We Need Innovation that Maximizes the Value of our Natural Assets
Wal van Lierop
President & CEO
Chrysalix is a technology focused venture capital company that builds mentors and connects high growth companies. It brings disruptive innovation to the world’s largest industries by focusing on where technology meets physical science. Its investments include breakthrough technologies like 3D printing of steel, fast charging electric vehicle infrastructure, emissions-free solar steam, smart mining and nuclear fusion.
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TheFutureEconomy.ca: What kind of innovations does Canada need today and how fast are they needed?
Wal van Lierop: We must first compare where we focus now and where we should be focusing. Canada is still very much a resource-based country, and you can see that in the dominance of the traditional industries on the TSX, and the resources we have are something that we should cherish a little more. Clearly, with the world growing to a population of 9 billion by 2050, which is more than 2 billion more than today, we will need more copper, zinc, gold and other resources.
What we need is innovation that maximizes the value of the natural assets that we have. A good example in Chrysalix’ portfolio is a company called MineSense, which uses sensors and artificial intelligence to significantly improve the efficiency, the bottom-line and the environmental footprint of mining operations. These types of innovations for resource-based industries also stand a chance to create a new tech industry that allows Canada to develop sustainable industrial innovation that we could export, whereas if we do not do this, we will have to import it. This type of tech is very valuable for Canada.
“Innovations for resource-based industries also stand a chance to create a new tech industry that allows Canada to develop sustainable industrial innovation that we could export.”
There is one other important point to be made in this context: access to more homegrown, sustainable industrial innovation for resource-based industries will undoubtedly also strengthen the position of our current, very large companies in the sector. I think that that is essential in an era where international consolidation is in fashion. Homegrown innovation will help protect our large companies from being taken over, whereas if they become or remain lone soldiers, without an ecosystem of supporting tech companies around them, the likelihood of them being acquired is very high. Yet, what we see is that the funds that are in Canada are being used for innovations that do not really match the opportunities or the needs.
So how should Canada address this issue?
The biggest struggle here is that we do not have a strategy. We are doing things too opportunistically. Here in BC, people like to say that we are leading the country in terms of economic growth. That is true but that is not the entire story, as we are also selling out the Lower Mainland in the process. Recently, researcher and public speaker Jesse Hirsh had a very interesting opinion piece about the reality of start-ups in Canada which said that we put all our money into all kinds of incubators that try to grow young companies and the focus is entirely on getting quick wins. It’s about running towards $100 million and exiting, and typically, most of these exits go to large US companies, like the Microsofts or the Googles of this world. So, his opinion is that we have created an ecosystem where we spend a lot of valuable dollars but it is not creating a sustainable industry situation. That is one of my biggest issues here. Here in the Lower Mainland, I see 9,000 little tech companies, 8,000 of which, in my opinion, are probably occupational therapy or others may call it political currency. We spend a lot of tax dollars through programmes and subsidies to keep these companies alive. If instead we could divert those resources to the best few hundred of these 9,000 companies, then we would stand a chance to create a much better industry ecosystem. But this is about coming up with more of a strategy, with a more deliberate selection process towards rewarding start-ups that contribute to the overall industry system and that want to stay.
Overall, we have good ideas and aspirations in Canada but there seems to be a disconnect when it comes to execution. We should be way less opportunistic and think much more about what we want to be when we grow up.
“Homegrown innovation will help protect our large companies from being taken over, whereas if they become or remain lone soldiers, without an ecosystem of supporting tech companies around them, the likelihood of them being acquired is very high.”
What is your perspective on the future of these legacy resource sectors, such as mining or oil and gas? Do you foresee a soft landing or do you see a hard crash ahead?
