Roaring Lion - Venture Blog

Part IV - The Need for Speed. Device Creation and Convergence

2011-11-16T07:33:00.000-08:00

It's almost taken me a year to update this blog, but I'm here.

It may be apropos that I have waited so long for the post on this subject - given the loss of Steve Jobs, the impending fall of RIM and the Global Occupy movement. As a refresher, we have been talking about the growth of technology at a break neck pace and the implications on innovation, economy and human behaviour. After discussing the incredible degree of change in technologies and their high level impact on our work and home lives over the last 20 odd years - we are now going to look forward - what is driving innovation and what do consumers and businesses need to know?

I remember a commercial back in the late 1980's in the US on cocaine addiction - it went something like this: "I use cocaine so I can be more productive at work so I can make more money.....so I can by more cocaine...." Albeit a little glib, I think it's right on the mark on where we are in today's curve of technology. Toffler's Third Wave predicted that computer and mobile technologies would ease the burden on the work force and allow people to set up a home based utopia while their productivity was increased, excess time available was focused toward a balanced home life. I would argue that Toffler's thesis would have been right had people taken the new found capacity in their lives and enriched it with non-material pursuits. However, with addiction, the devil is in the details. That new found capacity created opportunity to achieve more material gain - this material gain fed innovation creating greater capacity and so on.

Innovation, in its higher form, is the pursuit of finding new ways to improve the human condition. As defined in today's society, innovation means the ability to increase capacity in society. Even the World Economic Forum in its annual productivity survey defines developed nations as "Innovative Societies". This definition is necessary since as an economy reaches full employment, the ability to produce economic growth internally is created through innovative means of increasing capacity. The alternative to innovation in providing economic growth is immigration - a topic I will leave for future posts on other aspects of society. By inference of the above definitions, one would therefore conclude that the way to improve the human condition is to provide continuous economic growth. I will leave all moral judgement's aside - but keep in mind that this post is part of a series on the Tower of Babel.

Turning to today's technologies of interest - the new iPhone 4S with its Sari search engine and 4G speeds, UAV technologies (a la Google driverless cars), mobile based VoIP and video technologies, robotic cloning and many other artificial intelligence based devices are making human to human interface virtually obsolete. We can only imagine on how this increased capacity will improve our lives!

How we use technologies and what we do with the innovative capacity will define our times.

The Need to Feed - Wider Pipes and Better Vacuums

2010-12-13T11:43:00.000-08:00

Continuing on with my series "The Tower of Babel - the Dream of a Connected Society", here is Part III - The Need to Feed - Wider Pipes and Better Vacuums

Portfolio company selection is always a tricky thing. At times it is easy to be romanced by a great story or an eloquent entrepreneur; but at the end of the day, you gotta trust your gutt and dabble in prognostication.

The communications industry (and I include the internet here as well) is awash with advancement expansion and opportunities. There is so much going on in mobility, infrastructure, battery cells, mobile broadband and software applications (among many other areas) that its hard to keep pace with level of change and its implications.

I think we can learn a lot by looking at the automotive and communications industries together.

Taking away price constraints of the average car buyer, the consumer would look for something that was fast, had cool gadgets and didn't need to be taken into the shop every other Sunday. Factoring into his decision, that driver imagines himself driving unimpeded down the highway at speeds in excess of 140km/hr, no traffic to worry about, music blasting with crystal clarity and navigation systems lighting up the dashboard. Car companies know this and gear their marketing and R&D activities this way (have you ever seen a commercial for a 5 Series BMW where the driver was stuck at Yonge and Bloor?).

So where are we going? In order to push new product and advance communications efficiencies, we need to look at factors that either impede the consumer from achieving this euphoric dream or feed the consumers thirst to achieve this state. As in a driver's Utopian visions of himself, the open spaces are as a rare occurrence to him as the fashion model in the passenger seat. To remove the traffic impediment, governments are now revamping our commuter infrastructure, factoring new ways to travel longer distances (whereas in the Far East no renovation is required). This may keep the dream alive as more and more consumers enter or return to the markets for vehicles (especially in the Far East as the expansion of the middle class continues). Further, to differentiate one auto manufacturer from the next, new gadgetry is being introduced such that the car becomes a consumable on the same level as the television. These are the "wider pipes and better vacuums" . No different in communications. Wider pipes refer to the networks to facilitate the speed and unimpeded/uninterrupted online experience. Wired line networks are supported and expanded through broadband cellular that are pushing even the speeds of their wired line predecessors. Business and consumer communications are being driven to the mobile device through open API capabilities and the upsurge in tablets. Networks are being expanded over air and wired lines left to rust in the ground.

