BUILDING GLOBAL WINNERS THE EXPERT REVIEW PANEL REPORT ON THE ONTARIO NETWORK OF ENTREPRENEURS

Transcription

1 BUILDING GLOBAL WINNERS THE EXPERT REVIEW PANEL REPORT ON THE ONTARIO NETWORK OF ENTREPRENEURS Fall 2017

2 TABLE OF CONTENTS Letter from the Expert Review Panel... 3 Executive Summary... 4 Overview A Changing Global Environment... 6 Chapter One Successes Chapter Two Challenges Chapter Three The Way Ahead Conclusion Appendix 1: List Of The One Members And Descriptions Endnotes

3 A LETTER TO THE MINISTER OF RESEARCH, INNOVATION AND SCIENCE FROM THE EXPERT REVIEW PANEL Our Expert Review Panel (the panel) was formed in the last quarter of 2016 to assess the effectiveness and appropriateness of the strategy, governance and programs associated with the Ontario Network of Entrepreneurs (ONE), with an emphasis on the Regional Innovation Centres (RICs), and MaRS in particular. The five of us were chosen for our expertise in venture capital, social enterprise and international markets. Our group has first-hand experience dealing with the ONE and similar international innovation networks. Over the past 10 months, we traveled the province, from Ottawa to Thunder Bay, conducting consultations with key members of the ONE (network). We met with thought leaders in innovation policy, talked to all levels of government in the field and poured over insights from client surveys. We were also able to draw from Deloitte s July 2017 program review of the ONE and MaRS that provided good source material and guidance. Finally, we looked at how other jurisdictions were meeting the innovation challenge to see if there were lessons in best practices for Ontario to absorb. Our findings and recommendations represent our combined assessment of what is working well, what problems exist and what the government should do to prepare for the next decade of growth of Ontario s innovation ecosystem. The report concludes that while the ONE has many positives, there is a need to modify its structure and approach to innovation in order to set the stage for continued growth. The key themes addressed include a need to focus on global reach for Ontario technology firms, and on centralization and specialization of ONE members and their clients. The panel members would like to acknowledge the excellent support we received from the staff at the Ministry. As well, we want to thank the many contributors to this report especially the key members of the ONE who were very open with their concerns and who collectively form the heart of Ontario s innovation ecosystem. It is their leadership and commitment that we need to channel as we work together to build an even stronger innovation economy in Ontario. Gerry Remers Chair, Expert Review Panel Former President and COO of Christie Digital Systems Canada Inc. Andy Broderick VP of Impact Market Development, Vancity Community Investment Bank Ian Carew Director, Northleaf Capital Partners JF Gauthier CEO, Startup Genome Gerri Sinclair Strategic Innovation Consultant and Managing Director, Kensington Capital Partners 3

4 EXECUTIVE SUMMARY The speed and depth of technological change is astounding. A new wave of platforms and technologies are set to transform the very foundations of society, from how we drive (or don t drive) our cars to how we invest our money or diagnose our health. Commerce is conducted increasingly by algorithm. Huge data sets are spawning new industries. And all these changes have unleashed a global innovation race, with cities, regions and countries scrambling to get a piece of the economic benefits at the risk of falling behind. For the entrepreneur with a breakthrough idea, the challenge is to navigate this dynamic terrain and turn that spark into a profitable and successful company. For more than a decade Ontario s Ministry of Research, Innovation and Science (MRIS) has relied on its arm s length Ontario Network of Entrepreneurs (ONE) as its prime response to that need. The ONE s constellation of incubators and institutions, support programs and advisory services has helped nurture a culture of innovation in the province, with the number of startups growing and world-leading research emerging from Ontario universities and regional entrepreneurship. Yet compared to its competition, which now extends from Taiwan to Tel Aviv, Ontario s innovation ecosystem remains stalled in the middle-of-the-pack. Too few Ontario startups are plugged into global networks of ideas, capital and customers. Nor is the province producing enough companies that scale and compete internationally. And too few are applying these breakthrough technologies to address Ontario s social and environmental challenges. This is not an academic problem. Building companies with global reach is crucial to creating and attracting the high caliber jobs that will entice the next generation of talented Ontarians to work here, creating the communities and economy that will serve the province. So it is fair to ask, as the Minister of Research, Innovation and Science has done of this panel, whether the ONE needs to make adjustments. Is it adequately focused on identifying and helping the companies most likely to succeed? Does it deliver the right services and programs for entrepreneurs with global ambitions? And as we face the next wave of disruption from technologies like artificial intelligence, is a system that was designed for the needs of a previous technological age ready to meet the transformational challenges of the coming one? The panel s answer to the Minister is that the ONE needs renovations to be ready for the next era. Our inquiry uncovered a system that has grown organically over the last decade, resulting in an unwieldy tool to deal with the accelerating pace of technological change. The network needs a philosophical shift to meet the challenges 4

