How Tom Jenkins tackles the urgency of innovation in Canada

Tom Jenkins is the dynamic founder of OpenText and when you hear his ideas about how to push Canada, you know why he was able to build OpenText in a growth capital starved environment. He has just concluded the Jenkins Report for the government to understand what role it can play in building businesses. I am grateful that he is giving back. Here is his blog post about how Canada can grow in innovation:

In this series, I discussed the urgency behind stimulating innovation in Canada and how, in particular, innovation in digital media boosts productivity which is a key driver for prosperity. In this blog, I’d like to take this conversation to another level to examine how we as Canadians can do this. How can we build an innovation nation? 

1. We need to tell our stories. There is folklore here and it needs to be shared. The Canadian Digital Media Network (CDMN) and Canada 3.0 provide platforms for Canadians to tell, share and celebrate our success stories.  Both are laying the foundations for resources for future entrepreneurs, including access to mentors, information about VC funding, success stories, and more. OpenText has facilitated that conversation by powering the CDMN social collaboration platform used during and between Canada 3.0 forums.

Keynote Speech at Canada 3.0, 2011

2. We must shake off a cultural legacy of modesty and an aversion to risk taking.  This calls for a cultural shift. Starting at the elementary school level, we can form strategic programs that encourage future generations to become risk takers, welcome competition, and embrace the unpredictability of entrepreneurship that drives innovation.

3. The time is right to establish and connect communities of practice around innovation. For example, there is a gap in the VC community post dot com meltdown that we as a country need to fill.

4. It’s imperative to continue to invest in business in areas like Research and Development. Along with this investment, we need to introduce the tools and technologies to suppport the new demographic—digital natives—that are entering the workforce. This group will expect to use the same tools in the workplace that they're using at home to access, share, and manage information. Investing in R&D will lead to breakthroughs in business applications of these digital consumer tools, and push Canada to the forefront as a leader in developing breakthrough technologies.

5. Finally, we need to think globally not nationally… all the world is our stage for great accomplishments. It is crucial for Canadian businesses and academic institutions to reframe their perspective to reach beyond North America, and consider themselves competitors in the global economy.

Why Every Business Woman Should Want Aussie X

 If you watch the TED talk by Facebook’s Sheryl Sandberg on work, she talks about encouraging young girls to “lean forward”. What does she mean by that? I knew exactly what Sheryl was saying because it is what females in business face daily – how to push a point, get ahead, make a move, face down misunderstandings, quickly adapt, throw over a new proposal even though it may get rejected, get smacked down, try again in the face of failure. In other words, Sheryl wants girls to play the business game at a higher intensity than today. 

This is why the Dragons’ Den pitch by Aussie X (life changing sports programs that teach Canadians footy, cricket and netball) and their lead presenter, Kaela Bree, is so important for young girls. Kaela is actually selling shares in a company to help young girls find their inner strength. Playing netball is a wonderful training to teach girls to stand up for themselves and take action.

When I grew up in Zimbabwe, I spent hours playing netball. It took up minimal space and was mini-basketball, but far better suited to girls with nimbleness and fast analysis required to win, rather than the height or strength of basketball. I was crazy about this game and disappointed it was not in Canada. I often think about netball as I make snap decisions, pick team mates, throw the ball assertively, get yelled at by the team and work with stress. You have to lean forward, as Sheryl Sandberg says, every day and netball is one of those developmental experiences that helped me.

Although I dislike separating female from male in business and prefer to focus on pure business, I have come to see how the right attitude is critical. Instead of being “polite, young ladies” we need to encourage girls to grow their “animal spirits” as John Keynes called the drive to do business.

Female entrepreneurs who build a start-up from nothing to a small-medium sized company are doing the remarkable. The uber-pitcher on Dragons Den, Kaela Bree, happens to also be one of those female entrepreneurs achieving the impossible. Her title is Goddess Partner which I could see her Aussie X team believed. Goddess and, yes, partner who you would want on your team.

Would the Dragons see the potential though?

Yes! They got Big Jim Treliving to commit and the Aussie X team looked as if they were the Australian rugby team who had just beaten the All Blacks at the World Cup. Kaela and Aussie X succeeded in getting Jim, Boston Pizza owner, to invest as a partner. She got her strength and ability to be forceful from her netball, no doubt. 

Hmm, I wonder if Kaela asked Jim what was his favourite animal and what is his motto for living life?

I am a leopard and I choose the motto “Lean Forward” from Sheryl.

Jacoline Loewen, MBA, is a Director of Loewen & Partners Inc., a corporate finance firm working with business owners and family businesses. Loewen & Partners has raised over $150 million for owner-managed Canadian companies, as well as managing family business succession, acquisition, and final sale. She is an advisor, lecturer and writer of business strategy and private equity. Her latest book "Money Magnet: How to Attract Investors to Your Business," published by Wiley, was selected by the Entrepreneurship course at The Richard Ivey School of Business.