As more consumers migrate to newer technologies, these technologies become the principle devices - driving further innovation and stretching infrastructure to its limits.

And now the prognostication.......

Commuters

The day will come where mass transit will integrate speed and technology with multi-service delivery such as different travel classes and fares allowing business travelers the ability to better utilize their commuting time as well as offering multi-comfort zones for travel. Attracting many to mass transit leaving vehicles for leisure purposes and short haul trips on the open roads. This will free up our highways, revive our downtown complex and enhance our productivity.

When will this come: 2025. We need to exorcise our social angst against inequality and recognize people deserve to pay for luxury.

Communications

Keep your eye on technologies that enable speed and uninterrupted service such as attenuation and propagation equipment. Also, as people spend more time away from fixed lines, battery and storage technologies will continue to be in high demand.

As an investor, APPs will be very risky - leave it to the garage guys or sweat shops.

Linked In or Lights Out

2010-08-31T09:58:00.000-07:00

Continuing our investigation into the genesis of modern communications and its implications on civil discourse, I'd like now to look at the modern umbilical cord...or hip worn smart phones.

The last time I looked at my watch, a day consisted of two distinct periods - Ante Meridian (AM) and Post Meridian (PM); each period consisted of a 12 hour cycle of 60 minutes per hour and 60 seconds per minute. The engagement in business and social communications was generally from the hours of 8AM to 9PM, after which, communications in business became unacceptable, and social communications were limited to face-to-face interactions.

Due to historical constraints and social norms, decorum in communications meant that when a message was sent between two parties there was an acceptable time lag, say 3 hours (obviously time of day is a factor - but let's assume mid-day for simplicity), in which it was acceptable to return or respond to the initial message. Technology played a major role in creating this acceptable norm - as the receiving party was unable to retrieve the message immediately and was required to have access to specific resources to respond effectively.

Taking into consideration the advent of hip-top smart phones and 24/7 connectivity - let's look at what is happening in a business and social context to our normative behaviours.

I think a little digression is necessary this time. I work in Toronto, my portfolio companies are primarily based in Israel, they have business partners in California and key supply and sales channels exist in China. I recently held a conference call where it was necessary to link up all the partners in these jurisdictions. The call took place at 10PM EST (5AM in Israel, 7PM in California and 10AM in Beijing). In this scenario, the nature of what a "day" is has been changed. We actually had created a 43 hour day in communications reality (or for those who want to play geography perhaps 36hrs).

Globalization is a process that began well before the proliferation of smart phones and connectivity - the reality of a 43 hour day was there, is this proliferation a response or stimulus to the global nature of communications?

Back on track...communications need to be broken into two general categories: Business and Social.

Business Communications
In today's Global Village, scenarios such as the one I was engaged in are commonplace. To schedule, prepare, access and connect the above conference call, many smart phones were required. The fact that it was initiated and completed within a 5 hour cycle is itself a testament to the fact that the traditional workday no longer exists and there is a need for constant connection. There is no doubt, that without the use of a smart phone with all its connectivity and computing power, we would not have been able to be as productive or efficient. We gained tremendous time and limited the need to move resources by having these tools available. These events justify the procurement of smart phones for our staff, portfolio companies and greatly benefit all channels in the value chain. The need to increase efficiencies and productivity is the driver behind faster and more powerful devices.