5 ahead, focusing more directly on Ontario s core strengths and connecting companies to global networks. Doing so will require making changes to the way the current network is organized and governed. In short, we recommend that the Minister: Infuse Ontario s innovation network with a greater global ethos and strategic focus. 1. Focus the network s strategic goal on going global. 2. Develop greater international reach by creating new programs that connect Ontario entrepreneurs to the nexus of global knowledge and markets from the earliest stages of their development. 3. Increase government spending, while targeting a greater weight of those resources on sectors where Ontario has a competitive edge. 4. Ensure firms can get expertise from the best mentors and business leaders wherever they are in the province. 5. Improve the assessment mechanism of new and existing programs and clients and be willing to let go of those not meeting expectations of the network. Strengthen the central head office functions of the network to improve governance, program review and alignment to the province s strategic goals. 6. The network needs central coordination from inside the Ministry of Research, Innovation and Science to ensure resources are focused on priority sectors and technologies. 7. The ONE brand should be re-named (perhaps as Innovation Ontario ) to increase its profile and improve clarity among clients about its mission and the services it offers. 8. An advisory body should be established to offer expert advice to the Minister on innovation policies and programs. 9. Address the shortfall of investment capital through action on the MaRS Investment Accelerator Fund. 10.The RICs should be grouped (and some re-named) in three categories based on roles and responsibilities. The ONE, buffeted by external forces as well as internal challenges, is on the cusp of a new stage in its development. The recommended steps outlined here are designed to prepare the network to succeed in a transformational age, helping Ontario s entrepreneurs and innovators build the foundations of the provincial economy for the decades ahead. 5

6 OVERVIEW A CHANGING GLOBAL ENVIRONMENT The concept of innovation was not always embraced with the fervor it enjoys today. Irish philosopher Edmund Burke surveyed the political disruption caused by the French Revolution and warned against its intolerant excesses; lamenting that a spirit of innovation is generally the result of a selfish temper and confined views. But in the 20th century, innovation s role in driving growth made it a staple of economic theory. Its popularity has only accelerated in the digital age. Since the 1990s, invoking the need to innovate and embrace disruption (which Burke so feared) has become central to the business and public policy vernacular among those seeking to unlock the wealth of the next economic era. Ontario has not been immune to innovation s siren call. As far back as 1987, the provincial government of the day sought to better-connect industry with the publicly funded research being done in academia and hospitals by creating the Ontario Centres of Excellence (OCE). And in 2005, a host of provincially funded programs and organizations aimed at developing a home-grown innovation culture were pulled together under the auspices of the Ontario Commercialization Network (OCN). Over time, it was renamed the Ontario Network of Entrepreneurs (ONE) and provincial entities such as Small Business Enterprise Centres (SBEC) and Business Advisory Services (BAS) were included in the network. Known by its acronym ONE, the network has evolved into a complex web of 130+ independent not-for-profit organizations members that span government agencies, university labs, incubators and industry partnerships. All are aimed at supporting the growth of Ontario businesses at different stages of development, from researchers with promising ideas to startups with a new technology product. The ONE has grown through evolution rather than strict planning. It was always intended to operate as a mesh network in which the members and their business clients could be served according to their needs, wherever they were in the province. In fiscal 2016, the ONE received $97.7 million in provincial funding, roughly on par with the level reached in 2014 when the Campus-Linked Accelerators (CLAs) and On-Campus Entrepreneurship Activities (OCEA) programs were introduced through the Youth Jobs Strategy (YJS). The YJS was launched as a two-year strategy in 2013 and then extended for another two years in The largest portion of funding of the ONE $38 million in the 2016 fiscal year was delivered through the OCE, an intermediary organization working with industry, academia and 6

7 government on R&D collaboration programs, commercialization and entrepreneurship. Another $21.7 million funded MaRS, the Toronto-based incubator that is one of 18 Regional Innovation Centres (RICs) and which has become a coordinator to the wider network. And $14.5 million went to the 50 Small Business Enterprise Centres (SBECs) which work with municipal governments on the creation and growth of local businesses [the SBECs are the subject of a separate review]. Total MEDG/MRIS Funding to ONE members in fiscal 2016: 1 CLAs & OCEAs 3% BAS 3% AIO 1% MaRS SBECs 15% 22% SICs 5% $97.7m OCE 39% RICs (excluding MaRS) 12% There is little doubt that an entrepreneurial spirit has been rising in Ontario throughout the lifespan of the ONE. Ontario has more startups today than it did a decade ago. The number of startups in Toronto alone grew from 2,500 to 4,100 between 2012 and 2015, making it Canada s top place to open a business. 2 Yet the lifespan of the ONE has coincided with seismic changes to the environment in which Ontario companies operate. Other jurisdictions have piled into the innovation race, making the competitive landscape riskier, faster-paced and more global. Private sector incubators arose in Ontario and elsewhere alongside those of the public sector. A host of new technologies and platforms, from artificial intelligence to distributed block-chains and more, are pushing disruption to new frontiers. Meanwhile questions about how to protect and strategically manage Ontario generated intellectual property (from foreign multinationals) and how to ensure open access to data have become central to the fate of startups and a healthy innovation climate. 7

