Waterloo Tech Highlights for June 2024
Our goal is to provide you with a monthly primer on significant news events from private Waterloo-based technology companies in 5 minutes or less.
Intelliculture raised $3.5M of equity in a round led by Serra Ventures and included Emmertech and Tall Grass Ventures.
Swap Robotics signed a US$5M equipment financing deal to fund expansion of their robots for grass cutting and solar panel laying. They’re working through an investment round at the moment as well.
KA Imaging won a place in the Medtech Innovator program.
Kenota received FDA 510(k) and CLIA-Waiver Marketing Approval on their system for in-office allergy testing, making them the first in the world to do so.
RideCo is looking to hire a CFO to support their growth.
Shinydocs customer Town of Milton won the Municipal Information Systems Association 2024 award of Excellence for their digital records management system implementation with Shinydocs.
Zircuit received an investment from Binance. Terms were not disclosed.
Coguard received a grant from OpenAI to help them build a system to use AI to reduce software misconfiguration.
IllumiSonics received a grant of at least $750k from the Government of Canada INOVAIT program.
Chris’ Thoughts
Happy Canada Day! Go celebrate with a bowl of fresh local Strawberries.
This issue involves something that’s been on my mind for a while. I hope that writing here generates some discussion and improves the overall thought.
There’s lots of hand wringing going on about what’s wrong with Canada served alongside ideas about the core issue.
Significant and overlooked, our national productivity decline, wealth imbalance, and global competitiveness decline stems from a tendency to measure outcomes and success in terms of job creation. What if we have our incentives backwards and a focus on more jobs at all costs actually hurts us as a country?
Job creation sounds genuine enough because we’ve lived with it for over 60 years. Ask any regional or provincial development agency how they measure success – it’s through number of jobs created. Look at FedDev, and most other government subsidy programs and you’ll find a job creation requirement. Big government ribbon cutting events announcing factory openings for GM, Amazon and battery plants tout job creation. Heck, the government recently announced $1.7M of funding to some friends for the creation of 10 new jobs. Job creation remains measurable, honorable and easy to understand.
The problem – job creation doesn’t mean wealth creation. Job creation alone doesn’t increase productivity. Job creation doesn’t make us more globally competitive. In fact, a job creation focus does the opposite for all three of these according to the structure of most current government assistance programs. Here’s a few examples based on real events.
Job Creation Doesn’t Increase Productivity
The current trend in VC-backed software companies involves tracking revenue per head. One local company has really leaned into AI tools for developers and has managed to reduce their R&D staff by over 30% in the past 18 months while increasing their output by over 100%. Generating $450k of revenue per employee, they work tirelessly to increase that metric, paying a lot of tax dollars from profits as a result. They also pay healthy salaries to their employees, reducing turnover, providing employees with better tools and bigger challenges, resulting in significantly increased market share and more opportunities for each team member to grow. Departing employees now qualify for equally important roles at other companies helping them improve and scale. Importantly, company growth comes at the expense of competitors in other countries, so they’re diverting foreign tax dollars to Ottawa. When well-meaning people come knocking, offering incentive dollars in exchange for making more jobs, they’re quickly escorted out. These guys embody labour productivity. They do more with less. That’s the miracle of the industrial revolution that birthed the middle class in the first place. Somewhere along the way we lost the point. If you want to increase productivity, then revenue per head needs to go up. Through automation, technology and better organization we have done this for 100 years. Why did we get the idea that it was cool to stop doing that?
