The innovation engine that inspired the Canadian Innovation Corporation

A look at the Israeli Innovation Authority, the innovation engine that inspired part of the design of the now-delayed Canadian Innovation Corporation

In his book “Innovation in Real Places”, Dan Breznitz, Professor at University of Toronto and Co-director of the Innovation Policy Lab, writes “Canada easily wins the wooden spoon award for the worst innovation policy among all developed countries.”

One of the solutions to this sorry state of affairs being slowly contemplated by policy makers today is restructuring NRC IRAP. Until recently, this was slated to be absorbed into a Crown corp called the Canadian Innovation Corporation (CIC) in 2025. This loosely follows one of the recommendations of the Jenkins report, now more than a decade old, which identified core problems with the Canadian innovation support system that have mostly been ignored in the intervening years. With the frustrating but not entirely surprising news that the takeover of IRAP by the CIC is to be delayed until 2026-27, if ever, I thought I would take a look at what could be achieved if CIC is ever actually realized in a useful form. 

The model that was developed for CIC is at least partly inspired by the Israeli Innovation Authority, one of the most successful ecosystems at turning R&D and high-tech advancement into long-term economic benefit outside of Silicon Valley. This success is not accidental, but rather the result of carefully thought out support structures that span the entire technology development pipeline, from idea all the way to commercial success. 

Between 1999 and 2014, 10,185 Israeli startups were created. As of 2015, 50% of them were still in operation and 2.6% had achieved $100M ARR - percentages that leave even Silicon Valley in the dust, albeit still being dwarfed in absolute terms. This is the power of a cohesive policy framework that acknowledges the importance of every stage of the technology development funnel and incentivizes the right players to fill the right roles in supporting that process. 

In this article, I give an overview of a few parts of this innovation engine and provide a comparison with the Canadian counterpart(s), assuming they exist at all. To do this I draw on information from Dr. Breznitz’s book, several articles which are linked throughout, public-facing information from the IIA, and first-hand experience trying to turn invention into innovation in Canada.

The role of private sector in innovation

Much of the success of IIA’s technology accelerator performance comes from the active presence of anchor firms like Microsoft. Their model in Israel is to support selected startups through provision of space, engineering assistance, access to cloud resources, and connections to investors, for the most part without taking any equity. 

This support for early economic development begins a virtuous cycle for everyone in that ecosystem: the anchor firm gets a first-hand look at disruptive technologies years before they are relevant and can adjust course or plan investment and acquisitions accordingly; investors considering recently-minted Israeli firms get the confidence that comes with the stamp of approval and support of an established industry player; and the startups themselves benefit from early support, resources, and access to capital from both public and private sources that allows them to carry technologies through the valley of death and into commercial relevance. As of 10 years ago, almost 300 multinationals had a presence incubating disruptive technologies in the IIA. 

This mode of industry participation is not an accident. It is not done out of the goodness of the anchor firms’ hearts, nor is it because policy-makers and pundits beg them to do so. It is because IIA policy is structured in such a way as to make it a necessity. Thanks to sound policy design, the IIA is so productive of disruptive high-tech companies that to ignore them is simply not an option—better to get a first-hand look at the impending disruption by supporting it than be surprised down the road.

In Canada, industry is incorporated almost exclusively much earlier in the innovation pipeline. Canada’s approach is to partner public and private funding at the academic research stage. While this has been highly effective at producing papers and patents (Canada ranks among the top both in public spending on R&D and scientific papers produced annually per capita), it does not translate to downstream economic development. Canadian private sector investment in R&D ranking among the lowest among OECD countries, and is both trending in the wrong direction and is anti-correlated to public-sector investment in R&D. In spite of the productivity of our academic researchers, instead of spinning out startups with defensible IP that can bring benefit to Canada enroute to commercial success before involving industry players, we deliver the IP directly to the established players. Inventions are gone before they can become innovations. As Dan Breznitz writes: “Canadian politicians and policy-makers have always confused innovation with invention”. “Always” is not an exaggeration here: the Jenkins report opens with a story of Canadian innovators beating Edison to a better lightbulb design, but not getting support to develop it in Canada and eventually selling it to their competitor.

There is a world of difference between a patent that is held by a small firm or by the inventors themselves versus one held by a large firm. As Jim Balsillie has repeatedly tried to make clear to an unheeding Canadian government, patents grant negative rights: they do not grant the right to do anything; rather, they grant the right to prevent others from doing something. For a small firm, holding a patent is a significant cost, and will only happen if that firm is actively developing something that requires being able to block others from doing the same. For a large firm, holding patents is part of the cost of doing business, and it is perfectly reasonable to build a portfolio of patents that are not actively used, just in case they need it to block a competitor later. In other words: small and medium size companies develop and innovate with the technology they patent. Large firms do so only with a small subset of their portfolio.

Established industry has no need to support innovative Canadian firms the way they do in Israel. Because our policy conflates invention with innovation, and conflates patents filed with successfully executed innovation policy, they can get the IP at a fraction of the cost by funding the academic R&D directly. With a handful of exceptions, the innovative Canadian firm never existed in the first place. And if the innovative Canadian firm never existed, then there is no reason to look twice at Canada: nothing we do is going to be disruptive.

