Whats wrong with BC's tech investment policy.
First, about me,
I've been in the BC tech sector since my first web design gig in 1998. Born and raised in Victoria, I incorporated my company federally in 2003. In Internet time that makes me older than Facebook -- I've created jobs, both contractors and employee's and i've paid dividends. I've written books on web development, helped to set tech policy and now sit on a couple of elected boards including the Open Data Society of BC, and the Canadian Internet Registration Authority [CIRA] the organization that manages dot-ca and helps to build a better online Canada.
My corporation, StormTide Digital Studios Inc occupies the 0-4 employee small business sector -- sometimes called freelance web development. My primary business is selling PHP development services to the e-commerce sector. Between myself and a web designer I work with, we handle the e-commerce presence for more than 50 Canadian and American retail operations. Shopify we're not, but we do a respectable business, with a customization and integration ability unmatched in the industry. Want to put a million parts online, and have them index well, work with your dynamics platform and ship from a dozen pick and pack locations? Come talk to me. If you want to sell 30 sku's on the Internet? Go see Shopify.
Additionally as a twice-elected (members slate) board member at CIRA I am involved with granting of millions of dollars to Canada's not-for-profit tech sector as well as overseeing the administrators of more than 2 million dot-ca domain names.
I write what comes as a personal political opinion, and not representing any organization I am associated with.
The idiocy of chasing growth.
At some point in my career as an Entrepreneur I came across Dan Pink's "The Surprising Science of Motivation" and it really spoke to me; he talks a lot about mastery and purpose and that is largely what has driven me in business. It's not a forget-the-money proposition, but one that says, money doesn't buy happiness, but mastery and purpose can.
I pay myself a fair salary from StormTide, somewhere near the tax sweet spot that leaves just enough retained earnings to even out the high's and lows. I get no pension or benefits and I rent a condo in Victoria. I'm no tech billionaire, but I also work 9-5, get the chance to serve on boards, be political and work on amazing projects with no bureaucracy. I get to write books on PHP when publishers come calling. I get to hack on some serious works of public interest like online voting and cybersecurity research. I also do civil rights work, and can be a massive pain in the rear to people who would abuse tech for dystopian means. In short, I might not be a billionaire, but I have mastery and purpose in abundance.
It is in that lens that I look at the BC tech policy and shake my head. Hard.
Consider a Doctor with a General Practice, your typical family doctor down the road; now consider a society that measured their success by whether they had yet founded a Hospital. Thats basically BC's tech policy today; forget the family practice, the going concern, we're all going to build Hospitals, be billionaires and have scores of people working for us. The archetype to aim for we're told is Bill Gates, Steve Jobs and Mark Zuckerberg. If you're not landing a billion dollar valuation, well, you're not a /real/ player.
I went looking for the stats today, you can see them here [pdf], and they confirmed what I already knew. 98% of BC businesses are small businesses and 79% of BC businesses have 0-4 employees. That puts my StormTide venture somewhere between tragically mainstream and the winter doldrums. It also means your chance of being a tech billionaire is less likely than you beating Muhammad Ali in a fist fight or scoring the winning touchdown at the Superbowl.
So then, one would expect that BC schools would be doing what they do for doctors, setting expectations of a lifetime of family practice, of careers in noble institutions, in expectation of decent wages and a work/life balance. That they would be aiming expectations for the Mr Cleavers of the world, the wage earner with a home and kids, and the time to see them, rather than suggesting we're all going to be the next Zuckerberg.
But thats not the tech policy. No, the official government policy is that we're all going to be rockstars, and everyone's a special snowflake. Literally, everything is sacrificed on the alter of growth, and those who fly too high like icarus, well, they just couldn't handle the heat.
Its an idiotic model and one that needs to change.
100 Million in Series A nonsense.
Today Christy Clark announced she's creating a new public venture fund to the tune of 100 million dollars. The fund will ostensibly provide Series A funding to politically connected BC startups. They're targeting the Jobs not the Woz.
I've been around a lot of tech startups for nearly two decades now; my experience teaches me that public money is toxic to startups. I could get into a rant here about SR&ED and such but Ben Fox over at Medium has already penned a great 10 minute read on the topic, entitled BC Startups; The government is not your friend.
Beyond this mess, all real startups are incorporated in Delaware. They call this being VC-ready, and its not optional if you want to play the series funding game. The founders might live in Vancouver sure, but name a successful VC-path company that isn't incorporated in Delaware? Is BC going to invest in Delaware based corporations?
So if the real VC startups are out, the real small business community (the 0-4'ers) are out... who is interested in a pile of BC government cash? No surprise there, its the BC-based government-grant-writing subsidy suckers, the blue chip corporate lobbies parading as tech councils.