Social Communications
I would argue (and likely with myself) that the initiation of social networking and smart phone proliferation was primarily as a result of curious (jealous) children of parents involved in business communications. Why? What is the first thing that happens when you take your new Blackberry off to charge at home for the first time? What happens when your Internet connection freezes or a site appears to be locked while your kids are using it? It's no surprise to anyone that children, teenagers in particular, are particularly adept at technology problem solving and are most excited to see a new device on the kitchen counter. Given this innate curiosity and technical adaptability, teenagers quickly become super users. My Blackberry is way more powerful than I need for 90% of the functions for which I use it. Who created these functions? Why? Engineers from the University of Waterloo, Stanford, Harvard and MIT - that's who! They did it, because they were the curious teenagers skulking the device on the counter top and tinkering with the Internet to unfreeze the frames and open new social channels. It's the same teenagers that grew up to be the Mark Zuckerbergs, Larry Pages and Sergey Brins building the platforms to take advantage of the latent 90% power of the devices.

Aaaaahhh, the smell of fresh blood. All the ingredients are ready for the blood thirsty predators to seek their prey. Enter NewsCorp., Microsoft, TimeWarner et al. Demographics tell of a new age of consumer on the horizon. The ability to stratify, individualize and monetize these consumers as golden eggs....the goose (or Geese) are social networks.

Now that there is serious money in the game for social networks and the use of technologies to enable them, lead engineers in major development firms seem to have found the Fountain of Youth - gone are the grey hairs tweed jackets- enter the pimply faced American Eagle tee shirts. Combined with garage developments and Start-Ups, developers that are close to the social networks to which they cater are the most sought after. Ironically, the skulkers have become the target of desire as enterprise users now see value in the latent technologies and advanced communications abilities of social network sites. Twitter like tools are popping up in enterprise solutions as great collaborative platforms.

OK - thanks Scott. What does this mean?

In a nut shell, the teenager social network super users of today will have the expectations and ability to utilize latent capacity in existing and future technologies, pushing further the boundaries of time and space when they enter the workforce. The reality that they live today in a social context, will be the reality that needs to be adapted to in business.

If you are not "Linked In" through the utilization of business related social networks, do not understand the lexicon and expectations of super users you may as well be "Lights Out". To attract, retain and challenge the upcoming generation of talent that's necessary to drive the future of any enterprise, we need to understand their reality and adapt ours so that we can access that latent capacity.

What normative behaviours were in communications of the past is no longer relevant to today - not just because of the tools that exist, but because of the expectation that have been formed by the teenage super-user - the business manager of tomorrow. Response time of 3 hours will get you fired (BTW - forget 9-5).

The Tower of Babel - The Internet as a Foundation Stone

2010-08-06T06:53:00.000-07:00

Never since the Industrial Revolution has there been such a pace of change in the realm of technologies and communications. In our generation, the proliferation of the Internet has created opportunities for collaboration, expression and awareness on a global scale. From open access programming to the genome project, humanity has benefited tremendously from the borderless and seamless Internet.

Those who grew up with the Internet and its openness are a generation that differs greatly from their parents and grandparents. The values of openness, free expression and diversity are opposed to previous generation's views on privacy, discernment and compartmentalization.

When I began my professional career in the early 1990's, we had rudimentary email services, and at best, clunky use of what was the early Internet. The public Internet (as opposed to its initial military/governmental initiation) was not mature and empty of content and usefulness. As my career advanced, so did the effectiveness of e-mail services and the Internet boom.

During the tech boom of the late 90's I was working at Ernst & Young as part of the Venture Group and with numerous Israeli companies. I witnessed first hand the hysteria and unbridled enthusiasm that created the massive expansion of technology and the markets surrounded them. New tools were springing up daily for commercial and consumer use. Concepts that were from science fiction all of the sudden were present in front of my face. People were scrambling to register domain names like coke.com, Disney.com.....and they were available! Although the hype was fiscally absurd, by no means was the impact on society.

Advancement in semi-conductor technologies allowing for flash memory, larger databases and memory cards, spurned a new stage of expansion of the Internet - Internet mobility. As a result, devices in which the Internet and communications were accessible became more compressed and portable. It also allowed for more data to be squeezed through pipes that were quickly filling to their capacity. Thanks to companies like Akamai and M-Systems - the Internet revolution was able to maintain its pace.

Now, what does this all have to do with the Tower of Babel? Recall, the Tower of Babel was enabled by the inventiveness of Nimrod the innovator. Nimrod had created the ability to form bricks for construction, advancing society by moving to mass production. All of the sudden there were the available resources and structural integrity to achieve the loftiest of objectives.