Jacoline began her career working for Granduc Mines in Northern British Columbia and went on to work with Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy" which went on to be a best seller. She also wrote "Business e-Volution" which helped teams understand the business opportunities created by the Internet. She writes for the National Post, Globe & Mail and hosted Financial Post Executive podcasts (available on iTunes). She organizes CEO Roundtables and other conferences in alliance with Ivey Business School, Rotman and leading law firms.

Jacoline is a Director on the Board of the Exempt Market Dealers Association (EMDA), working with the Ontario Securities Commission to establish transparency in the private placement industry. She is on the advisory board of DCL International, Bilingo China, and Flint Business Acceleration. She was on the Board of Directors of the Strategic Leadership Forum where she ran the Knowledge Café series. Her other roles include serving as a judge for the U.B.C. and the Richard Ivey School of Business' Business Plan Competitions, mentoring for Canadian Youth Business Foundation as well as being a member of The Ticker Club.

Follow Jacoline on Twitter at @jacolineloewen

What can government do to help companies attract investors?

Speaking to a returning Canadian in the pharma industry, I asked him how Canada could improve its innovation. Not surprisingly, he said through investment dollars. He did want government to get out of the way and tax less but seems that theme is not heard. As he says, Government should not be picking the winners and losers. It is too hard for people who do not have industry depth and who are spending tax payers' money, not their own.
Here are more of his comments:

Our government needs to promote investment so that companies can access some much needed capital and expertise. On the VC side, for example, the Ontario government shut down tax credits for venture funds in biotech in the same year that it launched the Ministry of Research & Innovation, which effectively directed funds destined for biotech VCs towards academia. 

VC money is smart, vetted, and accountable, whereas academic grants are not.  Academia is important, but the lack of accountability suggests it is a much riskier "investment" than similar VC funds going into a company, so governments should adjust their investment portfolio accordingly to reflect this risk profile.

On the growth capital side, small, profitable, companies are often forced into two paths to access capital: (I) IPO prematurely (at least when capital markets are healthy) and (II) seek U.S. investors.  (I) leads to management distraction and an agency cost that has the potential to side track companies that need to focus on building their business rather than appease a large segment of near-term focused capital market investors.  (II) enables companies to access deep U.S. pockets and expertise, which is great.  But U.S. investors are more likely to move companies to the U.S., especially for knowledge-based companies, leading to the hollowing out of Canada that seems to continue.  Government can help mitigate the above two fates by facilitating a stronger Canadian PE industry.  I don't know enough about PE regulation to know how this can be achieved, but promoting the raising and deployment of capital for the mid-sized businesses, not just early stage, should be a pressing goal.

 On the flip side, governments do have deep pockets and some mandate for direct investment to foster critical mass in a given industry (isn't that the whole point of subsidies?).  Government can offer grants to companies as a form on non-dilutive funding.  But I don't think government should be allocating these funds and the money shouldn't be "free".  Perhaps some kind of process could be developed where companies can access grants if they can come up with matching funds from investors that ultimately manage the co-funded investments.  Red tape does need to be minimized, or else the money just goes to the best paper pushers rather than the best investors. 

Finally, because investors need to share risk on cash-flow positive companies with lenders, I wonder if there is some kind of mechanism for government to lubricate this process (but not participate in it).  They of course do this on a macro level with lower interest rates, but perhaps there is something they can do more specifically to promote investor-lender interaction.  

Ban stock-based compensation for bank employees

Back in the '90's, when I worked as the corporate strategist for a leading bank, Derivatives and the "Quants Jocks" were beginning their creation of investments that could be sold over phones, and then the Internet. I worked for the CEO and the top 25 SBU heads. At that time, the CEO said he did not want these fancy instruments because he could not get his head around them which signalled a strong message to me as he was a very numerate man. I respected his push back frommaking a lot of fast money.
He soon came under pressure as the bank began to fall back in the public stock market performance.
Since my boss was CEO but also the founder and still the owner of majority shares, he could refuse to go down the path of paid or employee CEOs who have put the entire world economy in such a terrible state. Hired bank CEOs raced to bring in derivatives because they boosted their results; why would they care about bank performance five years from now as they would probably be gone?
Pay for performance puts pressure on employee CEOs to act in their own self interest, enrich their personal bank account and try to keep up with all the other superstar bank CEOs.
Roger Martin, Dean of the Rotman School of Business in Toronto and a prolific author, has an excellent article on this topic of how bank executives are rewarded and the havoc the past pay structures have played as a result. Here is his comment on Chuck Prince saying Citibank and all the other bank CEOs kept dancing until the music stopped:

The answer was that thanks to the structure of their compensation, major bank CEOs were obsessed with their stock price and trying to keep beating expectations until the music stopped.  And the asset-based derivatives market was their clever device for beating expectations for much longer than could have happened before – because it was the world’s first market of infinite size. And it worked for them.  When the music stopped and expectations came crashing down, they were by and large wildly rich.

