Allen Lau is the CEO and co-founder of Wattpad, a global multiplatform entertainment company.
Fifteen years ago, I worked at a company facing a crossroads. We needed to decide if we were building a product company or selling a service.
While mulling our options, an investor shared a piece of information that has stuck with me to this day, shaping how I think about the entire tech landscape in Canada. All things being equal – such as revenue, number of employees – the value of a product company that owns intellectual property (IP) is four times that of a similar service company. Generally speaking, an investor will value a service-based company at one to two times its revenue, while product-based companies are valued at four to 10 times.
Why does this matter? Because today, there are two types of tech companies in Canada: those that are homegrown and those that are international companies operating in Canada. U.S. and global tech companies operating here contribute a lot to Canada. But ultimately, their Canadian offices are simply a service to their international headquarters.
With this well-known and tested formula in mind, it follows then that made-in-Canada tech companies are able to deliver at least four times more value than foreign-owned ones.
Every day we hear about the Canadian government supporting a foreign technology player through subsidies or other incentives. This is fine. The government can and should create a supportive technology sector for both Canadian and international companies.
But it’s time for the government to play favourites. Since Canadian tech companies deliver four times more value, the government should quadruple the support Canadian companies receive.
Not convinced? Let’s break this down.
When an international tech giant opens an office here, not only do they take some the country’s best talent off the market, but they effectively demote our bright engineers, developers, etc. to service workers. And when you deliver a service-based work force, you can’t capture all of the upside. In today’s knowledge-driven global economy, IP is king. The ability to develop ideas and monetize them means wealth and prosperity.
But when Google, Apple, Facebook or any other foreign company operates here, anything dreamed of, researched or developed by Canadian workers is owned by these U.S. corporations.
Canada’s growing innovation economy has added billions to our economy, and its great to see the government recognize the power of the entrepreneurial spirit, of innovation and ideas and, of course, IP. But it still seems like it prioritizes U.S. and foreign interests.
Case in point: The Sidewalk Labs Waterfront project in Toronto may produce the world’s smartest city, but experts believe any IP generated from the project will be owned by Alphabet. Last year, some of the country’s biggest cities lined up to court Amazon for their HQ2 project, offering massive incentives.
Separate from the question of IP is a sobering fact: Foreign companies can pack up their Canadian operations at any moment. Other industries have seen how this plays out, with the continuing challenges to Canada’s manufacturing sector being the most obvious example.
When homegrown tech companies succeed, they add to our reputation around the world as an innovation leader. They build and support the growth of the local ecosystem and pave the way for future leaders and more innovation. Importantly, homegrown companies commit to staying here because they know Canadian diversity fosters a unique breeding ground for ideas and products that can solve the world’s problems. And yes, they can also make money and build a global reputation along the way.
I recently participated in a round-table discussion among technology and innovation chief executives and government officials. There, a policy leader remarked that for every time the government shows their support (through photo-ops, ribbon-cutting, mentions/name drops, etc.) of a foreign-owned company, they make sure to support a local organization. It’s a 1 to 1 ratio, but the ratio is off – closer to 4 to 1 makes more sense.
In 2019, it’s time for Canada to put Canadian tech first and show a level of support commensurate with the outsized contribution these companies add to our innovation sector. This means four times the support for the amazing local ideas, companies and visionaries founded and operating in Canada. It means increasing the support for Canadian tech companies, which deliver more long-term value, and aren’t just creating IP for someone else.
It’s time to lose outdated key performance indicators such as job creation to measure the success of our economy; these kinds of short-term KPIs are remnants of the manufacturing industry heyday and don’t give a true picture of our economic power. Instead, let’s focus on how many ideas we generate, retain and monetize in this country.
In 2019, IP is king. Let’s act like it.
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