8 There are worrying signs that Ontario s innovation system is stuck at a regional level, with its competitive position slipping relative to other jurisdictions. The 2015 Global Startup Ecosystem Ranking showed Toronto fell nine places to 17th among its regional peers (and that ranking did not include Asia s hottest innovation centres), while Kitchener-Waterloo fell out of the top 20 from its 16th place ranking in The Toronto-Waterloo corridor was combined into a single entity for the 2017 Ranking, landing at 16th. 4 We recognize that there is volatility in these rankings from year to year. But we should not ignore signs of Ontario s main startup engines falling behind global leaders on key performance measures such as company growth, the number of company exits in which investors cashed in, and on the amount of later-stage venture capital funding. These weaknesses contribute to system-wide problems in Ontario innovation: Ontario companies lack global reach, with only a small fraction of small-and-medium-sized enterprises becoming strong exporters. The percentage of small businesses that grow into mid-sized ones has continued to fall since Ontario startups have a poor record of graduating from incubators to stand alone in the marketplace. That performance begs the question of whether the ONE, as currently constituted, is optimally positioned to help Ontario s entrepreneurs grow their businesses in a shifting, global environment. And if not, what changes are required to ensure it delivers the services Ontario businesses need to compete in what has become a global innovation arms race? This report lays out a diagnosis of Ontario s innovation system and makes recommendations to the Minister of Research, Innovation and Science on steps the government might take to adapt for this transformative era. This includes a fundamental shift on the way the current network is organized and governed. It recognizes and accepts that the roles and responsibilities of some members notably the OCE and MaRS have expanded beyond their original relationship to the ONE. This report and its recommendations deal only with the work of those members as they relate to funding received through the ONE. 8

9 Briefly stated, the ONE needs: Greater strategic focus on building global reach. There is increasing evidence to show that a company s degree of global connectedness is a harbinger of its future growth. Ontario companies need to be better plugged into knowledge, ideas, people and organizations in the world s leading tech hubs, from Silicon Valley to London, Boston to Berlin. The ONE needs to adopt a strategic focus to help companies create those connections from the earliest stages of their development. Stronger central governance. Strategic direction is hard to apply across a network without a strong central authority. The ONE needs stronger governance, located within the Ministry of Research, Innovation and Science, to ensure the network s players are aligned to provincial priorities. This would allow for centralized data collection to ensure network-wide funding accountability, as well as common metrics to gauge whether a program s performance goals are being achieved. Regional Innovation Centres (RICs) to specialize in client services and serve specific needs. RICs are serving more companies at a time when provincial funding has been flat, stretching their capacity to effectively deliver programs and services to clients. A new grouping of RICs based on roles and responsibilities would allow for greater specialization and collaboration, and return RICs and other network members (such as the OCE) to their core mandates as they pertain to the administration of ONE funding and program delivery. Our proposed recommendations may not be universally applauded. A new model is disruptive to those vested in the status quo. Like all jurisdictions, Ontario has local and regional sensibilities that often see investments by government as a zero-sum game: if one region benefits from some government policy, then surely another must be losing. Our investigation uncovered opportunities to encourage RICs to move to greater specialization in regions that hold specific competitive advantages rather than simply trying to expand their client base. Indeed, the Ontario government must make hard decisions about where our companies have the greatest opportunity to succeed in a rapidly changing global economy, and the ONE must align its funding and programs to this strategic direction. 9

10 In examining the ONE we have heard terrific success stories that left us encouraged about the state of innovation in Ontario. The demand for the ONE s services speaks to the emergence of a culture in the province that values business creativity and an appetite for risk that is vital to Ontario remaining an economic force in the 21st century. Our analysis and recommendations are designed to foster that further, and to ensure that the government s role in the system is clearly defined, communicated and executed. 10

11 CHAPTER 1 Successes

12 CHAPTER ONE SUCCESSES For generations of ambitious young Ontarians, the road to a successful career ran through a big institution the public service or a large corporation, bank or law firm. But that gravitational pull has weakened in the digital age. Many of today s graduates and young adults choose instead to pursue the risks and rewards of building companies and new products on their own. Culturally, startups are to this generation what rock bands were to baby boomers: a creative outlet with social cachet. Many of this century s most celebrated icons are the founders of the consumer digital era Steve Jobs (Apple), Jeff Bezos (Amazon) and Mark Zuckerberg (Facebook) as well as next-wave entrepreneurs like Elon Musk. Silicon Valley s potent formula of engineering skill, adventurous venture capital, funding support from the Department of Defense, and an eagerness to tinker has spawned envy and attempts at imitation around the world. Ontario was no exception, launching a variety of policies and programs through the first years of the century designed to promote business-led innovation and commercialize some of the research and knowledge within its higher education system. Much of that ecosystem has since coalesced into the ONE, a collection of organizations, programs, and services spanning the full commercialization continuum to help businesses grow from idea to market. In the course of our inquiry, our panel found a great deal of encouraging evidence that the ONE is having a positive effect on entrepreneurship and innovation in Ontario. Among its achievements: 1) The ONE s members are deeply committed to their work and believe in their mission. Our discussions with members of the network found leaders and staff deeply committed to their clients. Morale was high. Those working in the system believe in the importance of their work to their clients and the growth of the future economy. 2) The ONE has been a strong participant in nurturing a startup culture in Ontario. Ontario compares favorably to other jurisdictions on the number of startups per capita and has sustained this growth in terms of the number of startups created annually. 6 12

