In the startup world, it's all about risk and reward. Many entrepreneurs abandon secure, well-paying jobs to chart their own destiny – and take a courageous gamble where the winner often takes all or nothing. With minimal capital, runway and resources, every decision an entrepreneur makes carries hefty risk. This is particularly pertinent in Canada given the very limited capital available to scale up early-stage companies. As firms scale up, they are often stifled by a gap where risk run highest and private investors fear to tread. The question: who can fill this gap and help high-potential companies to scale up?
Some of the most promising startup ideas die on the vine or are sold to foreign interests because local investors simply aren't prepared to shoulder the required risk to scale them up. Of course, if a great idea is a sure bet, many people would have already made their millions.
The ventures with the biggest ideas often carry the greatest risk – and the greatest reward. Sadly, the probability of an emerging firm with a big idea making the big time is low; some might even say, miniscule. But when a rare startup catapults to business stardom, every organization they have ever touched is ready to claim part of their success. What about those who contribute to the vast majority of firms that fail? No one wants to be associated with a failure, particularly while managing the fallout of vanishing investment and return. Unless, of course, you are one of the few venture capital firms that manage an 'anti-portfolio' and promote the investment risk you should have taken – and the reward you missed out on.
Take Bessemer Venture Partners. As published directly on its website, it is a "long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up." Among blockbuster hits – such as Ciena Corp., Staples Inc., LinkedIn Corp., Verisign and Skype – the company has a long list of equally notable misses. These include Apple Inc., Google Inc., Cisco Systems Inc., eBay Inc., Intel Corp., FedEx Corp.and Paypal – just to name a few. It takes tremendous courage to publicly declare the loss of epic opportunity and reward. According to Bessemer Venture Partners, "the phenomenal success of these companies inspires us in our ongoing endeavours to build growing businesses." This very statement encourages others to take intelligent risk that could help scale up the next big idea and big company.
So if you happen to be an investor who discovers the next Apple or Google during its earliest stages of development, and decides to take the plunge, how do you help to it scale up and maximize success? There are three key risks that investors take into account when making investments: technology; business capacity; and intellectual property rights (IPR). And it is typically not technology that causes a startup to stagnate. As I have written before, this is often driven by issues related to business management. This includes the ability to assemble the right leadership team, develop a successful go-to-market strategy, and secure customers.
Another key stumbling block – and one that gets minimal airplay – is intellectual property rights management (IPR). I have seen first-hand how IPR strategy enables commercial success. As the former Vice President of BioChem Pharma Inc., I can tell you the success of our firm was largely founded on a winning vicious patent case. As the CEO of Terragen Diversity Inc. just a few years later, I managed a roll-up IPR acquisition strategy that helped fuel our success. Unfortunately, these companies did not have the staying power to generate ongoing wealth in Canada. They were sold to foreign interests. A key driver to these acquisitions: valuable and well protected IPR. A solid IPR strategy is required to play, survive and grow in the big leagues – and most large firms know this well. Just ask BlackBerry. They often invest more in IPR management than R&D.
Scaling up a startup is riddled with risk. Few investors today dare to back entrepreneurs with big ideas before they demonstrate real results. So, who steps in? In Canada, venture capital has retreated downstream from startups many years ago with little sign of coming back. Financial angels play an increasingly important role in the commercialization ecosystem, but in many cases, it is still too early for these investors to step up to the plate. It has yet to be seen whether the $400-million committed by the Government of Canada to help rejuvenate the venture capital sector will bring about positive change. So what steps can we take? We can begin by:
- Developing policies that actively stimulate and support the scale up of firms, not simply the launch of startups
- Encouraging publicly funded commercialization agents to target investments to those firms with the greatest scale up potential, and help mitigate of key risks that present barriers to growth
- Stimulating greater dialogue in the innovation system on the importance of intellectual property rights management and the development of related policies
- Educating firms on how to develop an iron clad IPR strategy and use it to commercial advantage
- Creating greater incentives for angel and VC investors to back big ideas that lead to the development of big wealth creating firms
- When building the next generation of large and successful Canadian companies, perhaps we should draw on inspiration provided by one of Canada’s greatest hockey legends. In the words of Wayne Gretzky, “You miss 100 per cent of the shots you don’t take.” It’s time to help Canada take more shots on big ideas – and grow the kind of companies that will propel our economy for decades to come.
Dr. Mario Thomas is an entrepreneur, strategic executive and former venture capitalist