iPhone displaying National Post article by Inovia Partners Patrick Pichette & Dennis Kavelman (ex-RIM/Blackberry)

Patrick Pichette & Dennis Kavelman: Fueling the Canadian Tech Flywheel for Our Economic Prosperity

By any global measure, we should be proud to be Canadian. According to the 2023 Best Countries overall ranking by U.S. News and measuring global performance on ten metrics, Canada is the second-best in the world, only behind Switzerland. So I guess we should feel good about ourselves, right?

The truth is that we are really reaping the benefits of our past generations’ investments in resources and infrastructure. And everyone who owns a house knows that one must constantly invest in its maintenance and renovations to keep its value. It’s unclear that in the last decades, we have properly “maintained our house,” so to speak.  Unfortunately, we are starting to see cracks in some walls, if not the foundation. 

Alarm bells are ringing from numerous sources regarding our current situation and the outlook on our future prosperity. Most of the recent headlines warn that  Canada seems to be losing its edge – its economic mojo:

We should be taking note of these serious red flags. And yet despite these warning signs, our view is that Canada has been quietly building most, if not all, of the key ingredients to become a true global powerhouse of economic prosperity in the coming decade. 

Moving away from a traditional reliance on natural resources, the future of wealth creation is now rooted in technology, whether in legacy industries or innovation. In fact, the wealth of today belongs to the Silicon Valley tech companies, with the well-known success stories of Google, Meta, Apple and the like. That Internet chapter is now done, and has created dramatic wealth and prosperity for the US. 

In 2023, seven of the ten largest companies in the world, in terms of market capitalization, were US-based tech companies… Some with capitalizations over 25 times that of the top industrial companies in 1994 (see chart below). Even when adjusted for inflation, this clearly demonstrates the incredible leverage of tech industries to create immense value.

Furthermore,  the world is now entering a brand new phase of tech innovation with the latest breakthroughs in AI and Life Sciences. It’s early days for these new fields, and already the race for supremacy has begun. The winners haven’t been determined yet, but US companies are looking to protect their leadership.

And unbeknown to most Canadians, Canada has been building amazing structural advantages over the last 30 years in the tech sector in general, and in AI in particular:

  • Canada is a global leader in AI research. We can claim leadership with names like Geoff Hinton, Joëlle Pineau, Yoshua Bengio and Aidan Gomez, among many others. In fact Canada has the highest number of AI publications per capita, and is home to many of the top AI researchers anywhere in the world.
  • Our Universities and research centers continue to attract and develop the best global talent. McGill, UWaterloo, UBC, and the Mila and Vector Institutes are only a few of the amazing centers where the world’s best academics are gravitating. And the facts speak for themselves – Since 2020, the growth rate of tech talent in Canada (16%) has outpaced that of the US (11%). This immigration of bright talent has been supported by an attractive and open Canadian immigration strategy.
  • We benefit from a maturing business tech ecosystem. Gone are the days when Canadian entrepreneurs had to exile themselves to the US to be successful. Over the last 20 years, Canada has worked hard to develop a robust support system for entrepreneurs to stay and build their businesses domestically. Companies like Shopify, Opentext, Constellation, Cohere and Lightspeed Commerce are prime examples of this success along with past champions like Nortel, Newbridge and RIM/BlackBerry.

These leaders and their financial backers have now built a growing well-oiled flywheel where successful entrepreneurs reinject capital in the system by encouraging the launch of new businesses, supporting a new generation of entrepreneurs, and launching or participating in angel and venture funds that further fuel innovation and risk-taking.

In addition, other important organizations and programs are contributing to the flywheel from the groundbreaking Co-op program at the University of Waterloo to incubators like the Creative Destruction Lab (CDL) and Venture Capital Catalyst Initiative (VCCI) and the Scientific Research and Experimental Development (SR&ED) Tax Incentives.

This is all very promising. And now that the flywheel is turning, our governments and institutions must take concrete actions to accelerate our momentum, leverage our competitive advantages, and secure a leadership position in the coming decade. 

A crucial step is to urge our Canadian pension funds (our own money) to actively invest in our VC tech and innovation sectors, which will create tomorrow’s global champions and generate the wealth we aspire to. 

The truth is that with the notable few exceptions of Quebec and Alberta, most large Canadian pension funds have shied away from supporting the Canadian VC ecosystem, hiding behind a principle of independence and the argument that maximizing (near-term) returns is their only mission. As a result, the largest pension funds have more invested in China than they do in Canadian public and private equities1. While large infrastructure projects may be more readily available for investors overseas, this isn’t true of the technology industry.  This is a huge missed opportunity for Canada.

Tech investing is very (read very very) capital efficient. A truly inconsequential amount of our largest pension savings invested in our innovation agenda gives us a chance to have a truly disproportionate impact on fueling wealth creation in our own backyard. Remember that it was such tiny investments in Apple and Google 25 years ago that returned trillions of value, and countless jobs for the US economy and its backers (US VCs mostly backed by US pension funds).

In short, it’s all about building long-term wealth versus entertaining a short-term vision, with very capital-efficient investments.

Speaking of short-term vision, we must take a moment to comment on the recent capital gains tax increase from the Federal budget. We need a fair taxation system, we all get it. But with the latest measures announced by the governments on capital gains taxes, we are taxing innovation, impacting productivity, slowing down our own flywheel, and putting the brakes on so much of the good work done to date. In other words, we are simply encouraging people to move and invest south of the border, the largest market in the world, where our taxes are now uncompetitive vs many US States. The best founders are smart and, like capital, will flow to the best places for them to build their companies. Let’s recognize this is a mistake, and we recommend reverting to a taxation system that promotes innovation and entrepreneurship.

Most Canadians have a deep attachment to our “Canadian model” of a gentler and fairer capitalism. And for all the good reasons we know and cherish. Canadians are typically proud to pay their taxes but expect competent and efficient government in return. Others will evaluate whether we have a competent and efficient government, but it’s clear to all that we can’t simply tax our way to wealth creation and prosperity.

In some ways, we truly are at a crossroads for our economic agenda. Over the past decades, many brilliant and dedicated people, organizations and programs have built the foundation for the next generation of Canadian tech innovation. Thanks to all the pioneers who have invested before us to create our tech flywheel, we now benefit from amazing assets, and a shot at the next Trillion dollar industry.

These are assets we can leverage to create the economic prosperity we aspire to, all in the context of our unique Canadian model. The recommendations are clear – It is time to invest in ourselves and seize the day. Carpe Diem!

Adapted from National Post. / 1. LetkoBrosseau Open Letter