13 Total Number of Startups Founded per 1,000 Ontario Silicon New London Berlin Tel Aviv Valley York The ONE catalyzed the creation of 2,214 startups through On-Campus Entrepreneurship Activities (OCEAs) along with Campus-Linked Accelerators (CLAs) between 2014 and 2016 alone. The startups that germinated from OCEAs and CLAs have a 91% two-year survival rate, 20% higher than the global average. 7 Relative to peers, Ontario entrepreneurs are well supported by a network of accelerators and incubators: 49 overall. According to Deloitte, that is more than New York City, London, Berlin or Tel Aviv. 3) The ONE has helped develop a clientele of entrepreneurs from a wide variety of sectors. The sectors served by the ONE range from app development to e-commerce, healthcare and financial services. The largest share of Ontario startups come from those involved in software, internet services, and media and entertainment. Interestingly, technologies oriented towards a specific end market (e.g., health care, financial services) contain a relatively small proportion of the firms, indicating a majority of firms most likely produce products or services applicable across several sectors. 8 Apps Professional Services Design Science and Engineering Real Estate Content and Publishing Advertising Data and Analytics Health Care Financial Services Hardware Commerce and Shopping Information Technology Mobile Sales and Marketing Media and Entertainment Internet Services Software Sectoral Composition of Startups in Ontario 2.05% 2.32% 2.34% 2.39% 2.43% 2.45% 2.62% 3.16% 3.19% 3.45% 4.09% 4.37% 4.65% 4.82% 6.04% 6.83% 7.35% 13.93% 0% 2% 4% 6% 8% 10% 12% 14% 16% 13

14 There are several examples of regions in Ontario that have developed sectorspecific identities based on local assets and capabilities. For example, Innovation Factory (if), the RIC located in Hamilton, has pulled together local health science assets in the region, from St. Joseph s Healthcare to McMaster University and Mohawk College, leading to the creation of the Synapse Life Science Consortium. The ONE is also servicing Ontario s emerging social enterprise sector, small companies that seek to marry social and environmental goals to healthy bottomline results. For example, the Social Enterprise Partnerships is a funding program, positioning the ONE as the go-to source for social enterprise business fundamentals in Ontario. 4) The Province s investment in the ONE is paying dividends. Evidence generated by Deloitte found startups that engage with the ONE perform better than those that do not. Moreover, companies that used services from the ONE were more successful at generating private funding, had higher revenues and greater success in generating patents. Leveraging provincial money to get funding from other sources is one of the main benefits of the network. For example: The OCE invested $44 million in companies in fiscal 2015, enabling them to leverage an additional $40.6 million in federal funding and $50.9 million from the private sector. 9 The MaRS Investment Accelerator Fund (IAF) has made 135 investments in high potential technology companies. Over 75% of companies have received follow-on funding that accounted to approximately $689 million. This represents 13.9 times invested capital. 10 Since being designated a Sector Innovation Centre (SIC) for information communication technology (ICT) in 2009, CommuniTech has attracted $222.5 million from other public and private sector partners to support 11 its digital strategy. The government data from 2016 indicates that the ONE helped 5,655 Ontario entrepreneurs open new businesses 20% more than five years earlier. Those businesses created 14,160 jobs and brought 4,475 new products, services and process improvements to market. 12 Though it s unclear how many of startups and jobs would have been created without the ONE. Entrepreneurs are not obliged to share credit for their success. 5) The Ontario Centres of Excellence has grown into an essential convener for collaboration between industry and the province s research institutions, and begun to reach global markets. The Ontario Centres of Excellence (OCE) is the biggest single player in the ONE and has a strong history of fostering innovation in Ontario. The OCE was 14

15 originally intended to accelerate industry academic collaboration through the use of matching grants. Today, the OCE has become a major vehicle for delivering and administering MRIS programs. It has expanded its mandate to provide a variety of programs, such as TargetGHG program, a $74 million GHG emissions reduction technologies matchmaking initiative, and broadened the reach of its startup and scaleup programs outside the province. Its annual Discovery Event celebrates the best of Ontario innovation and has become a must-attend gathering for innovators and entrepreneurs. The OCE is particularly effective at leveraging its provincial funding into further investments from industry. As mentioned above, the OCE has secured an additional $50.9 million in funding for its clients in 2015 from its $44 million transfer from the Ontario government. The OCE has incrementally increased sales by its client companies by $165.2 million in fiscal , a four-fold increase over the previous year. 13 6) The ONE has played a central role in broadening the innovation system beyond established centres like Toronto and Kitchener- Waterloo to reach all corners of the province. The ONE has successfully nurtured startups outside the traditional startup grounds of Toronto, Kitchener-Waterloo and Ottawa. Although some concentration remains (and should be encouraged), the ONE has ensured that the entrepreneur in Windsor or Sudbury has access to capital, mentoring and a network of support. SPOTLIGHT: In Northern Ontario, the discovery of significant mineral reserves including cobalt, silver and gold has played the major role in settling new communities and developing resource extraction supply chains for manufacturing. But mining faces enormous challenges, not only from global competitors but on cost and sustainability questions. The Northern Centre for Advanced Technology Inc. (NORCAT) is a Regional Innovation Centre (RIC) located in Sudbury. NORCAT s Innovation Mill partners with local entrepreneurs and existing companies to help start and accelerate their innovation and growth. NORCAT also has unique testing capabilities focused on the mining industry and provides access to one of the few training mines in North America. In 2015, NORCAT made major investments in their Underground Centre, a facility that allows local and international mining supply companies to test and showcase their products. 15

