"MaRS, Jobs, Banks and Small Business"
President & Chief Executive Officer
Royal Bank of Canada
October 28, 2010
MaRs Innovation Summit
It's a real pleasure to be here today to contribute to the
important discussion of job creation and innovation in the
knowledge economy. My perspective is influenced by three decades
of work in financial services, my role as Chair of MaRS, and
my concern with the critical issue of improving Canada's productivity.
The New York Times reports that there is a white brick café
in Greensboro, Alabama called the Pie Lab, which brings people
together to eat pie and generate ideas. Their self-described
formula goes like this:
- PieLab = a neutral place + a slice of pie.
- A neutral place + a slice of pie = conversation.
- Conversation = ideas + design.
- Ideas + design = positive change.
MaRs is PieLab, minus the pie. The premise is that innovation
doesn't happen in isolation. It happens when people interact,
debate, discuss and in doing so, foster innovation with purpose.
Author Steven Johnson defines innovation as occurring when
"we take ideas from other people - from people we've
learned from, from people we run into in the coffee shop,
and we stitch them together into new forms, and we create
something new. This means that we have to change some of our
models of what innovation and deep thinking really looks like."
He calls this the "liquid network" - an environment
that enables the coming together of ideas, in sometimes unpredictable
but satisfying combinations.
Job creation, the success of our entrepreneurial class and
our economic vitality here in Canada depends on the
creation of these liquid networks. Especially now, as we stand
poised at a new and significant inflection point in our national
history, created by:
- The aftershocks of the financial crisis, including the
grumblings of new protectionist attitudes and populist distrust
in traditional social frameworks
- The rise of China and India as economic powers and influencers
- The continued globalization of the world economy
- The issue of global warming and the growing tensions between
resource-rich and resource-poor countries.
These very large and powerful trends raise a multitude of
questions for Canada. What will be our role in the world as
it faces its social, political and economic challenges?
How do we participate more fully for the benefit of Canada
and those countries we connect with? How do we as a country
recognize and act on our relative strengths and weaknesses?
Canada is fortunate to have many, many singular gifts and
- We live on the second largest territorial mass in the
world which is rich with natural resources, including the
increasingly scarce resource of clean water.
- At 34 million people - which puts us in the lowest decile
of population density in the world - we take in more immigrants
per capita than any other country.
- We are one of the few nations in the world that has not
experienced war on home ground for more than two centuries.
- We are adjacent to what is still the largest economy
in the world, with all the attendant benefits.
- The World Economic Forum considered Canada to be one
of the bright lights during the recent recession, thanks
to strong fiscal policies and our banking system.
In short, we are a young country that has not grown up with
the same stress or disadvantages of many others. Our collective
memory is of political and economic stability, strong health
and education infrastructure, good social safety nets and
more peace and goodwill than not. And so we are well positioned
to achieve any and all goals we set for ourselves.
But we have to rise to the occasion and can't be complacent.
As good as our story is, our standard of living is faltering
and we have not kept apace of the global developments in innovation
and R&D - key components of future success. Our economic
success remains rooted in natural resources rather than in
innovation and the knowledge economy.
We need a better way to translate research and ideas into
viable commercial successes that create jobs and new businesses
and represent Canada well on the world stage. We must transform
our economies and look to the future rather than rely on the
Earlier this month (October 4, 2010) the Globe and Mail announced
the findings of a C-Suite survey, which puts the blame for
this country's poor track record on innovation squarely on
C-Suite executives. According to my peers who were polled
for this study, the two top factors important in explaining
weak Canadian productivity is business leaders' risk aversion
and a culture of complacency.
The World Economic Forum finds that Canada's competitiveness
position has slipped from 9th to 10th place, and warns that
we need to improve innovation, increase R&D and produce
higher on the value chain. We did receive some good marks
-- we ranked first in the world for having minimum procedures
for starting a new business and ranked a respectable ninth
for the time required to start a business.
This is an important success, since Canadian small businesses
employ nearly half of the private sector work force and in
2008 were responsible for 21 per cent of the total value
of exports, with an average value of $1.5 million per firm.
Here in Toronto, Stats Canada reports that the city experienced
the country's highest small-business growth rate between 2008
and 2009, at 7.5 per cent, compared with a national average
of 2.7 per cent. It also found that we are home to a self-employed
population in excess of 240,000, the highest number in Canada.
But our bad marks included ranking 24th and 19th respectively
on ease of access to loans and venture capital availability.
Equally troubling, we were 20th in company spending on R&D,
and 19th in our capacity for innovation, tied with Iceland,
China and Slovenia. In other words, it is easy to start a
new business but difficult to grow and transform that business
into a global leader.
Yes, we have examples of world-class innovation in Canada,
from Research in Motion, Bombardier, SNC Lavalin and our banking
system, but we need more - more examples and more action.