It depends. Natural gas, if we play it very carefully, can be part of the innovation strategy as an intermediate fuel, but oil is way more difficult in this country. We see that virtually all the international supermajors, from Total to Shell for instance, have left the oil sands. When it comes to mining, it is totally different. Mining, if we play it well, could really take off. In mining, the last thing I am going to talk about is a hard crash or even a soft landing. Mining – from the thirty or so mineral elements that are found in your iPhone and that play an enormous role in modern healthcare or in new forms of chemotherapy – has an enormous future. The most important thing to highlight about the future of mining is how we can really maximize the value of all that we have because many value chains of ‘Industry 4.0’ will start with digging something up out of the ground.
Of course, in our energy industry we also need to see what we can do to really turn things around and that comes with two questions. One is, we have to look for innovation that moves us away from the paradigm of ‘big is better’ and towards ‘small is beautiful’. In the oil and gas industry, we have seen a lot of incremental innovation in the past 10 years that has resulted in the productivity per rig increasing by 1300% between 2008 and 2017 in North America. But of course, we still do not have solutions for very simple things like, for example, a small upgrader in the field for the oil sands. If we had that there may be an opportunity to turn that industry around.
Is collaboration between established players and innovative entrepreneurs one of the challenges?
That is definitely one element but it really starts with a strategy. It is about maximizing the value of the assets we have and building alongside a new resource-based focused tech industry.
Every year, I am puzzled to look at the Conference Board of Canada’s innovation scores. Despite a decade or so of innovation agendas, new strategies and policies, Canada remains in the lower half of its peer group in innovation. It ranks about 9th in the best years among the 16 peer countries in the OECD rankings. In the past decade, the Conference Board of Canada has therefore given Canada a D on innovation most years and at best we got a C. So yes, a few performance indicators have improved but we seem to be persistent in weakness on most of our innovation criteria. So that is why I am saying we need a very strong vision and a clear execution strategy.
“Overall, we have good ideas and aspirations in Canada but there seems to be a disconnect when it comes to execution. We should be way less opportunistic and think much more about what we want to be when we grow up.”
For example, here in Canada, both the federal and the provincial governments come up with funds to improve innovation. It is a great idea but then as soon as it comes to the execution, something goes wrong. There is a disconnect because in the execution stage the money is in the hands of people who, for good reasons, focus only on getting a return ASAP. So that drives them very quickly to capital-light innovations that are not necessary, resulting in failing to build a long-lasting ecosystem for those areas of innovation that the country really needs.
What steps would you lay out that Canada could apply today in order to achieve meaningful support of innovative clean tech companies?
One: define a clear vision for our resource-based industries. Two: dare to select. Dare to pick winners instead of trying to satisfy everyone. Three: develop clear strategies to scale up potential winners and what that could include. For example, in their lifetime, many clean tech or sustainable industrial innovation companies face what I call the ‘two valleys of death’. Many tech companies only face one, which is proving out their technology. But after you have proven out the technology as a clean tech company, you still need to prove it out in the field. So then comes the first commercial project, which is very often a risky undertaking; preferably, you would like to have nonrecourse debt financing for that, but it is very difficult to get commercially. Therefore, your financing is either through equity or from a bank that will ask for a loan guarantee. That means that if that first project goes wrong, even if it has nothing to do with your own tech company, which happens from time to time, it is very often the end of the company because either the debt provider or somebody will have a call on the company. It is very important for government to provide nonrecourse debt financing for the first few projects through which clean-tech and sustainable industrial innovation companies roll their technologies out into the market while they are scaling up.
Chrysalix focuses on investing in breakthrough innovations. How do you go about doing that and how does Chrysalix work with its partners?
Only 1/3rd of our investors are financial investors and 2/3rds are large companies in traditional industries that are currently going through a lot of transformation – from mining to oil and gas, utilities, manufacturing, agriculture and chemicals. We have a very intense collaboration process with them where we start with what I call an ‘opportunity pain point audit’ at the very beginning of the process and then continuously use the technology wishes that come out of that to start looking for solutions. We do that as a VC but we also have a unique supporting academic network with 30 leading universities participating in it from MIT to Delft University of Technology, to Carnegie Mellon and the University of Waterloo. We increasingly use that network to find the most up to date innovations that can play a role in ensuring that Industry 4.0 also plays a full-fledged role in these traditional industries. So, it is a matter of trying to connect innovations with the large sectors of industry that need them and in that process Chrysalix is first and foremost a deal-sourcer and a matchmaker.