16 7) MaRS has emerged as a global player in the innovation space, carrying the Ontario brand beyond the province s borders and attracting foreign investment. MaRS began as an incubator but its presence in Toronto and its role as a distributor of funds across the ONE has raised its workload and profile. These factors have made it attractive to the technology divisions of several multinational companies. The MaRS incubator hosts 200 firms and organizations with 6,000 employees, and its West Tower is home to blue-chip global innovation brands such as Autodesk, Facebook, Airbnb, Etsy, Johnson & Johnson (JLABS), and Merck. MaRS is also mobilizing capital to close funding gaps. As of March 31, 2016, $100 million in capital was provided through MaRS programs. This funding has leveraged an additional $700 million of private capital in follow-on funding. 14 MaRS now attracts hundreds of investors, corporate leaders and innovation tourists from around the world. This map of 200 visiting delegations in 2015 shows interest in MaRS extends from China to Brazil, India to Europe. MaRS attracts hundreds of global visitors a year 15 16

17 CHAPTER 2 Challenges

18 CHAPTER TWO CHALLENGES The ONE has expanded organically and quickly over time. It has added partners and mandates to its mesh network in response to the needs of sectors and regions as they emerged. It has become a go-to vehicle to deliver policy initiatives and new programs from Queen s Park that may only tangentially fit the design of the network. The result is a system that can appear operationally opaque, sometimes duplicates services, and can lead to competition rather than cooperation among the partners. This chapter lays out the challenges facing the ONE, identifying what needs to change if the model is to respond to a swiftly changing global innovation landscape. 1) Ontario companies lack global reach. Evidence suggests that Ontario startup companies stall before reaching adequate size to compete globally. This issue is clear when looking at the customer base of Ontario s startups and the percentage of those customers that are outside the continent (other region customers). Ecosystem % Other Region Customer % Foreign Customer Helsinki 24% 43% Paris 21% 36% Berlin 28% 42% Jerusalem 32% 42% Tel Aviv 37% 45% Amsterdam 15% 28% Stockholm 30% 46% Montreal 13% 24% Vancouver 18% 57% Ottawa 11% 42% Toronto 12% 42% Waterloo 11% 43% Specifically, the Toronto-Waterloo corridor ranks 34th globally to the extent at which their startups have international customer reach. 16 Although the Toronto-Waterloo corridor has excellent connections with New York City, Silicon Valley and other hubs in North America, there is poor connectedness globally. Only 12% of Toronto-Waterloo startups customer base comes from outside the continent compared to 37% in Tel Aviv. 17 This underscores the degree to which Ontario startups are focused on selling in the province or just across the U.S. border. Lack of global reach is a key factor hampering expansion of Ontario s startup ecosystem

19 Ecosystem Lifecycle Model Phase 1 Phase 2 Phase 3 Phase 4 Activation Globalization Expansion Integration Silicon Valley Rate of Unicorns Berlin London Size & Resources Resource Attraction Global Global Ambition & Connectedness Sydney Paris Moscow Bangalore Stockholm Immigration Constraints Performance Rate of Exits Rate of Early Stage Success Leakages National Mexico City Santiago Startup Experience Part of the problem is that many startups may be reluctant to think globally about their ventures. Anecdotally, innovation experts shared the view that Ontario firms may not instinctively prioritize global sales activity because they believe the local market (which includes the United States) is sufficient to achieve some level of sales. There is evidence early-stage startups that show global market reach see their revenues grow 2.1 times faster. 19 Startup Genome research concluded an ecosystem s connection to entrepreneurs in other top global ecosystems (i.e., connectedness to the global fabric of knowledge, ideas, people and organizations), is a key success factor leading to market reach and growth acceleration. 20 Therefore, Ontario requires a paradigm shift to encourage companies to more ambitiously go global from the earliest stages of their development. 19