Job Creation Doesn’t Make Us Globally Competitive
A nearby Economic Development Agency, whose job centers around regional job creation working with a local technology hub who is supposed to look out for the interests of local tech companies spent a lot of time courting a foreign multi-national medical company to come set up a new R&D center here a few years ago. The foreign company received a significant amount of data and research showing the attractive attributes of the local job market and how proximity to the University of Waterloo would help them become more globally competitive. Of course, there would be tax incentives and subsidies for different things. But where do the attractive hires come from? They get picked off from the fledgling local med-tech startups. Whose research gets dropped by UW when a global multi-national comes with bigger pockets? The local med-tech startups. What do the incentives subsidize? A system where Canadian owned R&D becomes American owned and we not only lose the knowledge, but we lose the IP and monetary gains from owning it. This was literally an exercise in selling our local fledging med-tech community for the sake of a PR campaign. Every new job created would come at the expense of one taken from a local company trying to make it on their own and emerge as a global challenger – many looking to compete with the potential newcomer.
Fortunately, nothing came of these efforts. But what kind of system creates incentives create foreign jobs and foreign-owned IP at the expense of domestic ones?
Job Creation Doesn’t Mean Wealth Creation
Another local enterprise software company remained bootstrapped for over five years, quietly growing from their generated cash flows. Along came a federal government program offering a 5-year interest free loan of $5M in exchange for the company putting in $5M of their own and promising to create 55 new jobs. The CEO took the deal and immediately went out to raise $5M of investment capital. But the promised government funds came (very) late and now he had payroll and so he ended up having to raise $8M on much worse terms. Today the company is on the verge of a turn-around but at a severe cost. Recapitalizing a bunch of the debt into equity, and raising money on worse terms resulted in shareholders losing 90% of their equity. The founder has gone from owning 90% of the business to 7%. The people hired for the 50 new jobs all now work elsewhere, along with half the employees who pre-existed the expansion. Clearly this founder knows his mistake and owns it, yet it’s such a needless erosion of wealth and distraction from competitiveness and winning.
In software and many high skilled jobs, more is rarely better. Highly skilled workers want to work with other people of similar capabilities so too many bodies becomes a logistics exercise of people management and meetings and noisy Slack channels and new management positions who spend their time keeping everybody on the same page. I’m willing to bet there’s a startup in existence by now leveraging AI and productivity tools who will get to $1B of revenue with less than 20 people. And I’m sure it won’t be in Canada.
A Few Implications
Funny enough our SRED policy continues to chug along, doing the heavy lifting and remains applicable. It works because the Feds don’t put a salary cap on rebates (well they do but for practical purposes it’s not a factor). SRED needs some tweaks for sure but it’s far and away the best incentive program we have going, especially in terms of focusing incentives on what to do and not on how to do it.
Companies that Canadians are generally good at building, namely ones focused on software and automation should have their day in the sun if we get serious about becoming more productive. and AI moves from use as a tool to becoming a true job replacement. Sarah Tavel’s excellent Sell Work Not Software blog articulates the opportunity better than I could. Selling software makes a company less productive because they have $1M of labour and then add $250k of software cost. Selling a solution that eliminates $1M of labour cost, replacing it with $250k of software gets everybody’s attention because it’s productivity in action. Excellent operators like Costco have this down to an art form.
Artificial job creation gets exhausting after you finish turning over easy rocks. It opens programs up to deserved scrutiny like the Pasta announcement noted above. It creates a massive friction zone for government to meddle in free enterprise instead of letting markets figure it out. I’ve witnessed more than a few Contribution Agreements from government programs get bogged down in absurd salary caps for leaders – telling organizations that they must hire more people of much lower capability to make the announcement look more appealing to the masses instead of just focusing on sustainably competitive outcomes. Like most leaders, governments get quickly lost when they lose focus on outcomes and start messing around with the “how”.
Moving subsidy success criteria from “dollars per job created” to something oriented around productivity and competitiveness such as improving “dollars per employee” won’t magically fix all of Canada’s problems. I suspect the status-quo of more jobs at all costs will take a long time to wean off. We can choose global competitiveness or to become an outsource hub to enrich profits of foreign companies. Since today involves appreciating what we have and dreaming of something better, that’s my dream for this Canada Day. Along with a bowl of fresh Strawberries.
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Chris Wormald @cwormald