Fixing pervasive problems in federal government innovation funding programs

OPINION & ANALYSIS

By Aman Chahal 

Aman Chahal is an innovation consultant, helping companies and clients identify barriers to innovation and creating solutions.

When I worked at Sustainable Development Technology Canada (SDTC), I became increasingly concerned about how it was operating and spoke out about not wanting to cheat the Canadian taxpayer.

Who knew it would end up in a six-year battle for the truth, during which I was blackballed from even being able to speak to people in the cleantech industry?

While the Auditor General’s report on SDTC is exceptional, its recommendations point to a clear challenge in the Government of Canada.

Transferring SDTC’s portfolio to the National Research Council (NRC) reveals that there is a huge need for more education – within the government itself – about how the government works.

Why didn’t the government just get rid of SDTC entirely?

The first reason is that the government has committed to contribution agreements – contracts with payments, essentially – negotiated by SDTC with cleantech startups. The government is legally bound to honour these contracts. The second reason is we need something in this country that is actually helping entrepreneurs.

So then let’s ask a couple of important questions:

• What is the best way to honor the government’s commitments?
• What is the best way to restructure to optimize for the largest future benefit for Canadians?

Since the existing contribution agreements have already been signed, government really just needs to adhere to these and let the remaining projects close out naturally. Should be five years maximum.

After that, what’s the best way to restructure for optimal benefit?

The NRC is the wrong vehicle for having an SDTC-like function and it will not help the economy. The NRC is an economically inefficient organization.

Stephen Harper tried to privatize the NRC, but he went about it the wrong way. So now the NRC is this quasi-governmental and quasi-private organization. Its own labs are not accessible to entrepreneurs. The economics dictate that NRC prioritize contracts with industry. So the NRC’s national labs do not serve the nation’s interests, but the biggest pay cheque.

NRC’s Industrial Research Assistance Program (IRAP) is also rife with the same issues that affected SDTC. It is a pervasive problem that Nobel Prize winner Daniel Kahneman and management consultant and author Douglas Hubbard, in his book How to Measure Anything, allude to. The problem is known as the “expert’s dilemma.”

In my view, middle managers of incumbent companies typically cannot understand or measure disruptive ideas, especially when they're trying to get a return on investment.

As American academic and business consultant Clayton Christensen, who developed the theory of "disruptive innovation," wrote in this article: "Incumbments' focus on their existing customers becomes institutionalized in the internal processes that make it difficult for even senior managers to shift investment to disruptive innovation." 

In Christensen’s book, The Innovator’s Dilemma, he describes how companies that are large and previously innovative get an established customer base, and then are driven by the economics of large companies – which are very different than the economics of small startups.

Likewise, managers of government innovation funding programs aren’t used to understanding and measuring truly disruptive ideas. They’re trying to organize their programs in a way that the investments look logical – which is antithetical to disruptive innovation. Such managers are judging the startups’ performance on metrics that make no logical sense.

Another problem, based on my experience and what some companies have told me, is that some of IRAP's industrial advisors are known to hold grudges, although not every advisor is like this.

But what does a company do if it gets a frontline industrial advisor who really dislikes the founder or the company and/or doesn’t really understand the company’s innovation – especially it it’s in an advanced sector? In those scenarios, the fate of very innovative companies can be up to a person who isn't qualified to make the investment decision.

Even in the best-case interpretation of a government funding program, what if the advisor makes a mistake? There is no knowledgeable, impartial ombudsman to turn to. Without due process, we are potentially locking founders and startups out of funding that is vitally important.

Problems pervade all federal funding programs

The truth of the matter is all the federal government’s funding programs are affected with these same issues. Plus they are spread out among so many federal ministries and agencies that the administrative costs go up. There is an argument to be made that what Canada really needs now is a granting-investment bank that also serves as a national incubator.

Start this bank by consolidating all the public money given out from the Natural Sciences and Engineering Research Council and the Social Sciences and Humanities Research Council, including all the grants. This pool of funds then forms the startup capital to begin investing in double-blind ways, including with grants.

It is well known how biased existing granting funds are. All the money goes to the same men in academia. Making grants actually merit-based would help advance women (and their startups) who now have less than three per cent chance of accessing private funding.

Then take the money out of Business Development Bank of Canada and Export Development Canada and find the best investors to help design an innovative new investment vehicle with double-blind intake, and stipulate payback conditions.

For example, if a researcher who was paid from public funds for their research takes that research private and establishes a company, then the government should get a bit of money back. Not a huge onerous amount like a venture capital investment firm would receive – closer to what an angel investor would get.

Also, the government’s return on investment on the private side should be staged, from startup to scale-up, with a “graduation” payout. It’s similar to the structure Israel uses.

The reason for this approach is very simple: we are a small economy. And it is a global knowledge economy. We should consider that the new resource Canada will be exporting is human intellect and intellectual property.

Going forward, government and startups should keep these things in mind:

• Do not reward bad behavior. Outside of support staff, no one who was at SDTC or in any of these other government funds that operate similarly should work in investments in Canada. The reason is simple: If you’re not in the startup world, then you don’t know what is emerging.
• Double-blind all intake of funding applications. While this would be hard to do, it is possible to design a “business readiness level” that would account for industry product fit. And use analytics for investment. This approach also could inform Canada where regulations or certifications need to be changed.
• Open intake of applications directly to entrepreneurs. Don’t make them first have to work with and get a recommendation from an established incubator – as was the case with SDTC funding.
• Create the most stringent requirements for management of the funding organization, including double-blinding the composition of the management team as 50 per cent women, 50 per cent men.
• Make all due diligence that’s done confidential, to avoid introducing bias.
• Create an ombudsman. No system is perfect – assume there will be imperfections. All audits should always be done outside of and independently from the organization’s human resources department.
• Call the Y Combinator, the world’s most successful technology startup accelerator. All the resources a startup needs at the initial stages are available from Y Combinator’s “Startup School” free online course.
• Create a continuous feedback loop. Talk about the things that did not work, things that need to be fixed. Objectively measure and publish specific metrics and make it part of the business readiness level. Show how many companies that were supported have the right fit, and why.
• No directed investments. At best, we can create a culture that optimizes the conditions for innovation and entrepreneurship. We cannot then dictate what it should look like. We have no idea – that is why it is called innovation.

As Canadians and as taxpayers making investments in startups, we should structure ourselves as a national incubator. Part of the money we make on the private side gets reallocated in the public side.

Such a system would be the most economically efficient, incorruptible and unbiased vehicle in the world. It would be able to adapt with the time and changing conditions – and power Canada’s economy forever.

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