.

Toronto is potentially the hub of a network about energy technology markets. The financial expertise of Bay Street has long been recognized in the global marketplace for its sophistication about the nature of energy markets and the impact of oil and gas on mature industrial economies. There is within the inefficiently-fragmented Canadian marketplace a tremendous amount of knowledge concerning utility manage net, energy conservation, alternative means of energy generation and energy management software. This is beginning to become a part of the national venture capital and investment community, reflected in the portfolio Ventures West, the expertise in ARC Financial (www.ventureswest.com, www.arcfinancial.com) and the recent interest in Canada of investment firms like Enertech (www.enertechcapital.com). This has long been a cornerstone of the Quebec venture capital and investment communities, revolving around the activities of the Hydro Quebec venture capital group (www.hqcapitech.com).

The demand for new energy technologies has created a significant appetite for areas where only specialized venture capital firms concentrated in the last decade. Venture firms like Enertech, www.nthpower.com, www.sam-group.com and Hydro Quebec are being joined by the mainstream venture firms which are exploring new investment categories generated by both environmental considerations and the new price-structure of energy resulting from oil and gas price rises and a global sense of energy insecurity.

The question for MBAs studying venture capital strategies is how to establish a presence in areas where there is potential for a significant breakthrough. The question for policy-makers concerned with competitiveness is (entering the same room through a different door) how do we convert a unique domestic competitive advantage into a corporate presence in an area of rapid growth technology commercialization?

There are some obvious business models for new companies, e.g. energy pricing and energy auctioning around the delivery of specialized clean power as in. www.bullfrogpower.com. There is a constant demand for energy efficiency and power quality management business models. There is also an appetite for new energy sources, biomass, incineration, solar power, wind power, nuclear in a variety of forms and applications, fuel cells. There are several examples of successful Canadian companies operating in these areas: Enghouse, www.enghouse.com has built on energy management software. Carmanah www.carmanah.com built on an expertise on solar-powered lighting on buoys to grow a highly successful British Columbia company. One option is to build a portfolio based on a suite of similar type of companies whose potential is enhanced by the changing nature of energy production, management and consumption.

There is, however, a more ambitious strategy, where venture capitalists try to fill the gaps in the new advanced technology driven energy market. . At the centre of the new energy issues, the key issue is how portable power and distributive energy requires a significant innovation in terms of power management or energy storage technology. . Portable power requires different kinds of batteries or stored energy. A decentralized grid requires that we organize new technologies of energy storage. For this to work, however, there has to be a very different capacity to store energy for future usage. Enormous amounts of research and speculative investment have gone into the commercialization of existing electrochemistry and the search for clean energy generated from fuel cells. Despite all the rhetoric in environmental circles, this market is just starting to take shape. Imagine the early days of Cisco and Intel and the equivalent uncertainties about the marketplace that was developing in semiconductors and internet routing technology. The venture capital market in 1982 was preoccupied with the highly visible PC market. This new process of commercialization of university research was taking place, but it would be a decade before its full significance would be recognized. The energy storage sector is at a similar stage today.

A breakthrough in this area will be as big and economically disruptive as was the development of portable refrigeration, the development of a silicon chip for data-storage, and the development of a router to steer the traffic on the internet. So how does one assess the scientific research in this potential market? How does a venture capitalist build in Toronto (or Canada as a whole) the GE, Intel or Cisco of this new space?

Canada has long had a competitive advantage in energy-related research, with the portfolio of Hydro Quebec (www.hqcapitech.com) and the innovative investment strategy of Ventures West following on the success of the Ballard investment (www.ventureswest.com, www.ballard.com). This advantage has not been fully maximized because there has not been the kind of concentration and creation of scale which might have resulted from a network of private utilities structuring research. The innovative venture capital model of Chrysalix www.chrysalix.com produced some global linkages for Canadian investing in the Clean Energy space and the syndication of companies in the latest round constitutes an interesting mix of (http://www.chrysalix.com/news/fmu_news_more.php?NID=11 ) WestAm, Conoco, Mitsubishi, Teachers, Shell Hydrogen. In a similar vein, the development of a complex network of corporate venturing activities best highlighted by ChevronTexaco www.chevron.com/technologyventures and Norsk Hydro www.hydro.com/en/our_business/oil_energy/new_energy/venture_fund/ntvs_team.html has made this an extremely dynamic sector, where the Canadian role can still be defined by a mix of public utilities and private companies with world-leading expertise in energy investing.

The challenge here for the next generation of Canadian venture capitalists is to pick areas where a concentration of resources and expertise can build from commercialized technology one of the future Ballards.

The next generation of growth is held up by the difficulty of storing energy that is produced by portable power sources and then sold back to the grid. The next generation of company-creation in the energy sector requires a concerted effort to create a capacity to commercialize research in electrochemistry and nanotechnology. A world-leading energy storage capacity company could become the Intel of the portable power and clean energy breakthrough. The work being done globally in this area ensures that GE, Siemens and other companies with a clear presence in energy development will be significant players in this space However, there is a clear opportunity for a Canadian company to commercialize Canadian research, apply this to a rapid-growth market and then use its global market position to obtain the acquisition currency to expand globally. Key players are already shaking out. One such example is power storage. Pentadyne, VRB Power, and Active Power are all case studies of public companies in this space.