It's time to stop spending our future and start investing
in it. Innovation, R&D, Venture Capital - that is the
equation we must solve for and they are all interrelated.
I say this because Canada's labour productivity level in
the business sector has been lower than that of the US for
almost 50 years. And a recent report by the Institute for
Competitiveness and Prosperity shows that if the GDP per capita
gap between the US and Canada were closed, Canadian families
would have $12,200 more in annual personal disposable income.
This is a compelling carrot for encouraging innovation and
increasing productivity. There is also a stick. Our population
is aging, and underwriting their retirement years and health
care will present a serious fiscal challenge. As well, the
world economic order is changing around us at lightning speed,
driven by the BRIC economies that are aggressively investing
and competing to increase their own living standards. Competitiveness,
efficiency and productivity will be more important than ever.
We face no serious obstacles to taking action, except for
our complacency with the status quo. As a small country, however,
we must develop strategies that fit our profile, competitive
advantages and political realities. MaRS is a great example
of a "made in Canada" strategy.
Our future standard of living will get its sustenance from
a supportive, collaborative environment for entrepreneurship
and more successful commercialization of innovation. Collaboration,
rather than competition across our institutions - like MaRS
Innovation - helps compensate for our size disadvantage. We
also need to encourage diversity and immigration that can
generate variability and velocity in idea generation, and
thus commercial synergy and jobs.
Small populations tend to increase a country's need to outsource
ideas and knowledge and today, Canada has a small population
by virtually any standard. Pundits predict that our population
will reach 50 million by mid century, but accelerating this
growth through immigration will exponentially expand our collective
intellectual vibrancy, and our connection with and understanding
of markets around the world. What really matters to innovation,
says Ridley, is not how smart individuals are, but how smart
our collective brain is.
MaRs is a powerful example of Ridley's notion. It's a place
where the best laid plans to stop by for twenty minutes can
turn into two hours of sharing ideas, meeting new people and
learning new things. I know this because we advise and bank
most of the companies at MaRS.
What is the role of the banking sector in commercialization?
Sixteen years ago, RBC created a group dedicated to knowledge-based
industries in Canada. The group consists of growth companies
in emerging market sectors that are R&D oriented, highly
innovative, export oriented and with high growth potential.
Our clients comprise the full range - from very small, early
stage to the largest multinationals.
It is one of our fastest growth segments in our Canadian
Banking business with double digit loan growth (14%) in 2009,
and we are very honoured to be the leading bank in this sector.
We got to be the market leader because we've been working
with knowledge-based companies for a decade and a half, through
all points of the cycle. We're the only bank with a strategic
advisor and specialists in knowledge-based businesses - we
have specialists in information and communication technology,
cleantech, media and entertainment, and life sciences and
healthcare. Because of this specialization, we understand
the business models and can provide customized business advice,
and provide financial solutions that enable the journey to
commercialization. This includes debt capital, great advice
and connections to angels, VCs and government funding. We
also refer companies to each other - with material results,
again and again.
For example, Grant Tipler who works in our life sciences
and health services sector, was out seeing one of our biotech
companies, and asked the CEO, "What is your biggest issue?"
He responded that his biggest problem was dealing with the
manufacturer doing their product trials in Germany. Grant
arranged some introductions, and the trials are now taking
place - with no problems - in Toronto. In other words, our
longevity in the knowledge economy allows us to see possibilities
for connections that others don't, and we use this knowledge
for the benefit of our clients.
Our work with knowledge-based businesses - through MaRS,
across Ontario, and through organizations like Cleantech North
Association - makes us acutely aware of their challenges.
Complexity related to globalization, world-scale competition
and regulatory issues are issues, and early stage companies
are particularly hamstrung by insufficient access to capital.
We typically lend capital at the latter stage of a company's
development and bridging the funding gap between early stage
companies, R&D and commercialization is a persistent problem.
Canada doesn't suffer from a lack of pure research. It is
abundant and reasonably well funded. Applied research, which
moves an idea toward commercialization, is our national Achilles
heel because of the paucity of funding. As it stands today,
countries like Israel and the US are well ahead of us in terms
of programs and financial support to the knowledge economy
- although as I always emphasize, we can't solve our problems
by imitating someone else. We can learn but not replace as
dynamics are different.
Now, we often get the question why banks don't invest in
early stage companies. Although we do have some equity investment
activity taking place in funds of funds, the simple answer
is that we're in the business of advice and lending senior
capital, not venture capital.
We are not qualified as venture capitalists or capable of
lending the management support that good VC's can provide
to a company's success. Banks are first and foremost providers
of debt and early stage companies require equity - not debt.