20 2) The ONE s strategic goals are opaque. The ONE lacks clearly articulated goals across the network. The panel s interviews with RIC leaders and staff found significant confusion about the ONE s targets and how companies and RIC s are measured for success. Among the strategic questions the ONE s leadership needs to resolve: Should members shift focus from helping startups to helping businesses scale? Does the ONE emphasize technology plays or should it favour innovative products that could make traditional industries and sectors more competitive? Should the ONE lean towards serving companies that fill local or Ontario demand, or should priority be given to companies with global market ambitions? Only by asking and answering fundamental strategic questions will the network be able to operate in concert toward Ontario s goal of being a top ranking innovation jurisdiction. 3) The ONE lacks effective, active and transparent network-wide oversight. The ONE is currently governed by a patchwork of legal agreements set out in its individual funding transfers, with almost no effective oversight of system-wide funding. All ONE members are separate legal entities and organizations. 21 Each organization has its own corporate governance structure, with independent boards and decision-making power. Supervision of the wider network relies on two bodies: 1. ONE Advisory Committee Created to provide general oversight over the network, its programs and services and make recommendations to support the implementation of the program delivery model. The Advisory Committee has not met for more than two years. 2. Individual ONE Member-Ministry Liaison Committees Created to manage the relationship between the two Ontario government ministries that provide funding (MRIS and MEDG) and the individual members delivers the funds and services. The committees monitor performance against established goals, objectives, and performance measures in the funding agreements. This arrangement does not provide adequate system-wide oversight. The committees fail to meet regularly, making its leadership passive. The committees have grown unwieldy; the original membership of eight ballooned to 26 members, without increased coordination or delineation of responsibilities. 20

21 There is not enough coordination between the committees and MRIS. There is an unsatisfactory level of transparency on how the committees make decisions. The lack of strong, activist governance prevents the ONE from developing a clear strategy and strategic goals. It creates unnecessary confusion among the RICs and clients about what is expected of them in return for funding. And it inhibits network-wide data collection and funding accountability. The lack of central governance discipline opens the path for RICs to compete with each other and duplicate services. Furthermore, it prevents RICs from having a longer-term view of how and when funding will come. This inhibits their ability to plan and hire staff accordingly and affects their ability to deliver the highest quality of service to businesses. The vacuum in central leadership has been filled, in part, by MaRS, which has expanded its role as a RIC into that of a provincial coordinator, overseeing network-wide activities such as metrics and survey administration through MaRS Data Catalyst and Market Intelligence. MaRS also distributes public sector funds across the ONE through the Investment Accelerator Fund (IAF) and the Business Acceleration Program (BAP). But this expanded mandate for MaRS has created confusion and at times tension among other RICs, who question where decision-making power on funding resides. It opens at least the perception of bias for MaRS as both a provider of services (funder) to the businesses it incubates, while simultaneously being an intermediary of which businesses are funded through network-wide programs such as the IAF. 4) The ONE s funding is flat. Provincial money is the oxygen of the ONE system. It pays for the innovation infrastructure and programs, and is a vital prerequisite for leveraging capital from the private sector. But the current funding model is unable to deliver the predictability that members need to plan. For example, the RICs core funding has been flat since 2010 even as the network continues to expand its numbers of clients and the services it delivers. Funding was based on a 4-year budget forecast prepared by each RIC. However, unanticipated demand for RIC services has led members to scramble for more resources to adequately serve their increasing client base. The current budget of the ONE is unlikely to generate the desired outcomes of Ontario s becoming a top tier innovation jurisdiction. 21

22 RIC Funding BAP Program Funding RIC Funding 937, , , , , , , , , , , , , , , , ,000 BAP Program Funding 863, , , , , , , , , , , , , , , , ,421 Communitech MaRS Invest TechAlliance VentureLAB Innovation RIC Spark Innovation Launch Lab HalTech WEtech Innovate (TBC) Ottawa Factory Centre Centre Guelph Alliance (TBC) Niagara NORCAT IION NWOIC SSMIC $0 42% 52% 41% 46% 45% 45% 38% 51% 48% 48% 51% $200 51% 52% 50% 49% 50% 52% 49% 55% 55% 62% $400 45% 52% 59% 54% 52% $600 58% 48% 49% 48% 50% $800 Thousands $1,200 55% 48% $1,000 $1,400 48% $1,600 $1,800 $2,000 MEDG/MRIS Funding for RICs for fiscal