Public companies, such as FHFA’s target list, operate in two markets.  In the real market, they produce and sell real services – like mortgages and mutual funds – for real customers – like you or me or your company – who pay them real money, which, in a successful company, results in a real profit at the end of the year. They also play in an expectations market, where investors observe what is happening to the company in the real market and, on the basis of that, form expectations about what will happen in the future. It is the collective expectations of investors that determine the company’s stock price.

While most assume that stock-based compensation is an incentive to improve real performance, it isn’t.  It is an incentive to increase expectations about future performance because an executive’s stock-based compensation will be worth a penny more than when it was awarded only if the executive can cause expectations to rise. So the primary incentive at all times for executives with heavy stock-based compensation is to increase expectations – even when expectations are so high they can never be met.

So how heavily stock-driven were the bank CEOs?  There is very nice data in the study of the compensation and stock sales of the CEOs of the 14 leading American financial institutions by scholars Sanjai Bhagat and Brian Bolton. Seven of the American financial institutions accounting for 94% ($116B) of the FHFA suit totals for the American firms ($123B) are included in their study (Bank of America, Citigroup, Countrywide Financial, Goldman Sachs, JP Morgan Chase, Merrill Lynch and Morgan Stanley).  It shows that over the 2000-2008 period, the CEOs of these seven companies were making small fortunes by exercising options and selling stock – an average of $139M per CEO. That is almost double what they made in cash compensation ($78M apiece). They lost, on average, $83M in the market crash, causing some to argue that they weren’t taking excess risks because they had so much skin in the game. But it is hardly a compelling argument for a group that was left with net proceeds of the 2000-2008 period of $133M each, plus remaining stock holdings of $76M each.  Remaining personal wealth of $209 million is not bad given the massive destruction of value suffered by their shareholders and the American taxpayers.

So why did Chuck Prince feel so compelled to keep dancing? Shareholder expectations for Citigroup performance just kept rising.  During the 1990s, its stock increased 15-fold. Hence, expectations of future performance for Citi rose an incredible 1500%. And they increased another 50% between the beginning of 2000 and May 2007.  Goldman Sachs almost tripled between January 2000 and October 2007.  On the other side of the Atlantic, Barclays quadrupled in the 1990s and then more than doubled between 2000 and February 2007. These were universally sky-high expectations – and their stock-driven CEOs had to keep increasing expectations from the already sky-high expectations or their stock would fall, disappointing their overly optimistic shareholders and taking a chunk out of their wealth.

Because expectations take into account everything that investors now understand, the only way to increase expectations from the current level is to positively surprise investors – to produce results better than they couldn’t have expected.  That is awfully hard to do – especially if you did it last quarter and the quarter before that and the quarter before that.  And the financial services business is hardly like the smartphone business, which is growing so explosively that all players can experience dramatic growth simultaneously.  Consumers need only so many checking accounts, savings accounts, investment services and mortgages.  Companies need only so much credit, issue so much stock, and make so many acquisitions.  None of these are the possible source of repeatedly surprisingly great growth for the entire sector.  A given player can produce expectations-busting results by grabbing share but everybody can’t simultaneously – share change is a zero-sum game.

To keep producing positive expectations surprises, the leading financial firms had to create something unreal – something with no physical limits unlike the number of consumers, or real share certificates of real companies.  Their creation was the wide array of mortgage-based derivative instruments.  There was no limit to how much of it could be produced, sold and traded – trillions of dollars’ worth, in fact. As is chronicled in Goldman’s infamous Abacus transactions, all Goldman had to do is call up a crafty hedge fund and a couple of dumb insurance companies and create a product out of thin air to make some extra bucks while taking zero responsibility for any economic consequences. And since investors were not accustomed to the creation of infinitely large ethereal markets, they would be positively surprised for a while – maybe forever, the most delusional of CEOs might have hoped.

But nothing lasts forever – even an infinitely-sized product market – and boosted by enthusiastic and self-interested bank CEOs, expectations get overly high and then crashed spectacularly back to earth in 2008.  And the world is now dealing with an entirely new task: unwinding an expectations-driven market multiple times the size of the entire global real market. No wonder it ain’t going so great!

There is much discussion of tighter regulation of the banks, now that we’ve found out how damaging bad behavior on their part could be for the economy. One regulatory change would dwarf all of the others in protecting the economy: banning stock-based compensation for bank employees. It is not so much about how much they make but what incentives their compensation structures produce. Bank executives need to be turned back to managing the real market rather than dreaming up ways – and there will always be ways – of manipulating the expectations market and making off like bandits while the economy takes it in the teeth.