The Internet is the Foundation Stone of a new society that now has the tools and collective resources to meet any objective. Incredible power exists within such a tool...how we use it will define our times.

The Tower of Babel and the Dream of a Connected Society

2010-07-15T11:37:00.000-07:00

The story of the Tower of Babel is the story of humanity being outwitted by their own ambition. A refresher - in summary, early civilized humanity, united in purpose, sought to build a tower to the heavens to fight the authority of G-d. Upon reaching vast heights, G-d confuses the once unified group by introducing multiple languages that stifled communication, led to dissension and finally to the utter destruction of their method and ambition.

Over the course of the next few posts I will try to understand today's technological/sociological environment, its objectives and what I believe to be the inevitable result. I have broken my initial posts into the following topics so as to help any readers (is anyone out there?) through the digestive process:

The Internet as a foundation stone
Linked In or Lights Out
The Need to Feed - Wider Pipes and Better Vacuums
The Need for Speed - Device Creation and Convergence
Consumerism and its Impact on Meaningful Expression - Tweet Now or Forever Hold Your Peace
Consumerism - Today's Tower
The Collapse?

I am excited to begin this literary journey. As a father, this is a necessary journey to better equip my children for their society.

I look forward to your comments and input; I am always open to debate and dissension.

Venrock and the Smaller Fund

2010-07-09T08:22:00.001-07:00

Venrock's recent announcement of the closing of its latest fund with $350M of committed capital is a step in the right direction for the VC industry. My post last Fall about fund sizes highlighted the problems with large funds and that they primarily don't match today's reality, and secondly, create distraction from the essential value proposition of venture capital to begin with.

Here is a recent NYT article commenting on Vengrowth's new fund and the basis for their "new" approach: http://tinyurl.com/277o4fy

Israel Venture Conference

2010-06-22T16:25:00.000-07:00

One of our portfolio companies told us this week that at the Israel Venture Conference a few weeks ago, all but 3 funds said they will be investing in new companies.

For those who know the VC community in Israel, it is common, if not mandatory, that Israeli VC's invest together in groups of 2-3 - this being the case, entrepreneurs have only one chance to make it with Israeli VC's.

As I have said before, the venture community in Israel is in for a big change. We will see consolidation among the major players to preserve capital for only the most promising of portfolio companies and to rationalize overhead to match management fees. In effect, with the tandem funding that has been prevalent, this is the defacto situation already - we will only see it formalized.

With the shortage of cash comes a longer, deeper funding gap that needs to be addressed. I hope the OCS will fulfill part of this role, and the greater corporate and angel capital will need to fill the rest. As with everything, there is an ebb and flow. For those of us still out there, there are significant opportunities - these opportunities will be met with the challenge of achieving positive cash flow before seeking new money due to its scarcity.

There is no less creativity or thirst out there, so I am certain that the good times will be back soon.

Getting back to it

2010-06-22T16:15:00.000-07:00

I know it's been quite a while since my last post. For those of you who have been eagerly awaiting my opinions, insights and general venting, I will be getting back to regular postings shortly.

It's been a wild 2010 so far, and thankfully, for only good reasons. The recovery has taken a strong hold here in Canada and interest rates are starting to creap up as inflation is back on the doorstep. The G8/G20 are this week - reduction of systemic deficits are on the agenda.

There will be a lot to be said over the next few weeks as the Chinese Yuan has been unleashed and US debt will decline in value (the Chinese will move away from the US Dollar as a reserve currency putting less demand on the greenback).

There is certainly a lot to talk about the conspicuous absence of the Israeli venture firms at last week's ILSIBiomed conference.

All these items and more will be on my hit-list...so stay tuned.

