1. Contact :the authors
Robert McGarvey Joe Batty
rmcgarvey@shaw.ca battyj@telus.net
780.433.6323 604-824-5713
Diversifying Alberta’s Economy
3rd of 3 white papers
An Integrated Pathway for Technology

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Overview
Alberta’s economy is facing its most trying circumstances in decades. With oil prices collapsing, major projects
delayed or cancelled and capital disappearing from major sectors of the economy, there is a compelling
urgency to address the underlying problems. The challenge we face is to find new ways to diversify the Alberta
economy and, in the process, reduce our dependency on the volatile oil and gas industry.
Governments have been promising Albertans a more diversified economy for decades. Yet, despite multiple
attempts, little meaningful progress has been made. Evidence suggests that past diversification attempts have
failed because governments have either been too deeply involved in diversification (picking winners, owning
businesses outright) or too distant (simply leaving diversification to the market). Both of these strategies have
failed to achieve significant progress.
Our analysis suggests that the heart of the problem is structural and that diversification of the Alberta economy
must begin with fundamental reforms:
1. Adapt to the new economy: The economy has changed in the past 50 years; Alberta’s banks and other
financial institutions have not kept pace. Many of Alberta’s most exciting growth opportunities are
technology-based. That is, they are underpinned by patented inventions, copyright, software and
services. However, Alberta’s financial infrastructure has not adapted to these new assets, undermining
the free flow of capital. As a result, various sectors of the Alberta economy, including the technology
sector, are undercapitalized and therefore underperforming in the market.
[White paper No. 1 outlined the growing importance of intangible assets and presents a methodology to help
technology companies overcome this deficiency.]
2. Reform Alberta’s capital markets: Capital markets are out of sync with the new economic reality.
Unfortunately, an overwhelming bias has developed in Alberta’s capital markets, funneling investment
toward oil & gas, property and unproductive stock market speculation. Approximately $2 billion a
month in managed investments (RRSPs, TSFAs, pension and mutual funds) leaves Alberta to be
invested on Bay Street or Wall Street. Capital market reforms could redirect some part of this capital to
local businesses, allowing Albertans to make direct investments in investment-ready opportunities that
help diversify the Alberta economy.
[White paper No. 2 investigated ways to reform capital markets to encourage more direct investment in Alberta.]
3. An Integrated Pathway for Technology: Diversifying Alberta’s economy means doing things
differently, but these new approaches also need to be supported by a commercial ecosystem, an
integrated pathway for technology. The third, and final, white paper in our series outlines some of the
most common management challenges facing technology companies and other SMEs (small- to
medium-sized businesses). The key objectives of management in this role are to prepare the
opportunities for commercial success, in other words, get them market-ready but also insure they’re
investment-ready, properly structured to receive an investment and deliver a return on investment.
[In this white paper we outline a pathway for launching new and exciting businesses in Alberta, creating entire new
industries and diversifying the economy.]

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Management Issues in the World of Technology
If Albertans are going to diversify the economy, it means doing things differently. At a minimum, it means
recognizing that the economy has changed and that major institutions need to adapt to the intangible value-
drivers on our economy. Furthermore, Albertans will need to reform the structure of capital markets to open
new financing channels that can start seriously developing the vast potential of Alberta’s high-tech sector.
The problem is, despite decades of trying, nothing seems to push the technology sector in Alberta over the top.
What’s wrong?
Clearly, there are many problems in this underperforming sector, but apart from these external factors, a large
part of the problem is people related. Management problems plague technology, issues that expertise in
corporate structuring and an advanced understanding of intellectual property can help overcome.
The two most consistent management shortcomings in the tech sector are misplaced competencies and
inexperience about the process of commercialization. Both of these problems can be solved structurally, so
long as all parties are willing to co-operate.
Misplaced Competencies
The world of technology is quite different from most conventional businesses. Innovation usually begins with
highly trained scientists conducting R&D (research and development) in a university laboratory or an inspired
inventor tinkering in the family garage. After the euphoria of the initial breakthrough or invention, the
developers, recognizing that they have something of commercial value, spin off the new technology into a
business. The resulting small, privately owned companies are normally composed of the original technology
development team and their hopeful investors.
This is where things get difficult. Money is hard to come by outside the laboratory. The challenges shift from
developing the technology to the (equally challenging) task of finalizing a commercially valuable product or
service and then taking it to market.
It is no surprise that most venture capitalists (VC) and angel investors complain about a lack of market focus in
tech start-ups. Inevitably, if they invest at all, they’ll immediately begin a process to bring in new management,
individuals who have proven track records of success in taking products to market.
Regrettably, this creates an often fatal conflict of interest. Naturally, the R&D management team wants to
focus on and protect their ‘baby’, the innovation they’ve spent years developing. Investors, however, are more
interested in profits. Many a world-beating technology has stalled and ultimately died as a result of this conflict.
For VC-supported ventures, the problems are compounded by the fact that these fledging companies are
expected to deliver significant results in a very short time. More importantly, if they are to remain
headquartered in Alberta, most will probably need to be publicly traded to deliver the return on investment VCs
demand.