23 5) The ONE s funding and delivery model makes longer-term planning difficult. It also leads to tensions among network partners. The panel sees the current delivery model (i.e., the funding and planning cycle) as an obstacle to growing Ontario businesses, largely because it prevents longterm planning. The fragmentary distribution leads to duplication and inefficient accounting for spending. The Ontario government currently uses both MaRS and the OCE as a vehicle to flow funding to deliver ministry programming, which has led to an unintended expansion of both their administrative size. And by allowing some members of the system to play a role in how funds are distributed, the current model has contributed to tensions between members. For example, there is a perception across the RICs that MaRS BAP responsibilities extend beyond a purely administrative role and include funding decision-making responsibilities. This creates tension between MaRS and the RICs. Other RICs do not know if MaRS is giving them funding or taking funding away from them. In our interviews with RICs, the question Is MaRS my boss or my peer? was frequently raised. Furthermore, the panel believes its role as a distributor of funding stretches MaRS s capacity to serve its own clients, a possible explanation for MaRS s lower levels of client satisfaction in the Net Promoter Score (NPS), a standard measurement of customer experience and how likely they are to recommend the organization to a friend or colleague. Just 39% of MaRS clients who responded to the 2017 BAP Survey said they would recommend MaRS to other potential clients the lowest of any RIC. On average the willingness to recommend a RICs service to a friend or colleague was 63% across the other RICs. 23 There are other possible explanations for this discrepancy, including the potential that MaRS carries the pressure of greater expectations because of its profile. Some members of the panel argue that early-stage startup founders are not a reliable judge of impact. But overall, the panel was concerned by the sentiment. Deloitte s analysis of the BAP survey results suggested the level of dissatisfaction experienced at MaRS, at both the organizational and individual service level, is the result of MaRS being stretched too thin due to high client volumes. 6) The individual parts of the ONE operate independently,each providing their own back office support that leads to fragmented data collection and higher administration costs for the network. Each member (OCE, RICs, CLAs and SBECs) within the ONE operates as an independent entity. Each has its own back office that handles accounting, data collection, legal arrangements and performance metrics. The lack of system-wide knowledge about clients, built on a single customer relationship management (CRM) software system, leads to misuse like the practice of RIC-shopping where businesses rejected by one part of the network for support simply try to 23

24 get it from another. Meanwhile, as each RIC expands, it further strains its own back office capacity and, potentially, the resources it can devote to serving each client. In short, this atomized approach to program monitoring hampers the ONE s ability to function as a true network, with negative consequences for its effectiveness and Ontario s overall innovation brand. 7) The ONE continues to suffer from a lack of investment capital at early stages in particular. There are significant funding gaps, specifically for early stage companies. Early-stage funding (i.e., the sum of seed and Series A funding) is one of the most relevant indicators of the sufficiency (or lack) of local funding, because from Series B and especially for later rounds, capital markets are international rather than local. While more and more jurisdictions are increasing their innovation budgets, Ontario has not gone up in the 2017 Global Startup Ecosystem Ranking with the ONE s current investment: The Toronto-Waterloo corridor has reached a level of early-stage funding per startup of $0.44 million, rivaling top global ecosystems: $0.76 million for Silicon Valley, $0.57 million for New York City, $0.48 million for Berlin, and $0.45 million for Los Angeles and London. 24 Ottawa has a funding gap per startup of $0.14 million versus the numbers above. 25 While the total amount of venture capital in Ontario is increasing (up from $1.2 billion in 2015 to $1.8 billion in 2016), the province s startups still trail leading jurisdictions in average deal sizes per round. 26 Overall dollar amounts and rankings are highly volatile. Startup Genome analysis reveals that Canada s early-stage funding is low compared to the United States. 27 Thomson Reuters data shows that average Canadian financing remains small at $8.26 million per deal in 2016 (though up from $5.1 million in 2015), with the average deal size is far behind the U.S., U.K., Israel and China. 28 The lack of early-stage funding could be a reason for our inability to scaleup in Ontario. If the highest potential startups find it more difficult than their counterparts in better resourced ecosystems to raise appropriate amounts of seed and Series A funding, they are less likely to accelerate (or survive) to the scaling phase of their lifecycle. 24

25 CHAPTER 3 The Way Ahead

26 CHAPTER THREE THE WAY AHEAD The last decade has been a period of remarkable flowering of an entrepreneurial ethos in Ontario, visible in the number of startups and an expansion of public and private sector partnerships in innovation. That success suggests the ONE has played an important role and should continue to play a leading role in fostering further growth. For Ontario startups, competition is just as likely to come from Singapore or Berlin as from the startup across the street. New technologies and platforms have emerged, making the innovation landscape not only broader but dependent on factors, such as access to big data sets and intellectual property protections. The global innovation economy is increasingly driven by a leading group of urban regions. These innovation hot spots have several common features: strong academic institutions an exceptional and young talent base a rich pool of startups and innovative global companies an abundance of risk capital government support and focus on innovation access to open, dynamic markets (at home and abroad) interactions and collaboration between science, startups, business, and creative industries (convergences) Ontario s innovation ecosystem is strong in some but not all of these areas. Thus the ONE requires a significant reboot if the province is to keep pace in a global race. Three themes emerge: 1. The ONE must adopt a strategic focus on going global, developing programs that plug Ontario companies from the earliest stages of their development into global markets and knowledge hubs. 2. The ONE needs greater centralization of purpose and coordination to articulate and drive its strategic goals, as well as to govern its mesh network. This requires a central body within government to assume responsibility for networkwide back office functions like program design, data collection and funding accountability. 3. The delivery end of the system RICs, CLAs and other partners should focus on delivering services to clients and have the freedom to specialize, either in local strengths, company size or specific sectors. 26

