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Hustling and the growth of Canadian companies

Canadian businesses have an enviable record of being technology pioneers. Unfortunately our startups fail too often to capitalize on their technology lead.

We have a much smaller pool of risk capital in Canada, our culture is risk averse, and we have fewer of the skills required to drive and manage growth. Our mid-size firms are vulnerable to being taken over due to the lack of protection in our securities and foreign investment laws, unfavorable currency exchange rates, and the so-called Canadian discount, which depresses the trading value (and therefore trading volume) of our stock by 20 per cent or so.

We have seen numerous mid-size firms such as Zarlink, Tundra, Mosaid, Bridgewater, and March swallowed up before reaching the $1-billion tipping point. We need large, valuable clusters in Canada such as Nortel, RIM, Newbridge, and Cognos to build the critical mass required to develop infrastructure, recruit big-name talent, spin off divisions, and seed startups when their own entrepreneurial employees leave.

If in-house counsel wait until startups or mid-size firms reach the inflection point where products first ramp in significant volume to begin to help their clients scale, it will often be too late. Competitors will step in, find ways to reverse engineer and clone your client’s products, and, using their existing engineering, marketing, and sales infrastructure will literally eat your client’s lunch.

So what steps can we take as in-house counsel to set our clients up for success?

Plan the infrastructure

Infrastructure plans need to be formulated and agreed on well ahead of the bell curve. I do appreciate that startups need to spend resources getting products out the door, however in-house counsel would do well to ensure their clients are aware of some of the long lead times required to roll out the infrastructure required to properly support growth.

Setting up branch or liaison offices, or incorporating abroad can take many months to accomplish. I recall that more than a year was required to establish a representative office in Malaysia a few years ago. Where it can be justified, resources should be spent on understanding what is required to set up a business office, or hire a distributor, or import product into a given market.

Waiting until revenues begin to ramp can expose your client to competition and denial of your client’s hard fought for first mover advantage.

Preview agreements

Being asked to draft or review an agreement at the very last moment can result in substantial loss of negotiating leverage and cause clients to hit a snag, slowing down growth plans.

At Zarlink, where I was the head of the legal team, for a number of years we had a process in place that required in-house counsel preview agreements at the earliest opportunity for “showstoppers.” For example, we had a technical, financial, and legal due diligence process that required contracts be reviewed at a high level when evaluating which of a number of intellectual property suppliers we should license technology from, or which foundry or manufacturer we should engage as our partner. This helped to avoid costly changes of direction down the road.  

Public financing

To mitigate against some of the challenges in doing a private raise in Canada or the costs of attracting and tying up foreign investors, sources of government funding should be explored.

Funding from Canadian and provincial departments, Crown agencies, and other government sponsored institutions is often available in the form of non-repayable grants and contributions that are non-dilutive to the shareholders.

Such funding can help delay a financing round or potentially avoid it altogether. There exist myriad programs such as IRAP, NSERC, OCE, and SDTC which will cover a portion of client’s project expenses such as the purchase of equipment, and the like as well as wages paid to marketing and sales teams that can help defray the costs of some of the required infrastructure, including in companies that are pre-revenue.

The submissions required to be filed to apply for such funding (e.g. project, strategic, and operating plan) can often be tweaked and recycled over and over again.

Trade secrets and patents

To allow an adequate time buffer for clients to scale, it is worthwhile taking a hard look at the relative advantages and disadvantages of protecting intellectual property as a trade secret as opposed to providing public disclosure to competitors by way of a patent filing.

There is nothing new in this of course, however I can bear witness to the fact companies can maintain their technology lead for years through trade secret protection. At Zarlink, we built a sizeable medical semiconductor business around this strategy (with the exception of a few well-placed patents) and effectively maintained a two-year gap against our rivals. It gave us an 80-per-cent global market share in semiconductors for implantable devices such as pacemakers and defibrillators.

Path to revenue

Companies can build amazing technology and hire employees who are passionate and committed yet still fall short of their mark. At the end of the day, as much as we think our client’s products will be compelling and possibly improve humanity, our clients also need to make money, preferably buckets of it.

I am a big fan of creating flowcharts, whether a supply-chain flowchart or one to track product development or similar. It helps me to visualize a path to revenue so I can understand what the critical path items are and where the potential bottlenecks may be.

By “bird-dogging” how my clients are going to monetize their business I get some measure of assurance I am not going to overlook an important step that requires legal input. It sounds elementary but sometimes some of the easiest work practices end up being the most successful.

These paths to revenue help ensure as the veil is lifted from my clients and their potential becomes apparent, the potential speed bump has already been spotted and hopefully there is line of sight to revenue.