The OMERS pension fund (Ontario Municipal Employees Retirement System) is unusual in its aggressive march into financing Canadian ventures. With its recently launched venture capital arm – open for business in October, 2011 – it now invests directly in businesses that need fuel to become competitive at the global level.
From his perch as chief executive officer of the pension fund’s venture capital division, OMERS Ventures, John Ruffolo is in a prime position to evaluate Canada’s competitiveness globally.
Why did you decide to create a direct venture capital arm?
OMERS, like other pension funds, had been in the venture capital funding business for a long time. And in 2008, OMERS decided that it would shift its strategy and no longer fund venture capital firms, but that it would rather go directly and build its own direct arm. It’s well known that the performance of investments in venture capital funds, particularly over the past 10 years, has been very, very poor. Secondly, while the investments have been losing money, the fund manager just continues to earn management fees from declining assets. And [because OMERS is a direct investor in all of its arms] we can share all our resources and be far more strategic and have a direct eye right on the marketplace, as opposed to an indirect eye through funds. We don’t invest in funds.
Why have Canadian companies had difficulties in the past becoming competitive on the global stage?
We have great engineering talent here and great ideas. These guys start a business and they start to bootstrap themselves. They really watch their dollars, which gives you a good discipline of not burning money. … But when it becomes a question of selling your product and service around global markets, a lot of these Canadian companies have been unable to get that capital because there have not been capital sources available in Canada. It requires a significant amount of capital.
If they bootstrap themselves, they don’t really bust out globally. They either turn into lifestyle businesses or they sell themselves to largely U.S.-based companies that have far greater access to capital. The U.S. companies lever the technology and distribute it around the world.
[A lifestyle company] enables one or two founders to earn a very nice living and they don’t have to take a massive bet and bring in new capital. They see that the company is on a good path for the next 10 or 20 years, they can pull out dollars, have their house, buy a cottage, take the family on trips.
There’s nothing wrong with lifestyle businesses. People are making millions of dollars from them, but they’re making it for themselves. They are not venture fundable businesses. Once you raise capital from a venture capitalist, there is an expectation that the business will go through a very high growth so that it can pay back the returns to the venture capitalist. The venture capitalist can’t make any money out of a lifestyle business.
Some might say that Canadian business owners are not risk-takers, like American ones are. Is this true?
I don’t agree. Are there more risk takers in the U.S. than in Canada? Yes, but from population differences.
When I talk to some of the top U.S. venture capital firms about risk-takers, you know who they think are the biggest risk-takers in the world? Calgary oil patch folks. They go: ‘Oh my god, these guys see a piece of ground, they look at it, they drill endless holes, raise millions of dollars and strike a lottery ticket.’ The risk associated with that is ridiculous. Our oil and gas sector people are probably the greatest risk-takers in the world.
It’s not a Canadian thing. I find that in the technology sector, I don’t compare Canada to the United States. I compare Canada to Silicon Valley. Silicon Valley is a unique country in itself. When I go to other places in the United States, I hear the same questions that there are not enough risk-takers there. They compare themselves to Silicon Valley, too.
The difference is that when I ask a CEO [in the United States] about his background, it is fascinating how they describe it. They’ll say, ‘I raised millions of dollars, and I lost everything. I learned from that and built another company, but all I did was get the capital back. It wasn’t a good outcome, but at least I saved some jobs.’ And then they’ll say, ‘Here is the third company, and I now learned from the first two failures, and this time, I’m going to not only go way faster, but I’m going to watch those sort of areas where I hit a wall.’ In Canada, you don’t hear that. They’re embarrassed to say they had one, two, three failures, where in the United States, they wear it as a badge of honour. If you’re a first-time CEO in the United States, and you haven’t failed yet, you haven’t joined the club. I don’t see that in the United States outside of Silicon Valley.
What qualities must a Canadian company have to make OMERS interested in investing capital in them?
We have three criteria. First of all, you identify the rock-star management team, and it’s usually two founders, and you’re looking for someone who is trying to solve a problem that has been eating away at them. They’re really passionate about this problem and they really believe in it, and they’re not doing this simply to start up a business. They’ll do what it takes to solve this problem. And they also have a view that the world is not just Canada, but they are trying to solve a problem for the rest of the world.
Secondly – and we are largely looking in the technology sector – we’re looking at a problem that results in a large enough market. It’s a bit of a challenge, when you’re investing in a very early-stage business, and you don’t have validation what the size of the market really is. …We have to be able to have the vision to see that this could be a very large market on a global basis. There doesn’t have to be evidence of it today, but we have to be able to dream it.
Thirdly, depending on the stage at which you’re investing, you look at the company momentum. Are there proof points, now that you know you’ve got a great team? And how quickly are they getting traction in the market? How do they get traction? You extrapolate on this.