Cleantech or Snake Oil

2010-01-19T07:15:00.000-08:00

In my position, I am often invited to conferences, approached by entrepreneurs and pinned into corners by exuberant developers. It seems, disproportionately, that ideas and conversations have migrated to the cleantech "industry". It seems that every idea is either "green" or is the next great "cleantech" break-through. I often challenge those to whom I am speaking with the question of "what is clean-tech"? Was the invention of the internal combustion engine a cleantech breakthrough as it moved away from coal generated steam? Is the cell phone a cleantech technology as it reduces the need for copper wiring? Is the computer a cleantech as it reduces the need for paper as a data storage medium? You get where I'm going here. All innovation is based on a consumer based perception of progress. If the consumer defines progress as leaner, faster smarter - well, you can bet the next wave of commercialization will trend toward these characteristics. If the consumer defines progress as bigger and brighter (see the automotive industry from 1967-1974) well, that's the way things will go and damned with all else. The drive toward invention of technologies that support the reduction of their carbon footprint is based on a consumer sentiment and demand. Every well managed company seeks consumer input in their product development processes - if the consumer is demanded reduced carbon footprint - well so be it. But this is not cleantech, this is innovation by definition, fed by what consumers believe is progress.

As an industry, I don't believe cleantech exists. Those venture capital funds that raised hundreds of millions of dollars have traded on a buzz word, not an industry. This is as a result of the need for venture funds to find new relevance in a tightened money environment and to generate more LP's that need to address the politics of ethical investment.

Just like investors are being duped into this space through semantics, taxpayers are similarly being slapped with "Eco" fees, bag taxes and disposal charges. Politicians are using guilt and propaganda to make us pay taxes...and feel good about it. This is for another post, but thank you all for letting me vent a a little.

Fund size and respectable returns

2009-10-15T10:20:00.000-07:00

A main reason Lions Peak Capital Corporation, our Fund Management Company, chose to create a small fund (the Lions Peak International Innovation Fund, LP) is well explained in the following post by Josh Kopelman http://tiny.cc/MBiky. Given our focussed fund size and the lead generation created by our incubator investment (Targetech Innovation Centre) we are able to dedicate significant time and resources to the success of our companies (not just throwing cajillions at them to do their best with).

Don't get me wrong, we're still looking for additional investors (we set out to raise our fund in at the beginning of the worst economic environment in decades), however, we are focussed on our portfolio and are maximizing the value to the LPs.

In my opinion, the major cause of the swelling of VC fund size was the SEO/Marketing/Viral inputs required for Web 2.0 models. In today's world, the chances of hitting a Google, e-bay or Skype are very thin given the relatively low development costs and concentration of developers resulting in thousands of new companies annually.

Medical devices, telecommunications and software operate differently than this model (notice I didn't say Biotech)- so why is there a necessity to inflate fund sizes? Simple answer - sustainable management fees. The overhead and salaries of management funds are paid by the investor out of committed capital. In other words - a flat percentage of say 2.5% per annum of the committed amount of $100M would be $2.5M per annum. If a fund manager operating on the Web 2.0 model of 2003-2007 needed $100M of development, SEO and marketing money to get a decent stake in companies - that gave him the $2.5M per year of management fees. Well, it's now 2009 - that fund is wrapped up - how does he pay his staff? What about his overhead? His boat? Gotta raise another $100M. Make sense - no.

I've said it many times in many forums, it's time to get back to basics - focus on strengths and the ability to effect change. Invest in companies with strong industry validated technologies and good honest management. Work together to diversify the strengths and, above all....be patient.

Managing the runway

2009-09-23T07:44:00.000-07:00

A long runway can bring a valuation lift in excess of its nominal amount. This is intuitive to many of us in the investing world, but to entreprenuers, it doesn't seem to strike them. Consider the following:

Company X has a novel product that has passed it feasiblity stage and is currently constructing a prototype. In order to complete the prototype, prove its effectiveness and receive viable sales leads, the company CEO says he needs $2M and 12 months.

You are the investor and need to evaluate whether to invest, at what amount and valuation. Your assessment is based on your expectations for value on the achievement of the objectives stated (which includes confidence in management), the comparative market place and the ability of the company to attract the necessary capital to go the next mile. (I am skipping the complexities of the regulatory, business, economic and consumer market place for simplicity of this example).

Anyone who has evaluated a business and development plan for an early stage company such as this knows that budgets are guidelines and cannot be relied upon to reflect the true cost of achieving the stated objectives. I may sound hyperbolic here, but in my experience 50% more time and money is the minimum deviation. OK - so now we estimate the company really needs $3M and the hold period has been extended.

