November 14, 2018

Minister Bain’s ISED Supercluster Magic Math, a CATA Op-Ed: Charles Plant, Senior Fellow, the Impact Centre & CATA TECHNOW Analyst

Supercluster Magic Math

It has been a while since Innovation, Science and Economic Development Canada, or ISED, formerly Industry Canada, announced the award of $950 million over 5 years for the creation of superclusters. We thought it would be interesting to figure out what ISED has as objectives for them and whether these objectives are reasonable.

Government’s Expectation from five Superclusters:

The first thing one should note is that the total GDP impact is over 10 years. This means that the total GDP increase would be $5.35 billion per year. Now this is for a program that will last only five years. Thus the first math issue we have is whether it is reasonable to claim credit for results over 10 years for spending over 5 years. Let’s even suppose that the effect of spending $190 million a year could actually generate benefit of $5.35 billion a year, a multiplier of 28 times.

That’s the biggest multiplier effect I’ve ever heard of but then it has been a while since I’ve taken any traditional economics course and maybe magic is now possible.

The next issue is jobs created.

The math says that the government will create over 50,000 jobs. Now they aren’t specific about whether that is 50,500 jobs that last ten years or 50,500 job years. I haven’t heard this newfangled measurement of job years. I guess I prefer the old calculation of 5,050 jobs that last 10 years. I have to go with the presumption that it is actually creating 5,050 jobs that last ten years as if it were 50,500 then each job would generate only $105 thousand of revenue and that doesn’t make any sense. Let’s look at that though and see what can be generated by an investment.

When companies obtain equity capital they go out and hire new people who go on to drive revenue up and the company keeps on growing and expanding.

That’s a bit simple but go with me on this one.

Let’s presume that most of the money being spent by the superclusters is doing the same thing as equity does, creating jobs and thus revenue. For every industry one can calculate the impact of $1 million of equity and look at how many jobs it supports and how much revenue can be driven.

Stats for 3 Superclusters

The first step in evaluating impact is to calculate the amount of capital required per employee. We did that by looking at the results of over 300 software companies and over 180 industrial product manufacturers. The chart above shows the amount of capital required to support each employee in these two industries.

Based on this analysis, an investment of $180 million (after admin expenses) will end up creating 1,005 jobs after 5 years (real jobs, not job years), not the 4,300 jobs expected from this program.

We also calculated the revenue per employee and as shown in the chart above, this should create over $480 million of revenue. Using a typical revenue multiplier of less than 2 times (i.e., let’s say 1.85 times to determine total GDP created) then the $480 million becomes $888 million and given that this is an annual number, it seems like a good return for an investment of $540 million. Now those last numbers are annual ones and let us just give the government their claim that a five year program will create 10 years of benefits.

Why not claim 50 years of benefits? There must have been a memo about that. That $888 million a year over 10 years would be $8.8 billion of revenue, not the $35 billion expected by the government.

Every company I know counts the number of jobs they have, not job years. They measure revenue per year, not over time. If we have a program that is dedicated to helping industries create jobs and revenue then we would all be better off if we used the same units of measurement, not ones that make no sense but create big numbers. And in doing the math, we would all be better off and able to understand how to compare one funding opportunity with others if we used as a basis, numbers that are obtained from the actual companies that would be benefitting from the program.

Finally, 1,000 jobs is a good-sized tech company in the US. And nowadays, $950 million is what many of the top end unicorns receive in equity funding. These are not supercluster numbers but then did we really think $950 million would get us 5 superclusters with more being added.

I think we should be happy just with the creation of a couple of unicorns as that is all we should realistically expect.

About Charles Plant, Senior Fellow, the Impact Centre 

Charles Plant is a Senior Fellow with the Impact Centre, working to develop research and education programs in innovation and entrepreneurship. Charles also serves as a CATA TECHNOW Analyst.

He is a serial entrepreneur who has been an officer, director or investor in a dozen technology companies. Charles has also provided financing, consulting and coaching services to several dozen other technology companies. He was co-founder and CEO for 15 years of Synamics, a telecommunications software firm that provided mass calling platforms to telcos.

He spent four years at MaRS ending as CFO but spent most of his time as Managing Director, heading up a group of former entrepreneurs and specialists who developed thought leadership, provided education, mentorship, market intelligence and capital to over 2,000 technology startups in Ontario.

Active for much of his career in the world of finance, Charles has been a corporate banker, an investment banker and served on the Management Committee and as CFO of the Investment Accelerator Fund (IAF) at MaRS and CFO of MaRS Innovation.

As an educator, Charles spent seven years on the faculty of York’s Schulich School of Business teaching in the MBA program and now teaches management and leadership skills at the University of Toronto’s School of Continuing Studies. He has an MBA in marketing and is a CPA and Chartered Accountant. His blogs and other resources for entrepreneurs can be found at https://scaleupos.com. Email: cplant@imc.utoronto.ca

Related: Op-ed: Canada’s innovation policy agenda just doesn’t do it: A lack of attention to taxpayer returns on our nation’s most successful tech companies could leave Canada behind, argues CATA (Ottawa Business Journal)

 

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