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This creates a second level of misplaced competencies. Going public and managing public markets in a start-up
technology firm requires knowledge and skills that even experienced commercialization teams lack. Therefore,
there are several different problems - a structural misplacement of expertise and built in conflicts of interest -
that need to be overcome before the technology venture can reach escape velocity.
Almost everyone involved in a start-up technology venture is expertly trained. But misplaced competencies
result in highly skilled people fulfilling the wrong roles, dooming many ventures before they have a chance at
market success. As a rule, scientists are intelligent and hard working. The few who have commercial successes,
however, combine these skills with natural abilities in business. But relying on innate knowledge is a hit-and-
miss approach that more often than not leads to technology failure, not success.
Case Study in Successful Commercialization: Sony Corporation
One of the most famous case studies in technology commercialization is the Sony story. The story highlights
the unique set of skills necessary for technology success and the importance of designing products from a
market perspective.
The story begins with three Bell Laboratory scientists toiling away in Murray Hill, N.J., in 1947. These highly
skilled scientists, working in one of the world’s most famous technology development labs, rocked the world
when they invented the transistor. With its tiny slivers of semiconducting germanium and electrodes of gold
leaf, the transistor revolutionized the field of electronics. The three scientists on the development team went
on to great fame, winning the Nobel Prize in Physics for their innovation.
Western Electric, the large and bureaucratic parent of Bell Labs, marveled at the achievement of their
scientists, but could think of no particular commercial application for this new technology, apart from hearing
aids. So they decided to license their innovation to others.
One of the first licensees was an unknown Japanese company that had recently Americanized its name to Sony
(they wanted a simple four letter name like Ford). At the time, Sony was a small start-up company selling a few
hundred tape recorders a year in post-war Japan. The company had no track record, no exports and few
prospects. Sony’s founders, Morita Akio and Masura Ibuka, had read about the transistor and recognized
immediately that it would revolutionize radios.
In planning their product strategy, Akio and Ibuka rejected the traditional ‘technology push’ strategy employed
by Western Electric and started from the market end; reverse-engineering a product that would capture that
market. Ibuka had travelled to the United States on several occasions and marveled at the many young people
he’d seen enjoying rock-and-roll music. He imagined a radio that was built for this new generation. To fit their
lifestyle, the radio would need to be portable (small enough to put in your shirt pocket), cheap and battery
powered so that it could be taken anywhere the youth of the age wanted.
The transistor radio, as it soon came to be known, was born. It was an immediate smash hit for Sony and a
breakthrough that launched the company on its road to global supremacy in 20th century consumer
electronics.