There is no guarantee that venture capitalists can “pick winners” in this or any other space from competing technological innovations and patterns of scientific activity. Flywheels are popular for short term energy storage and represent an intersection of nanotechnology and practical application to energy needs. There have been incremental innovations in electrochemistry and battery technologies, but no breakthrough of the type which revolutionizes a sector, despite many anticipated new product developments. The lack of substantial innovation in batteries has long been commented on by analysts. A shrewd strategy requires risk-spreading and the capacity for an innovative company to make acquisitions in areas where there are reasonable prospects of breakthroughs, a strategy which served Cisco well in its early stages of growth into the company we recognize today.

The opportunity for Canadian venture capitalists to concentrate expertise in an area of demonstrated competence is the kind which we need going forward to ensure that there are 10 Ballards and 10 RIMS for each occasion in which the natural circulation of the capital in the global marketplace results in a major Canadian assert being acquired and integrated into the operations of companies in other countries. With an understanding of the competitive space in power storage technologies, one of those global players could be designed by Canadian venture capitalists operating at the cutting edge of the energy technology space. The following web-links help to navigate that space:

http://www.wired.com/news/business/0,1367,63639,00.html?tw=wn_tophead_2
http://www.pentadyne.com/News2004Nov22.htm
http://www.electricitystorage.org/tech/technologies_technologies_flywheels.htm
http://www.beaconpower.com/products/EnergyStorageSystems/flywheels.htm
www.vrbpower.com
http://www.smalltimes.com/document_display.cfm?document_id=3730
www.mhtx.com
www.angstrompower.com (www.ventureswest.com)
www.pentadyne.com
http://www.wired.com/wired/archive/8.05/flywheel_pr.html
www.activepower.com
www.energyinnovations.com
http://www.sandia.gov/news-center/news-releases/2003/renew-energy- batt/betterlithium.html
http://finance.yahoo.com/q/bc?s=VLNC&t=5y (Valence stock chart)

Part Two: Ontario as a Hub of Global Technology Commercialization

The development of an energy storage company requires a sophisticated approach to building the networks required for the commercialization of technology. The competitive advantage of Silicon Valley has long been the way the skills of commercializing technology are recognized and developed. Similar developments around Cambridge in England require that decision-makers take a deeper look at the category of commercialization of technology, which is the key to the next generation of competitiveness. There are several models for technology commercialization which can now be assessed : www.msbi.ca in Montreal, www.teic.co.il in Israel, www.gate2growth.com in Europe, and www.ut-astec.com in Japan, Only if we understand where the global standards are can we be competitive in the commercialization of technology and use that kind of knowledge-based economic strategy to construct sustainable competitiveness in Canada.

There have been frequent attempts to jump-start innovation and growth creation in the Canadian economy. Unfortunately, most of them have proven to be underperforming because they focus on spending money rather than on developing disciplined strategies. There is no real shortage of capital for next stage technology commercialization. There is, however , an extraordinary difficulty in developing the incentives necessary for developing world-class management teams in areas where a Canadian competitive advantage could exist. We are at a critical juncture in the establishment of a competitiveness strategies based on converting knowledge to sustainable prosperity in the Canadian context. Contrary to frequent misperceptions, the Canadian capital markets have been very good at creating “new ventures”. There are a large number of specialized Canadian companies that have either through RTOs or IPOs successfully launched new ventures. There are a large number of companies on the CVX that have resulted from this, ranging from specialized electrochemical innovations to specialized materials in asphalt, rare earth commercialization, geological surveying technologies, robotics, marine biology research. The problem comes from growing these companies in a manner which provides them with acquisition capital and the kind of management expertise and global reach which enables them to build sector-leading brands like a Bausch in commercialized opthamological research.

The new program for the commercialization of technology requires a much more global approach. There is scarce point in the reinvention-of-the-wheel approach to research funding which suggests that a local community gains from producing the 115thn best research programme in some aspect of genomics research. Nevertheless, frequently that is exactly what happened in publicly-financed scientific research. I have proposed a project entitles 50TECHNOLOGIES.com which would attempt to address this problem and create a new dynamic in the relationship between scientific research and venture capital.

The concept: A web-enabled on-going web-site (50TECHNOLOGIES.com) which would provide an organized framework for examining the commercial prospects of research technologies globally. It is also predicated on the assumption that not all the technologies being developed in global research institutes have been appropriately assessed in terms of their commercial potential. The example used below of the commercialization of marine biology is intended to make the point that genomics is not the only scientific discipline on which venture capitalists should be focused.

The operating model: Canadian B-School students would be involved in assessing the commercial potential of and commercial activities in up to fifty areas of scientific research and technological development.

