You hear a lot of talk these days that Alberta needs to “go green” and that technology should be to the 21st century what energy was to the 20th.
But if the energy industry is supplanted, how will the Alberta government replace the billions of dollars in resource royalties that flow into its treasury every year?
The truth is Alberta is not simply regulating the oil and gas industry. As owners of the underlying resource, the province is in a kind of equity partnership with the energy industry that assures it significant returns. That will be difficult (but on impossible) to duplicate.
If technology is going to be the future, then we have to change the way technology is developed in Alberta. The government could play a critical role in this asset development and help solve its revenue problem.
At the moment, venture capital (VC) is the principal financing vehicle for technology worldwide, including in Alberta.
A few decades ago, venture capital was on fire, leading the new economy transition. Venture returns for pioneer companies like Apple, Facebook and Amazon were spectacular. Venture capital became the go-to financing vehicle for companies that launched the digital age in modern capitalism.
In recent years, however, the industry has been less than spectacular. Since 2006, the average five-year returns on venture capital have oscillated around zero. As Fred Wilson, a principal at Union Square Ventures, bluntly puts it, “Venture capital funds, as a whole, basically made no money the entire decade.”
What’s wrong with VC?
VCs fund ‘orphans’ – it makes direct investments in isolated, privately-owned startups. Organizational conflict is built in because VCs urgently need to migrate management priorities from research and development to sales and marketing in order to get to market quickly.
Regrettably, VCs also place their target companies on an unreasonably short runway to an IPO (initial public offering) or step-up acquisition (generally by larger U.S.-based VCs).
So although the managers of VC funds make a fair living, the system doesn’t serve the interests of technology commercialization or the people of Alberta very well.
Fortunately, there’s a significant new made-in-Alberta venture capital initiative developing.
Edmonton-based ABCTech is a 20,000-strong technology network that includes some of Alberta’s brightest and best technology developers. It’s sponsoring something they call Venture Capital 2.0. Not only could it provide significantly higher investor returns, it offers a novel solution to the Alberta government’s financing gap.
What’s Venture Capital 2.0 and how is it different from conventional venture capital?
VC 2.0 utilizes a platform and cluster strategy. Industry clusters are groups of similar and related firms in a defined geographic area. They share common markets, technologies and worker skill needs, and are often linked by buyer-seller relationships.
Employing a platform-based merger and acquisition strategy within known clusters separates the research and development from the commercialization functions, helping to solve the management conflict. It also encourages economies of scale and is the best way to leverage venture investment by building a network of related companies rather than the development of single entities or orphans.
A unique feature of VC 2.0 is the adoption of state-of-the-art intangible asset capitalization. Given that most technology ventures develop intangible assets, a key element in VC 2.0 strategy will involve identifying, properly managing and (where appropriate) capitalizing these (presently undocumented) intangible assets onto technology company balance sheets.
Therein lies the opportunity for government. Given that intangible assets are not generally of collateral grade, ABC Tech’s new strategy involves an asset insurance program that would insure the balance sheet value of the intangibles, providing reliable asset security for debt and equity financing.
The result would be asset-backed investments, and increased financial capacity and capabilities, which aren’t available through traditional VC. If the Alberta government were to underwrite this insurance program (as government did with housing in the past), they’d play a foundational role in asset development and could earn a royalty return on global sales of all derivative products and services.
By employing these strategies, VC 2.0 could significantly increase the success ratio of Alberta innovation. And it could migrate venture capital to a much lower risk, syndicated structure that will help diversify the economy and solve the government’s revenue problem for decades to come.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.