27 Our recommendations fall into two categories: I. GO GLOBAL Recommendation 1 Focus the network s strategic goal on going global. The Minister s top priority should be to focus on building global reach in Ontario s ecosystem to become a top 10 jurisdiction in sectors or technologies where Ontario has a competitive advantage. There is increasing evidence to show that a company s degree of global connectedness is a harbinger of its future growth. Ontario companies need to be better plugged into knowledge, ideas, people and organizations in the world s leading tech hubs, from Silicon Valley to London, New York City to Berlin. An example is Israel s organization called Start-up Nation Central helps global companies connect with thousands of Israeli startups and Research and Development centres. These relationships enable Israeli startups to grow globally from a very early stage. While some members (such as MaRS, CommuniTech, and Invest Ottawa) are pursuing stronger global ambitions, the ONE needs to adopt a network-wide strategic focus on helping companies create global connections from the earliest stages of their development. Given the maturity of Ontario s innovation ecosystem, there are several fields of technology which have shown scale and momentum, such as artificial intelligence and advanced computing. Potential sectors to consider may be advanced manufacturing, digital/ict, clean technologies, and health sciences. By clearly articulating a vision in a way that it can be easily accessed, understood and disseminated, the entire network would work together on shared goals. Recommendation 2 Develop greater international reach by creating new programs that connect Ontario entrepreneurs to the nexus of global knowledge and markets from the earliest stages of their development. A startup s fate is often determined early, when it first identifies a problem to be solved or an untapped market opportunity to be exploited. If we want Ontario companies to scale to global size, they need to have that outlook from the earliest days, seeking borderless opportunities for new products and services. 27

28 In turn, support from the ONE needs to focus on startups that demonstrate a global view of customer development. While it is not possible to precisely predict which companies will be among the one per cent or so to flower into global firms, the focus of the ONE s support should be on nurturing those that are aimed that way from the start. Ontario companies must be aware of and adopt the best business practices from the great centres of global knowledge and technology. That means being engaged not only with Silicon Valley and New York, but to global innovation centres in Europe and Asia such as Tel Aviv, Berlin and Singapore. Top innovation ecosystems are centres where global customers are found because startups from all over the world compete there, and where entrepreneurs are knowledgeable of global market needs. For example, in the software sector the key global markets are primarily Silicon Valley, London and New York City. The panel recommends investing in new tactics to enhance global reach, as well as allocating a large part of the network s program budget to executing these strategies. Below is a summary of examples of programs that are on track and direction for others: a) Establishing global connections along the same lines as leading private sector accelerators, to help startups develop quality relationships with entrepreneurs in global markets. For example, Techstars, Mass Challenge, 500 Startups and Startupbootcamp are accelerators that provide access to international capital, mentorship, marketing, business development, customer acquisition, and talent recruitment. Techstars accelerators are based in leading innovative jurisdictions around the world, including New York City, Berlin and Tel Aviv. b) Delivering more robust matchmaking services, in which government resources help companies develop sales channels abroad. One particular example is Finland s Finnpartnership s Matchmaking Services. This approach would help broaden the local entrepreneur s network and can promote the large presence of Canadians in places like Silicon Valley, New York City and London. The panel recognizes that some of this work is happening under the mandate of the Ministry of International Trade (MIT), but more connections need to be made with the ONE. c) Developing a think tank that would provide a platform for academics and industry leaders to study best practices in going global. d) Hosting an international startup event bringing global entrepreneurs to Ontario. 28

29 e) Encouraging foreign entrepreneurs to come to Ontario, thereby promoting global networking and partnerships. For example, Hong Kong has started paying part of the salary of their entrepreneurs that intern with Silicon Valley firms. Another example of global network building is the Israeli Innovation Authority s 12 landing pads for foreign entrepreneurs as part of an Innovation Visas program. f) Leveraging Ontario s foreign national community to increase global collaboration. There may be lessons for Ontario from Startup Genome s Pay it Forward Project, for example. g) Increasing international collaboration through program criteria. For example, the Ontario-Israel Research Network Program Magnet (managed by the OCE but currently outside the ONE), is a successful model. The Magnet program s current challenge is focused on cybersecurity needs in Ontario s fintech sector. Applications must include at least one SME from Ontario, one SME from Israel, and one partnering financial institution from Ontario. h) Launching an overarching web presence to showcase Ontario s brand to other governments, investors, and global jurisdictions. This would make it easier for foreign firms to identify innovative companies, hubs and sponsors in Ontario. Recommendation 3 Increase government spending, while targeting a greater weight of those resources on sectors where Ontario has a competitive advantage. Ontario competes against dozens of other jurisdictions that are increasingly investing in their startup ecosystems. The Ontario government should consider both increasing funding and directing resources at those technologies, companies and sectors that have the best chance of success. The panel recommends a significant increase in the total innovation budget to meet the network s goal of becoming a top 10 innovation jurisdiction. Increased investments must be aimed at a narrower number of sectors and companies where Ontario has a competitive edge or opportunity to compete globally. The panel recognizes there are budgetary restraints, but is compelled to recommend that both a budget increase and changes in how resources are allocated throughout the network will have the biggest impact. Directing the ONE to focus on targeted technology types or sectors of the economy will help to amplify existing areas where Ontario has a competitive advantage. This would orient the ONE towards scaling Ontario s innovation capabilities towards global competitiveness. 29