January 17, 2012

A Sustainable Startup Model for Canada

At the end of my last post on the gaps in the R,D,E chain, I talked a bit about why people with the development skill set are attractive to large companies, but ultimately don’t fit in with these companies’ emphasis on engineering (e.g. rigour, discipline, process).  Startups are by far the best at the critical development piece between research and engineering, and yet the existing model for startups has them dissolve after acquisition.

Quite often when a company buys a startup they think that they actually want the organization, but the supporting jobs start disappearing, a bit later the technical staff will drift off, and in the end the whole place just shuts down.  Canada is full of acquired entities that followed this path.

That is OK on some level, because the transition will hopefully have brought some measurable amount of money or expertise into the country. But ultimately, it also means an economics loss: the loss of a company, the associated jobs, and a skilled development team that has found ways to work together effectively and efficiently.  This is especially important for a country like Canada where there are not a lot of big companies left that do engineering on a large scale (Nortel is gone, RIM is spiralling to the bottom, etc.).

So, how is it beneficial for the development capabilities of startups to be dispersed instead of being rolled into other development projects?  Industry really doesn’t want the development skill set in the long term, and every startup is forced to waste time starting their company from scratch. Following this traditional path is both capital inefficient for the startup as well as sub-optimal for the region in terms of long term economic growth. On the flip side, any law or policy that limits the ability of a startup in a small economy to be sold to the big players in another economy is fundamentally a mistake. Doing so just lowers the competitiveness of the venture and ultimately weakens the economy.

Having witnessed an economically successful cross-border acquisition and the aftermath, I can’t help but wonder if there isn’t a more effective way to build companies. This was on my mind when it was time to set up another venture in Canada: TandemLaunch was the result.

TandemLaunch is meant not only to solve the major international challenge of university-industry tech transfer, it is also meant to be a “sustainable startup” for Canada. TandemLaunch runs multiple development projects in parallel, each encapsulated in its own company to avoid cross-project distraction. Each portfolio company is structured in such a way that they are easy to acquire by industry, and allow industry to hand pick the technical resources that they need.  All other assets, including facilities and people, stay with TandemLaunch after any acquisition for assignment to new projects.

This means that the jobs created by TandemLaunch actually stay in the country of origin, grow in that country, and the money that is made on acquisitions is invested into future ventures in that country.  This maintains and creates jobs, and sustains a long term company.  All this, while transferring technologies into an organization that’s more effective at engineering, and ultimately consumer production.  The idea is to treat the invention and early prototyping steps that small economies like Canada are often very good at as the product of the larger entity. Each portfolio company has its own business model, revenue stream, and ultimately acquisition opportunities, but from the perspective of the larger entity they are revenue streams themselves.

Added side benefits are: the ability to create and maintain stronger industry connections, by the nature of multiple venture engagements; higher capital efficiency of each portfolio venture (avoiding a significant portion of ramp-up cost as the resources of past ventures are re-used where appropriate); and the fact that investment capital is maintained in the entity and thus the country (TandemLaunch is effectively an evergreen fund).

We will see how the model unfolds, but I have high hopes that it will lead both to financial success and an ongoing contribution to the local economy.

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