The role of inventors in innovation

In Canada, academics are disincentivized from participating in commercialization of their research. For reasons that continue to baffle me, Canadian policy frowns on academic researchers profiting from the outcome of their research at a structural level. While the disincentive is not explicit, it exists in the form of a mountain of red tape and conflict of interest management that comes with attempting to spin a company out of a research lab while maintaining a job as a professor. In fact, the opposite inventive exists: researchers have the option to turn external pay into research grants as a means to avoid paying income tax on it, if only they agree to put that income directly toward research instead of personally benefitting from it. The end result is that most Canadian academics simply can’t be bothered to take the results of their research out of the lab, content instead with collecting a few small royalties on a license or doing the “virtuous” thing and recycling that money back into their research programs.

The usual logic given for this is that taxpayer dollars should not be used to the benefit of an individual, and so grant-funded research cannot be a source of profit for the researchers. This view does not hold up to even cursory scrutiny. While an easy rationalization, it suffers from the same short-sightedness that characterizes the entire Canadian innovation pipeline. A for-profit business created using the results of taxpayer-funded research is far more likely to end up net-positive for Canada in the long run than a patent licensed out to any third party, particularly if that third party elects to use it as a deterrent instead of developing it.

By ensuring that taxpayer dollars are limited to only those parts of the innovation pipeline that can generate a measurable public good in the short term (papers published, patents filed, jobs created), Canada misses out on all the possible long-term economic benefits as intellectual property either leaves the country to find the early stage support needed to develop it, or simply goes undeveloped beyond the patent filing.

In contrast, Israeli innovation policy makes it easy for academics to participate in startups, and places no stigma on personally profiting from doing so. The result is more participation by inventors in turning invention into innovation, and a steady stream of innovative Israeli companies crossing the valley of death and achieving profitability, which in turns feeds the innovation engine.

Policy has a, enormous impact on incentives and the psychology surrounding them. Israeli policy makes clear that their most important resource is the inventiveness of the minds that contribute to their innovation pipeline, and that participating in it will be rewarded. Canadian policy makes clear that academics should stay in their labs, and drops support for innovative technology in the most critical stage: the valley of death between patent filing and revenue generation. 

Incentivizing early venture capital involvement

The stage of development between invention and sustainable revenue is known as the valley of death. In this space, public funding dries up but the idea still has significant technical risks before it is commercially viable, too much for venture capital investment. This is where most inventions disappear—either snapped up by a large company at almost no cost, established as a startup in the USA, or simply forgotten.

The IIA deals with this using their Technological Incubator Program (TIP). Early stage ideas that are too risky for VC alone can get 2 years of funding, between $500,000 and $800,000, of which 85% is public and costs no equity. The other 15% comes from a VC firm that takes some equity (with 667% leverage!). The public portion of the grant is repayable later only if and when the company generates revenue. Most importantly, though, the program relies entirely on the free market to allocate funding. The public sector involvement ends at providing the grant, leaving diligence to qualified, sector-specific VC partner firms. This funding is perfectly sized and timed to de-risk a novel idea to the point that the VC market can take over.

I’ve written about this model before. By letting those with skin in the game lead the charge, the TIP avoids getting bogged down in due diligence, and funding can be allocated efficiently. By sharing the risk, the government incentivizes risk-taking by private capital, greatly increasing the chance that both their initial grant is recovered, and that an invention becomes an innovative company. (Credit where credit is due: the Ontario Center of Innovation (OCI) has adopted a similarly hands-off model, though they take equity through following a VC round up to 50% instead of using a grant model).

In contrast, with a handful of exceptions that will be the subject of a future article, the Canadian innovation support systems almost all require proof of revenue (usually $500,000 declared to CRA in the previous fiscal year) to even consider investing public funding. This is an utterly unrealistic goalpost for a newly minted invention, and this and other similar support gatekeeping metrics are directly responsible for the loss of huge swathes of Canadian intellectual property to countries that understand its value. By not taking risks on its innovators past the invention stage, Canada ensures that we are the only country in the world that does not benefit from our world-leading research output.

The focus on short-term economics and a systemic aversion to risking taxpayer money is costing taxpayers heavily in the long run. If instead of requiring $500,000 revenue before daring to take a risk on an idea, the public sector provided that first $500,000 as a grant to leverage seed-round VC funding, Canada could be leading the way instead of hobbling along in last place among the OECD by any metric of innovation that matters. A hands-off approach on due diligence makes the program lightweight administratively, and could easily reduce overheads compared to incumbent systems. Innovation requires risk, and waiting until the risk is low enough for incumbent Canadian support systems ensures that we miss out.

Wrapping Up

The irony of everything that needs to happen to fix the Canadian innovation pipeline is that none of it is actually innovative. Successful, proven models exist that are readily adaptable to the Canadian context.

The common theme of everything we can learn from the IIA is that the role of the public sector in innovation is to incentivize the right players to get involved at the right stage, and then to get out of the way. The catalyst for the virtuous cycle of innovation has to come from sound policy design.

Until our policy makers recognize and accept that reward requires risk; that innovation does not happen overnight and can’t be measured in jobs created and last year’s revenues; and that investment in the future of the Canadian intangible economy will not pay off within a single election cycle, we are more likely to see continued misplaced investment in branch plants over our own potential innovators.