We make investments right across the spectrum of the stage of the company [– a lifecycle company]. We go as early as seed stage [$500,000 to $2-million of capital], early growth stage [needing to raise $2-million to $10-million] and late stage [in Canada, it’s typically $10-million to $30-million financing.] The very unique thing for OMERS Ventures is that we run across all three stages. Our investments to date range from $500,000 to $30-million. We take a balanced portfolio approach. Out of our first 10 investments, four of them have been in the later-stage category.
Is Canada indeed lacking innovation to become competitive, as some critics say?
I don’t think so. I think that purely from an innovation engineering part of development, I would put Canada up against anywhere in the world. When I’m down in the [Silicon] Valley, they talk about the Canadian engineers, particularly from Waterloo, [Ont]. I was stunned. This is from the top [venture capital] investors in the world.
Innovation isn’t the issue. The issue really is, how do we get more of these folks building companies, to get them the support to be successful. That support includes capital, mentorship, government support. Every country is trying to compete against Silicon Valley.
Right now, I would say the issue for Canadian competitiveness is that the days of Canada thinking we can compete in all industries, at all levels, are over.
With globalization, Canada is going to have to make very strategic choices of where it’s going to focus and innovative industries is one of those. It also means that you’re also not going to be able to do some things that traditionally Canada has supported. And that’s part of the problem [with convincing governments]. It’s very anti-votes. The voters right now tend to be in traditional industries.
There’s just not enough money to do everything. … Those manufactured products that are highly labour-intensive, the reality is that we are not going to be able to compete. It’s painful not to support those industries, but the reality is, those industries will die and it’s only a matter of time.
Do you get rid of all manufacturing? Absolutely not. You look at high-end manufacturing, where it requires massive investment in high-end technological equipment. Who does this very well? Germany.
They are one of the highest-wage countries in the world, yet they’re the biggest exporter in Europe, and they focused in on that high-end manufacturing. This is the issue why you then hear Canada has low productivity. If we focus on the manufacturing that requires big investments and technological equipment, that is far more productive, our productivity goes up. We are not reinvesting in that equipment. We’re continuing to just keep on with the status quo, and we’re starting to see our productivity slide down in the wrong direction. It gives me massive anxiety.
What about car manufacturing?
Car manufacturing is a good question. Do we continue with the same? Or do we say, we’re going to focus in on hybrid vehicles? We could become the world leader in this one space, and drop the broadness of manufacturing for manufacturing’s sake. What concerns me is that the U.S. is seeing those jobs lost to Asia. And when push comes to shove, and the U.S. has to make a decision on shutting down plants, do they shut them down in Canada or in the United States? If we’re not making those investments in the Canadian plants, they’re going to be shutting down the Canadian plants.
What should Canada do in terms of public policy to create more and better startups?
The federal government has been very supportive. They’ve been trying to help identify, along with the private sector, areas that they could stimulate.
And one of the areas that they announced in the budget was providing more access to capital for those. The government allocated $400-million. That’s a good example of the government actually listening.
It is very hard, to find that right balance. I don’t think the government should be making investment decisions, but I think they need to help create a level playing field so that Canadian companies have a chance to compete globally. This fund is going to be welcome.
But the bigger one they’re working on – and I think it’s is going to be far more effective – is looking at immigration policy. They’re working on two immigration policies that I think could be game-changing. One is called a startup visa, and the other one is called the immigration investor program.
Both are designed to get foreign capital into Canadian technology companies and to get more foreign talent here working in Canadian technology companies. One of Canada’s assets is its diversity of people. Now this to me is really smart. … Talent is the No. 1 issue for companies that are growing in Canada. We asked all of our portfolio companies what is the No. 1 issue that you want help from us on. And it was technical engineering talent. Every one. This is going to be key to our future.
What countries are getting it right in terms of fostering innovation and global competitiveness?
Germany is one, but look at Israel. For a country that has such a small population, they are very focused. They are a big startup nation. They are strong in high technology, related to the military and defence. In 1989, when the wall fell, millions of Russian Jews, extremely well educated in the sciences, moved to Israel and it created the most massive influx of brain power in a very narrow area of their history. … A number of venture capital firms, largely U.S.-based, were attracted to come to Israel to provide the fuel necessary for these companies to grow.
You see it with advanced manufacturing from Germany, Israel in innovation and Sweden in telecommunications. Sweden very narrowly focused in on the wireless industry. Countries that don’t have the requisite population have no choice but to do that. If you are Brazil, China and the United States, do them all.
Name some companies that OMERS has invested in that are good examples of success.
I would say the great success stories already are [learning management system] Desire2Learn in Waterloo and [social media platform manager] HootSuite, [market research company] Visioncritical in Vancouver, and [written story sharing site] Wattpad.
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