Now, let's look at the runway. We have a company with $3M in the bank, based on my evaluation, that money will run out in 18 months. At that time, the company will be ready to hit the market and need money to ramp up production, marketing, infrastructure and operating costs. At this stage, I have great potential for a strong value lift.

When does the company seek additional investment? Do they seek the money before achieving the stated milestones? Has the company factored in the distraction related to raising funds and the potential disruption in operating capability? What happens if the due diligence time exceeds my burn capacity?

As the company actually needs to seek out the investment well before the placement to allow for due diligence and other potential delays, there will be increased execution risk absorbed by the new investor. Now, as the new investor, the existence of sufficient capital to achieve the full development plan and to carry the company into the early portion of the next stage would put me in a position (assuming a competetive term sheet exists) where the value of the company would be based on the full plan less a discount for execution risk (with limited risk based on the availability of capital). However, if there was only enough capital to get to where the stated achievements, when factoring in execution and capital risk, the investment loses its attractiveness. Therefore, the valuation ascribed to the next round has significant downward pressure.

Let's put this to a work. You are the Series A investor, the company is asking for $2M at a $6M pre-money valuation - you will have 25% of the company. A comparable company that has achieved A,B and C has recently raised $8M at a pre-money valuation of $16M.

Scenario 1: Invest the $2M as budgeted. The company achieves A, but not B & C and needs more capital - it only has 6 months more burn left.

Scenario 2: Invest $3M, the company achieves A, B and C, but is left with little continuing cash.

Scenario 3: Invest $4M, the company achieves A,B and C, and has $1M cash to continue operations.

What the next investor would likely say would be as follows:

Scenario 1: As no signficant advances have been made from the last valuation point of $6M, and the company has limited burn remaining - an offer for $4M for an A-2 round is proposed at a $6M pre-money valuation. Your investment of $2M is now worth $1.5M and you own 15%.

Scenario 2: The company got to its stated objectives, but has its back against the wall - the vultures are circling and the company is desperate to continue as its on the cusp of being a going concern. It's desperate for the cash, and all the investors know it. The offer is for a Series B of $9M at a pre-money of $9M - 50% of the company. Your investment of $3M is still worth $3M and you own 12.5% of the company. You carried a lot of risk, and got out by the skin of your teeth. You don't have much to show for your investment at what should have been the highest growth point.

Scenario 3: The company has competing term sheets at the table and the luxury of a runway to evaluate the right fit for itself. It has achieved its stated objectives and is prepared to start on the path to the next stage. The starting point for the bid-process on the term sheet is the deal profiled above at $16M pre-money - patience gets you a slightly better deal of $18M pre-money. The company raises the same $8M as the reference deal. Your investment of $4M which gave you 40% of the company is now worth $7.2M (an 80% unrealized gain). You have a stake of 28%, a very respectable holding.

Now let's look at the impact of the runway based on the residual values of each investment:

Scenario 1 - baseline investment - runway is nominal, objectives not made - loss of $0.5 or 25% - future losses and dilution is likely

Scenario 2 - $1M above requested - no runway, objectives met - no investment loss - but future losses and dilution likely

Scenario 3 - $2M above requested - $1M runway, objectives met - gain of $3.2M or 80% - nice holding of 28%.

So, the value of the extra $2M investment in the Series A for the runway created additional immediate value of $3.2M with strong accretive growth potential.

It is this excercise that should give you the valuation point, term and conditions of your investment. The success in achieving the Series A funding is dependent on your ability to demonstrate to the entreprenuer the long-term value versus short-term dilution of their shares. This task requires finesse, patience and perhaps a little alcohol - all the topic of a future post.

Shana Tova.

Mr. Obama (and Harper) - don't touch the VC industry

2009-08-31T07:35:00.000-07:00

In a piece in the NY Times today, Alan Patricof and Eric Dinall0 argue that government should not lump the VC industry with other forms of Private Equity organizations. The main basis being that the VC industry poses little risk to the overall economy (the capital represents less than .2% of the US GDP) and the overall economic benefits are huge as venture backed companies become global businesses creating jobs, taxes and benefit to all consumers.