“The most important thing to highlight about the future of mining is how we can really maximize the value of all that we have because many value chains of ‘Industry 4.0’ will start with digging something up.”
What do you consider the three or four most promising sectors in terms of investing in innovation in Canada today?
As I’ve stated before, mining represents an enormous opportunity by bringing all the aspects of what I call ‘Industry 4.0’ to the industry. The second sector is the energy industry. We have an abundance of renewables; not just solar and wind, where we have just started, but in particular hydro and then last but not the least, the Holy Grail of clean energy: nuclear. If we as a country would put a little bit more money in a company like General Fusion that is really starting to break through, that could have tremendous benefits, for instance for our traditional oil and gas players but in many other places too. Two other very important areas are agriculture and water. There are of course innovations that I am wondering about all the time relating to climate change. A very big question is the thawing of the permafrost and if there is something we can do with all that methane that will be set free. It’s a very big threat but also of course a very big opportunity.
Which direction do you see innovation going towards in the longer term?
At Chrysalix we made our name as investors in clean tech and sustainable industrial innovation and that is becoming mainstream now. Clean-tech is not an industry. It is a nice marketing slogan and 10 years ago I was on record saying the moment that clean-tech becomes mainstream, it will become invisible. When I go to a mining company and I say to them that I have a technology that can help make their mining operations more sustainable, people will shrug their shoulders and be sort of half interested. But when I tell them about the economics, then people get very interested. So, sustainability is basically an entry ticket. These days, things are much more about what I refer to as the true enablers of necessary transformations in resource-based industries. What I am thinking then in the future is more sensors, internet of things, artificial intelligence, machine learning, drones, even robotics and autonomous driving vehicles. This is the trend, which is being focused on a lot. Every industry for starters needs to become an IT industry but that is very quickly also becoming just an entry ticket in the same way that sustainability has become an entry ticket. Ultimately it is all about how we can sense things, turn that sensing into information, then act on the information in the best way possible and do that while engaging with our customers.
The Netherlands is often looked up to as a leader in innovation and sustainability and this is especially true in terms of water management. So how does Canada compare in terms of innovation and sustainability, and how is it positioned to lead in the future?
That’s an interesting observation because things changed about 10 years ago. I think that until 2005 or so the Netherlands was absolutely not recognized as a global leader in innovation. I recall that at that time I would go to Delft University and try to lure professors out of their job to start a new company, most of them would say, “No, we do not do that. We get subsidies for our research from the Netherlands and from the EU. We are not interested.” Then something happened and in the past decade or so the Netherlands has suddenly popped up as a center of innovation. Why did that happen in that period while Canada was much more at the forefront internationally 10 years ago? Is it because the Netherlands is outward looking and Canada is more inward looking?
Ten or twelve years ago here in BC, we had Ballard and also MDA, before it moved most of its operations down south; in Ontario it was the heydays of Nortel and BlackBerry, and then something happened. Is it because we have developed an ecosystem that is just focused on quick sales to American companies?
That trend needs to be turned around because I think Canada, with its well-educated population, with its big market down south and the excellent connections to the countries its people are coming from, is phenomenally positioned to be the gateway to the Pacific. But we need to find out what vision we have for the country, what strategies we want to follow to achieve that vision, and how to execute it in the best possible way. We started with it and we end with it too: where is the beef in the strategy of Canada’s innovation policy? The country has tremendous potential, why does it not live up to that? Why does the Conference Board of Canada give this country at best a C in innovation every year? We deserve better. Something needs to change in order for the country to live up to its full potential.