The market: There would be free-services provided on student-written case studies and updates. A gate-accessed service for investment banks and venture capital firms would provide a more value-added activity.

The object: To brand a consortium of Canadian B-Schools as the center of global information on the commercialization of technologies and to offer a now non-existing service about the commercial potential of avenues of research to the global scientific community.

An example: In a field like marine ecology , there are very few examples of successful commercialization. It would assess all major existing commercial activities with analyst quality data ( e.g. www.marbio.com, TVX-listed spinoffs from Canadian university research). It would look at existing research in the academic discipline of marine ecology It would look at market-demand as in existing activities (spending on fish-stock maintenance, research budgets on aquaculture investments etc.)

The opportunities for commercializing university research on a grand scale involve three sets of activities:
(i) Conventional venture capital activities, building companies around specialized research activities and developing portolfios regardless of specific category;
(ii) Strategic venture capital activities, where significant trends, like energy storage can be combined with research activities galvanizing the activities into a stronger commercial presence. This often goes hand-in-glowve with corporate venture strategies where the expertise of a partyocualr compoany is applied to commercializing researcgh in a rekated area of scientific endeavor ;
(iii) The longer-term interaction between commercial skills and research skills which would come from a social network like 50Technologies.com. Acoustical engineers working with venture capitalists to discern market needs for noise-blocking technologies, recognizable warning signals (like car-alarms) etc. change the nature of scientific research to reflect more realistically the way in which research activities take place, in a less remote series of activities and one which is much more interactive with market trends.

Is it credible that Toronto could become a hub for global technology commercialization? The next innovations in the global economy have, in many cases, no natural place of geographical origin. Is the next SONY Walkman being invented in Sony’s labs or is it a product that is being engineered in Finland, combining wireless payment capabilities with access to original content providers in a number of satellite locations? SONY’s venture capital portfolio (www.sonyvc.com) covers a spectrum of new technology areas on which future growth could be predicated. Is the next breakthrough in agricultural biopesticides being developed by a Chinese PhD student in a McGill laboratory using Swiss research money? How will these innovations be financed or commercialized? How will the entrepreneurs who want to back them be backed by venture capitalists? It in inconceivable that a growth strategy for innovation-based economic development can take place in any jurisdiction without a strategy for technology commercialization. It is also inconceivable that there be a strategy for technology commercialization which can succeed without understanding the global nature of research and providing all the stakeholders with a roadmap and a rankings. It is increasingly apparent that there can be no economic development without great universities and that great universities are indispensable because of their ability to provide networks where ideas intersect: entomologists and agricultural land-sue planners, marine biologists and economic development strategists.

To have a realistic chance of success, there has to be an Ontario-based approach to technology commercialization. It requires three things:
(a) encouraging science-based and innovation-based Ontario companies to participate in corporate venture capital, commercializing the next generation of growth;

(b) the development of a blue-chip fund with a specialized expertise in commercializing technology, along the lines of MSBI in Montreal, where venture capitalists can be incented to create companies that commercialize world-leading research;
(c) a commitment to an innovative approach to facilitating the activities of researchers and venture capitalists by bringing researchers into contact with thinking about commercial benefits and bringing venture capitalists into contact with early-stage research and creative innovation. While 50TECHNOLOGIES.com is not an idea cast in stone, it is a potential model for achieving precisely this objective

If this is done, Toronto, as a capital-market could become a global leader. I
believe that it can only be a capital market city which delivers this kind of economic leadership, because it is the capital markets where “research” in economic activities is world-leading. It certainly provides the University of Toronto with a unique vantage point on these type of economic innovations, the kind of vantage point which can only be matched in New York, Zurich, London or Amsterdam.

Conclusion: 10 Future Ballards and 10 Future RIMs

The task of public policy and capital markets in a country with the economic architecture of the Canadian economy is to ensure that thereat are 10 Ballards and 10 RIMs. In 1987, I wrote of Nortel that the choice was between playing in a farm team economy and playing to be a global champion. For almost twenty years, we have successfully commercialized technology but failed to grow these companies into well financially-engineered national champions which could be sustained by foreign investment (e.g. the classic case study of the role of longterm German capital in the financial engineering of Ballard). There are dozens of companies listed on the TVX, which commercialize everything from brilliant university research on biopesticides to CO2 processing technologies. The challenge is not to “create” companies. It is to grow them to a size necessary where they can, in the standard metaphor of venture capitalists, be the hatched leatherback turtle which makes it from the beach to the sea.

For almost twenty years, Canadian companies have been disadvantaged in their global growth strategies by the difficulty of using acquisition capital to integrate compatible companies in Europe and Asia. Our investment banking expertise has been limited to domestic deal-making and has resulted in a situation where we lose head offices rather than build global players. As the next generation of debate about the commercialization of technology takes shape in boardrooms and political offices, it is imperative that we focus the public policy debates in Victoria, Edmonton, Queen’s Park, Quebec City and Ottawa on the real issues. The problem is not the availability of capital for start-ups, an issues which has distracted decision-makers when they focus on the commercialization of the next generation of technology.