Here is the article - http://www.nytimes.com/2009/08/31/opinion/31patricof.html

Please Mssrs. Obama and Harper - keep the regulators clear of the VC industry - we need the freedom to be focussed, professional and nimble to make our portfolio companies and investors (and taxpayers) profit.

Success is based on Global integration - a brief view on Canada-Israel integration using the "Economist's" Innovation Study

2009-08-30T12:20:00.000-07:00

The Economist Intelligence Unit released “A new ranking of the world’s most innovative countries” in April 2009. In it, the Economist ranked 82 countries based on their innovation capacity from 2002 to 2006, and forecast their performance through 2011. In its study, innovation is defined as the application of knowledge in a novel way, primarily for economic benefit. Companies deem it vitally important as a competitive tool. Government policymakers see it as essential for economic growth.

Both Canada and Israel overall were top quartile rated countries, Israel ranked 9th (10th in previous study) and Canada ranked 14th (13th in previous study). While encouraging on the surface, this performance for Canada and its policy makers is extremely troubling. While performing well overall and ahead of countries such as Australia, Ireland and Belgium; Canada’s ranking has fallen from its previous ranking in the 2002-2006 study. 2004-2008 was prior to the economic downturn, where Canada’s economic performance was keeping pace with the G8. This was a time where ample resources were available to harness the value of the economic landscape. In contrast, Canada’s ranking fell, as less innovative growth occurred and support for the innovation environment was not developed.

On the other hand, Israel’s ranking rose from 10th to 9th in the comparable period. Israel’s innovation culture continued to grow from its Yozma roots and attract foreign direct investment. A large factor in innovation is direct inputs – defined in the report as skills, R&D spending and access to technology. Here, Israel nearly outperformed all 82 countries, ranking 2nd overall. However, its innovation environment index – defined by factors such as political, market opportunities and foreign trade and other environmental factors, ranked 27th. This is the primary basis why there are very few globally competitive multi-national Israel based corporations. Canada, in these indices performed 14th and 11th respectively.

The complementation of Canada’s environment and Israel’s innovation inputs provides for an optimal combination of factors. In terms of The Economist’s study, this would result in direct input ranking of 2nd with an environmental ranking of 11th – a strong improvement over existing circumstances. As Exhibit 1 illustrates, further integration of innovation processes will yield more results in achieving global competitiveness for both economies.

These observations, while on a national economic scale, as stated in Economist’s study, are similarly applicable to industrial entities as well. There are many industrial applications that Canada and Israel operate at high international levels – and where global performance can be improved.

Stanley Fischer's response to my last post

2009-08-24T07:56:00.000-07:00

http://www.globes.co.il/serveen/globes/docview.asp?did=1000492624&fid=942

Inflation in Israel - a case of once bitten, twice shy

2009-08-21T06:05:00.000-07:00

Inflation as a topic of obsession in Israel is almost as popular as hummus. Not too long ago, Israel sufferred from hyper-inflation whereby the country had to re-monetize its currency and create a CPI adjustment mechanism in virtually all of its financial activity.

Over the course of the last 15 years, inflation has been in control as Israel's economy has integrated well into the Global Village - wading in relative calm waters of 2-6%. Now, as the country teeters and recovery from the Great Recession, fears of inflation are raising their head. Lead by increases in housing and energy prices, Israeli's fear that inflation will come back with a vengeance.

I think the jury is still out globally whether this recession is truly over. While economically speaking, the recession may be at its last days due to the fact that negative growth has subsided - the fact that a paradigm shift in consumer spending and demographic economic behaviour has been impacted (meaning baby boomers are scared out of their mind to spend away their nest eggs) means that this recession will not end in hyper inflation.

So why are many Israeli's reacting like the inflation bug is in the air and encouraging Israel's central bank to raise interest rates? This fear may actually become a self-fulfilling prophecy in Israel, only to result in higher housing costs (which were not as impacted by the recession as other jurisdictions) and even greater inflationary reprecussions. The memory of the hyper-inflation of the past, combined with trade restrictions, embargos and a non-diversified economy are still very fresh. While Israel today is a highly regarded export based nation, well-integrated to the global economy with a multi-faceted economic environment, the Israeli on the street is still gripped by memory and geo-centricity. The Israeli Central Bank so far has resisted the tempation to increase rates...largely due to the influence of Stanley Fisher (who was not in Israel during that hyper-inflationary period). It is up to the Israeli on the street to see the forest through the trees.