BCTIA who was standing next to Clark when this mess was announced, has a wonderfully varied board that mixes between exec's from Telus, the surveillance expert from MDA, and peeps from Electronic Arts -- the progressive firm that helped bring you the high-technology worker designation and the gem that is EA Spouse. Want to know who is looking for 100m in BC's public capital? Well take a gander at the board makeup.
These folks have nothing in common with your typical BC tech business, the small 0-4 sector guys and gals just trying to earn a living in tech; the folks who dream one day to own a house in their hometown and to be able to walk down the city streets without seeing tents setup in the park. More to the point, they've also got nothing to do with BC startups, rather focusing on the Delaware C Corp markets like everyone else in the vulture game.
Thinking you're going to startup fund 100 million into CCPC's and they're going to become the next Facebook and stay a CCPC paying taxes to the crown? Dream on. Think you can require CCPC? You just killed that startup.
Think family practices, not hospitals. Horses, not unicorns.
The typical BC Tech Business
Your typical BC Tech business is an entrepreneur and some contractors loosely setup to do something cool; if they've hired their first real employee (read filled out a TD1), then they're doing well.
Throw a stone in this town and you'll find 50 of em. They come out to meetups, they're the geogeeks and open hackers, the Open Data kids, the civic developers. They're the designers who meet at the bar on Friday and discuss the latest moronic client to ask them to do work, for free, on spec -- because the clients idea is 'just that good'. They're all profitable, tax paying, and for the most part working off of their revenues -- you wont find convertible notes, venture funding or credit-default swaps in this crew. They're incorporated in Canada, not Delaware. They think a ratchet is tool for working on a car -- and thats a good thing.
When the Venture crowd moves into town, they immediately suck the oxygen out of the room. They hire up a bunch of developers at 20%-50% over market rates, and build offices with kegerators, automated coffee machines and playground equipment -- the rest of the revenue businesses do their best to keep up, but don't really compete; after-all, they're competing not with the marketplace but with some nebulous pot of cash that has to be spent. The excess should be scandalous, but everyone seems to count it as just the cost of doing business in proximity to unicorns. Don't mind the rent in silicon valley and the social problems gentrification is causing when theres no corresponding increase in affordable housing.
90% of these venture firms fail in the first few years. A fraction of 1% of the funded 'make it', go public and convert that investor equity into serious cash from Joe Public's retirement account.
The result on the industry is a boom/bust cycle, rapid wage inflation and equally fast deflation; a tragic instability in billable rates, service revenues and the availability of qualified help -- after all, none of this results in a single new qualified programmer being added to the marketplace, and startups don't pay for student tuition. There's no extra worker capacity in this system, and high tech workers already bill salary rates considerably higher than the median income.
Worse, training a developer is a 20 year proposition, starting from grade-school -- I can count on one hand the number of developers I've met that started programming after graduation. Its not a field you retrain into, its a craft you master -- it would be as if the NBA was looking to create the next great team by investing in training adults to play basketball for the first time.
You want to train programmers and grow the pool of talent and create good new jobs? You make sure every kid has a computer in the home and free access to the best self-paced learning opportunities outside the school system. You teach kids how to safely talk to strangers, and allow them to hang out on IRC channels and on mailing lists. You identify the difference between social media and internet communities. You kickstart digital literacy, and attack the digital divide.
But thats just the vulture capital model everyone knows and loves. What happens when the SR&ED sapsuckers get involved is even worse. Some ~5 billion in totally unnecessary corporate welfare is poured on the Canadian SR&ED sector each year and tech gets the lions share of it. The program was supposed to increase our innovation pace, but like copyright and patents, it stopped doing that a long time ago. You can read a bit about that here;
Due to the corporate welfare programs, these venture folks are billing a big chunk of their worker's salaries back to Ottawa and are adopting a profit-comes-later attitude. Even the market giants ignore revenue and continue the lie that they're all going to be the 1000x'ers once they finish building market share. Its a killer combination. The fair market rates for services crater. The tech industry calls it disruption, but really its just temporary market instability as no one really expects these companies will ever turn a profit or that the lower prices will become the new normal. There's a world of hurt out there for your typical Canadian family just trying to co-exist with the jerk-tech sector. Consumer's love it for a while, as the low prices seem almost too good to be true. But the catch for governments, is that they really are just that -- too good to be true; every so often, perhaps once per generation, someone invents the printing press or the automated loom and an industry changes forever, but most of the time, its just sock puppets and Superbowl ads.