It is at a later stage of development where banks play a broader
role in capital formation. But we do know who does make these
kinds of investments, and what government programs are available,
and we make hundreds of connections between our clients and
VCs every year. In a world where capital is hard to find,
our knowledge of where it is, is valuable.
But there is a very large difference between what VC firms
do financially for knowledge-based businesses and what RBC
Banks have a different risk profile than do VC firms. Financing
by banks is short to medium term collateral-based debt financing
that requires regular cash outflows of regular interest and
principle payments by the company.
For a start up, debt financing's assumption of cash flow
can be extremely difficult and timeframes are much different
than those of the banking industry.
Venture capital is a better option because of its long term
horizons and because it doesn't require collateral, thus allowing
the company to preserve cash flow that would otherwise have
gone to debt repayment. Start-ups often say VC funding lets
them sleep better at night because they don't have to worry
about a pending covenant or payment.
When a VC takes a stake in the company - be it in the form
of common and preferred shares, convertible warrants or options,
its goal is to exit its investment at some later stage by
selling it a third party or the other equity owners, or listing
it on the stock market. This type of capital infusion reduces
balance sheet leverage, as opposed to bank financing, which
In addition, the VC's operating model is to make a number
of investments with the hopes of a small number hitting a
home run. It then makes its money by selling the company or
merging it with another company. RBC makes its money on interest
spreads. It would be foolish to earn debt returns for what
amounts to an equity investment. Quarterly results and accounting
don't lend themselves to private equity investment and, as
a matter of interest banking regulation is discouraging and
even preventing banks from providing private VC on private
equity investments. As much as I believe banks play a role
in facilitating early stage companies, we are not the solution
to this problem of early stage underfunding.
So how does Canada and Ontario solve the early stage funding
short fall? In my view, a lot of little things are necessary.
We will never have a developed VC market like Silicon Valley
nor will - or can - our governments spend billions on commercialization
as is the case with some emerging countries.
Our solution must work for Canada, a small country with a
highly skilled work force, outstanding science but limited
domestic markets. Our solution must be a combination of different
- government programs and support has to increase (R&D
tax credits - subsidized funding programs)
- ways to give easy access to VC's from the United States
(access, tax equality, relationship building)
- Specialty funds like those in MaRS or government support
funds (RBC contributes to the Ontario Innovation Fund)
- Angel programs and initiatives (info sharing and transparency)
- The development of a VC industry in Canada
It is not easy but we have to find ways to improve access
Now, just because RBC doesn't provide financing for early
stage companies doesn't mean we're not involved at the incubator
stage. Unlike other banks that wait for stable cash flows,
RBC is there right at the beginning. At this stage, our client
may not have fully built out their business but have developed
their research into a marketable idea. We bring advice, our
network and our expertise, all of which are helpful to early
stage growth. By helping early, we're betting that we will
be the bank of choice as the company grows based on the relationship
we've built and the value we've provided. We've followed this
process with companies like Open Text, a public high-tech
company, and Arctic-DX, a company that is developing a molecular
test for macular degeneration, and it's a process that makes
a real difference to the ultimate success of early stage companies.
Let me give you an example. We met a company with an idea
four years ago. Claron's idea was software for image-guided
surgery using CT scans. One application was software designed
to take a CT scan and perform a virtual colonoscopy for diagnostic
purposes. In this case, we provided a loan against tax credits
(secured lending), we successfully introduced the company
to a US VC firm, and when Claron moved out of MaRS, we provided
a mortgage on their new building. The company now provides
systems to medical centers through North America and in Europe,
China and Japan. We're proud of our continued contribution
to Claron's success, and our deep understanding of their business
allows us to continue to provide good advice and counsel.
Canada has a tremendous opportunity in its knowledge-based
- Canada's bio-based economy is valued at more than $78
billion and is considered foundational to our national economy.
- In media and entertainment, we expect that the shift from
physical distribution to digital distribution of content
will generate new growth and revenues.
- The cleantech industry grew by almost 50% during the financial
crisis of the past two years and is rapidly shifting from
a domestic market to an export market. Canada has the potential
to build world class companies in this space, with virtually
all cleantech companies looking to move beyond Canadian
- In IT, despite very strong growth in IT services, our
productivity in this sector is lagging the US due to underinvestment
and shortages of skilled people, but attracting a skilled
labour force plays into our strengths.
Despite many challenges, Canadian companies in the knowledge-based
industry are translating new ideas into real and economically
significant contributions to our country. For us at RBC, it
is a real privilege and immensely satisfying to be a part
of this process with our clients, with MaRS, and with the
many partners we have who play a role in the success of this
key industry. But we have to find ways to take it to the next
level which is what today is all about. The future vitality
and productivity of Canada will be driven by our success in
Thank you for your attention and enjoy the conference.