If the Great Recession turns into the Great Stagflation, to which is a huge possibility once stimuli work their way out of the economy and the US current account comes back to haunt the world's largest economy, interest rates will be a less important lever to control the economy (in fact there isn't much more that can be done due to their historical lows anyway) and other monetary policies will not change the situation on the ground. The US will have little more gas in the tank to stimulate due to the mind blowing deficits and debt it already has incurred.

Economic growth as a result of increased consumer spending will not drive economies. Internal population and spending shifts will. The US and most of the Western world have negative birth rates, relying on immigration to spur spending and population growth - this can work...in the long run. It is well known that immigrant families from less fortunate economies are the best savers, investing in the succeess of their children and growing a future, which will not create the immediate economic growth needed.

However, in Israel, immigration from countries such as the US, Britian, France and Canada result in young vibrant professionals - often with financial resources in tow, resulting in a stimulus to the economy that is globally unique and tremendously beneficial economically.

So - what am I saying - inflation? deflation? stagflation? recession? Well, for Israel, given the economic, social and political leanings of the world, I believe immigration from wealthy nations will continue at an increasing pace. This will result in a positive buffering impact of lower global demand and shift the economic output toward domestic demand. I am confident Israel will have one of the world's best economic situations in 10 years. Other countries, specifically Japan and Western nations, will likely be in the stinker - high immediate economic growth due to stimulus, with a temptation to raise interest rates, only to retreat to a staglationary scenario until, somehow, the generational wealth transfer results in lower overall government costs and higher consumer spending.

So Israel - don't worry be happy - as the mishna says: "it's better to be the tail of a lion than the head of a fox" ; )

Risk aversion trumps customer relationship in Canadian banking system

2009-08-19T12:56:00.000-07:00

I am officially now a victim of the sub-prime crisis in the United States. No...I'm not a property owner from South Florida, I'm a Toronto home-owner with a loan to value mortgage of 70%.

We have to admit here in Canada that our policies have spared us the brunt of the financial crisis. Our mortgage lending policies here have been conservative (LtV of 80% for conventional with high leverage lending guaranteed through a government agency) and our bankrupcy laws highly protective of mortgage lenders. The significant loan losses generated by the big Canadian banks was primarily based on US sub-prime lending and not our domestic market. So why then have our banks turned around and punished the prudent, conservative Canadian mortgage borrower? Why is it that a conventional mortgage or financing that should be a no-brainer is trumped by underwriters. Why is it that our system punishes the entrepreunerial spirit by limiting access to self-generated wealth?

After having a relationship with my financial institution for over 16 years, no missed payments and paying an ever increasing amount of fees and service charges, someone on the 56th floor of the Ivory Tower has decided that my money ain't good enough. Someone must have a sense of entitlement, and it is not me.

So, did our system protect us from the fall of the Nations - yes. Did it screw the guy on the street - you bet!

I bet the banking and oil industries consult with one another how to eke out more dough from the complacent spineless consumer.

Oh - I forgot to mention the arbritrary increase in interest rate spreads all the Canadian banks took because of the "situation".

Getting things roaring...

2009-08-17T10:27:00.001-07:00

Well, now that I have my soap-box...watch out. I'll give you a little backgrounder on who I am and what I'm doing here before I go and rant about the latest opportunities and obstacles around.

I am a partner of a relatively small VC called Lions Peak Capital Corporation (www.lionspeakfunds.com) as well as the Managing Director of ADA/OPT (that's ADAPT / ADOPT), a relatively new initiatve to encourage innovation and trade through collaboration.

In short, I'm trying to get people working on projects in Canada/US talking to and working with people and projects in other international jurisdictions.

Our investment philosophy at Lions Peak is not much different, in that we're connecting our portfolio companies from abroad to local North American channel partners.

I'll warn you, I'm a pretty opinionated person - while I don't mean to offend anyone, I'm sure many of you will be over the course of my posts.

I look forward to hearing from all.