The market effect is killer, the PHP developer who was previously freelancing for a fair wage is now facing competition from a venture firm who's billing 50% of the developer back to Ottawa and making their payroll through series A funding from the province. That developers now 'disrupting PHP' and giving away development time for 'free'. The whole thing is an unsustainable joke, but with the presence of founder-ratchets, down-round protections and the other 50 tools in the vulture toolkit, theres still lots of profit to be made for the financiers, even when things predictably go off the rails. In fact, while most founders believe they have the greatest investors ever, if there's an unfavourable ratchet in the agreement, chances are your investors are actively working to ensure the next down-round.
You could call me cynical, but I've seen the cycle more times than I can count. The number of unicorns pushing 10 years old is an exceptionally short list. Whats not a short list is the number of failed startups and bankrupt tech geniuses who made bad business decisions.
This is a failure architecture, and we need to give up on it already. You're not going to be a unicorn, realize the game, see the matrix, and aim for sustainability, mastery, purpose. Aim for craftsmanship.
The developer exchange.
If there's one light in the BC tech policy pipeline right now its the BC Developers Exchange. Its pretty much under-wraps, but they're developing it in a quasi-open way with public servants working publicly on GitHub, so little gem's are spilling out here and there.
The idea here is to create some sort of pay-for-pull-request model where civil servants can get the freelance crowd to hack on their project backlogs. Its a solid idea, and it should be supported.
But there's an issue, it seems to be following the same architecture of the prior Open Data program, in that there's no significant legislative commitment, no big projects to kick it off and no real meaningful funding announced. They're in the singles bar, but afraid to go talk to anyone because well "they've been hurt before".
Worse, when the freelance crowd has managed to get governments on board (as they did in the openStudent debacle) the Ministries involved have always got cold feet and gone for the IT baron's products. I think they're following the no-one-ever-got-fired-for-buying-ibm model. A convenient defence mechanism that prevents real opportunity from ever taking root.
IT done like this dies a death pecked to death by ducks and its why the Gov cant stand up a website for anywhere near what it costs in the private sector.
What they should have done.
My prescription for the BC Tech sector would be to get out of our way.
- Ease the securities regulations that make Kickstarter and crowdfunding essentially illegal in BC.
- Allow for Social Enterprises to incorporate, and develop an appropriate legislative body around this concept. Kickstarter itself just incorporated as a b-corp, so we're behind the times already.
- Reform the treatment of stock options and shares so that taxes are collected at legitimate liquidity events and not on a calendar basis (remember the JDS uniphase fiasco? The market does.). Folks are happy to pay taxes on legitimately realized gains, but there should never be taxes assessed on purely paper gains.
- Develop things like flow-through shares and other capital mechanisms that encourage casual investment without the absurdities that come with venture capital type funding. These models actively encourage CCPC's over the Delaware model.
- Eliminate the concept of a qualified investor. The public can be accountable to its own bad investment decisions, and limiting risky investment opportunities to the rich while allowing folks to buy million dollar homes on leverage is totally inconsistent.
- Ban the Double-Irish tax avoidance nonsense. There's no point in seed funding the next Facebook if they're just going to turn around and pay no taxes.
- Get rid of SR&ED credits entirely and instead reduce payroll taxes. Thats 5 billion that could go a long way to eliminating the need for CPP remittances.
- Cancel the 100 million dollar Series A fund and address the reasons BC Tech businesses think government is not their friend.
- Reduce the overhead on maintaining a corporation; My biggest single expense after salaries and computer hardware is accounting and compliance services.
- Open all the things. Open Data, Open Source, Open Government, Open Corporates. Put some real $ behind it. There's a billion dollar civic tech market at the doorstep and it will pass us by for lack of a few peanuts worth of investment to address the cost-recovery problem and a lack of data warranty.
- Kick the Robber Barons out of BC government IT procurement. Learn how to develop in-house capabilities again and how to contract and work collaboratively with a vibrant market of small vendors. Become ready to work with 79% of BC's businesses. The 0-4 employee sector drives this economy. Ditch the warranty/insurance requirements and validate the work in-house like anyone else accepting a pull request on a private sector project.
- Develop a diverse set of programming languages, application servers and technology platforms, reject the Microsoft monoculture. Embrace BYOD. Embrace infrastructure as a service.
- Buy a Raspberry Pi and an Arduino for a kid every now and again.
- Learn how to evangelize BC Tech. Making connections is key to any tech business. Trade missions and other tools that can connect small business with export markets will pay dividends. Exporters aren't all rip+strip+ship. Theres thousands of BC small businesses that export tech services, and they contribute to the GDP, both intra-provincially and internationally.
- Most of all, don't pick winners and losers in the tech sector, ban corporate welfare, grant writing and funding applications for commercial entities. The 0-4 sector is hurt by these actions and they're downright counterproductive to market forces.
At the end of the day, the best tech policy would be one where we don't know there's a tech policy and have no reason to advocate for one.
Rethink the plan BC.