Read the whole article

Roger Martin is dean of the Rotman School of Management. He is also a professor of Strategic Management at the School. A Canadian from Wallenstein, Ontario, Roger was formerly a director of Monitor Company, a global strategy consulting firm based in Cambridge, Massachusetts. He is the author of "Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL." He serves on the Thomson Reuters board of directors.

How to do a Health Food pitch on Dragons' Den

"Hi, I'm from "Hali-flax," said Brent, the pitcher of 0megaCrunch Flax, a health food. By using this corny joke to open his pitch, Brent gave a quick insight into how five years of partnering with him could feel, and the Dragons responded warmly. A sense of humour shows a great deal, for example, how Brent would build relationships with the retailers who would be selling Omega flax. 


So what the heck is flax and who cares? In any pitch to investors, the entrepreneur must illustrate very quickly why there is a burning need for their product in the market. Who would buy these jars of what looks suspiciously like hamster food? Luckily Brent had Arlene to step in and give his pitch for him. She showed why she is the Master of Persuasion and gave Robert a thorough primer on the value of flax as the miracle food to help those baby boomers. 


Next, the make-or-break question. "Sales?" 


Turns out Brent has a steady cash flow and is already working with Sobys in the Maritimes. The large retailer demands professionalism. Brent is ready to expand his territory. The business is making a fair profit but his sunk costs are growing due to marketing costs. 


Finally, it was time to try the flax. Out came a slightly sinister mascot called Flax Boy. The Dragons nibbled on the flax and I waited for a grimace. What is good for you often tastes like lawn clippings or tree bark. Evidently Omega Crunch is pretty tasty because Bruce, who has revealed himself to be a bit of a foodie and health nut, was scoffing down the stuff, "This taste is unbelievable." 


Then came his Big Jim swoop: 50 grand in dough for half the pie. No doubt, he was thinking it could add a health value to pizza crusts for Boston Pizza. 


Jim needs a controlling interest because he'll need to make business moves that may be over Brent's head and out of his comfort zone. This is the big decision for owners. Do I want to be in control or do I want to share the steering wheel and go a heck of lot further than I thought possible. It may seem obvious that Jim will bring his food industry clout and within a year, Brent will be in a far more profitable position than today. Yet for Brent, he knows it will mean a sea change in how the business will operate. 


Kevin threw in an offer with a pearl of a marketing idea: put Uncle Kevin's "smiling bald head" on the jars. That might work for golf balls but Arlene and Robert submitted their views on that idea in their diplomatic way. I did agree with Kevin about getting rid of Flax Boy, although torching him seemed a tad extreme. 


Arlene choked on Kevin's marketing plans, but made an offer with a similar financial structure that included a royalty fee in order to get paid back more quickly. This is good for a silent finance partner, but Brent knew it would kill his cash flow, which he needed to build the business. He also wanted more expert help. 


"Holy Flax! Three competing offers," said Robert. Indeed, Brent had interest but he recognized that although Jim would take more ownership of the business, he had deep food industry experience. That expertise is priceless. 


I have to say, with the dragon heavyweight on board, I'm looking forward to seeing Omega flax its muscles. 

Jacoline Loewen, MBA, is a Director of Loewen & Partners Inc., a corporate finance firm working with business owners and family businesses. Loewen & Partners has raised over $150 million for owner-managed Canadian companies, as well as managing family business succession, acquisition, and final sale. She is an advisor, lecturer and writer of business strategy and private equity. Her latest book "Money Magnet: How to Attract Investors to Your Business," published by Wiley, was selected by the Entrepreneurship course at The Richard Ivey School of Business.

Jacoline began her career working for Granduc Mines in Northern British Columbia and went on to work with Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy" which went on to be a best seller. She also wrote "Business e-Volution" which helped teams understand the business opportunities created by the Internet. She writes for the National Post, Globe & Mail and hosted Financial Post Executive podcasts (available on iTunes). She organizes CEO Roundtables and other conferences in alliance with Ivey Business School, Rotman and leading law firms.

Jacoline is a Director on the Board of the Exempt Market Dealers Association (EMDA), working with the Ontario Securities Commission to establish transparency in the private placement industry. She is on the advisory board of DCL International, Bilingo China, and Flint Business Acceleration. She was on the Board of Directors of the Strategic Leadership Forum where she ran the Knowledge Café series. Her other roles include serving as a judge for the U.B.C. and the Richard Ivey School of Business' Business Plan Competitions, mentoring for Canadian Youth Business Foundation as well as being a member of The Ticker Club.

Follow Jacoline on Twitter at @jacolineloewen