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Sony, a totally unknown start-up from an impoverished country, tens of thousands of miles from its consumer
market, took on the world and won.
Sony’s lessons for Alberta
Sony’s success proves that technology can happen anywhere. After the Second World War, Japan lay in ruins.
U.S. bombs had destroyed its economy and the country was under occupation by U.S. forces. Coal mining,
textiles and agriculture were the primary industries. Consider that Japanese exports were minuscule in those
dark days - composed of cheap disposables - like those colourful paper umbrellas that adorn cocktail glasses.
There is a feeling that Alberta’s natural place in the global economy is to provide primary energy products and
that it’s too out-of-the-way to be a hub for advanced technology. Well, in the early 1950s, no place was more
unlikely or out of the way than Japan.
Success for Sony did not rest upon primary R&D. Modern economists believe, and encourage governments to
believe, that investment in R&D, particularly at the university level, is the best (if not the only) means of
developing a high-tech sector in the economy.
Sony’s success proves this idea is wrong. Success in its case depended upon Sony management’s ability to
leverage advanced technology but was highly dependent on the company’s commercial genius and market
savvy.
Sony’s commercial genius, however, was less innate than hard-earned. Their so-called genius was built on
experience, a lot of hard work and an intimate knowledge of how corporations and markets work in the real
world. This general knowledge was augmented by industry specific knowledge about their customers,
marketing and distribution, and a refuse-to-lose management determination.
Finally, Sony had generous access to risk capital that its competitors’ lacked. The company took advantage of a
unique set of circumstances in 1950s Japan. After the Second World War, the government of Japan recognized
it would have to make special efforts to rebuild the war-ravaged economy. It targeted various industry groups
as likely candidates for growth and capitalized specialized banks, mandating them with the sole purpose of
financing and modernizing local Japanese companies.
The Japanese government’s initiative proved to be the catalyst. Through its development ministry (MITI), the
government stimulated the movement of capital and labour out of declining industries, such as coal and
textiles, and into modern industries like electronics, steel, petrochemicals and automobiles. This unique
combination of urgent societal need, political will and targeted financial institutions created an integrated
support system for Japanese companies during that turbulent period of their history.
This integrated pathway model could be employed by Alberta to diversify its economy today.
An Integrated Technology Pathway
An integrated pathway starts with the original creators of innovation and supports each stage of the
commercialization process from initiation to successful winners (like Sony in post war Japan).

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But the world has moved on since the industrial era of the ‘50s. Step 1 in today’s economy involves recognizing
the unique qualities of intangible assets. Intellectual forms of property are generated in great numbers during
the technology development process. They are unique in that they (generally) have global application and are
infinitely divisible. These special qualities can help overcome many of the chronic management problems found
in the tech world.
For instance, successful tech start-ups we’ve witnessed have utilized two separate companies operating in
tandem. They overcome the problem of misplaced competencies by keeping the core IP in the original privately
held company but then licensing various commercially important rights (global marketing and sales rights, or
geographical/industry specific rights) into the second, commercially focused, company.
This has two major benefits: It allows the R&D team to maintain ownership of their baby and focus on
technology development, while another specialized team can take the product to market unencumbered. If this
is done expertly, then the two teams can focus on their areas of expertise without internal conflict, plus
(presuming a successful venture) the R&D team will have a consistent flow of royalty income to continue their
work.
Unleashing the ‘Enterprise Value’ of Intangible Assets
Step 2 in the integrated pathway involves valuing and leveraging the company’s IP assets. Treating IP properly
and capitalizing it on the company balance sheet creates an asset that can be leveraged.
At present, GAAP (Generally Accepted Accounting Practices) allows for the accounting of an asset’s historical
costs. The direct costs of developing an asset, whether it’s tangible or intangible, must be recorded and
capitalized on the originating company’s balance sheet. Although this almost never happens in practice (with
intangibles) due to prevailing norms in Canadian tax law, it is not only allowable but also required under GAAP.
Technically, almost all tech company financial statements are incorrect, yet the accounting profession
continues to ignore this requirement.
But there is another significant bonus to structuring the venture in two separate companies. Managed properly,
the full commercial value of the IP licensing rights can be capitalized. In other words, handled expertly from a
legal and accounting perspective, the full (and much higher) enterprise value of the licensed technology rights
can be captured on the commercialization company’s balance sheet, setting the stage for listing on public stock
markets and access to the institutional grade finance that is so vital to success.
Enterprise Value is the ultimate value of an asset based on tried-and-true appraisal techniques that measure
the highest and best use of the asset.
Best use assumptions are standard techniques used in valuing traditional tangible assets, particularly real
property. They assume that the asset owners have the skills and resources necessary to achieve the anticipated
market value.
Enterprise value is actually a forward-looking appraisal of the intangible asset. Enterprise valuations tend to be
higher than standard because, unlike the R&D team, the licensee’s commercialization team, financed
appropriately, can reasonably expect to capture the full commercial potential of the asset.

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Why is this important? Because it will now be possible to fit a substantial investment into the commercialization
company without punishing dilution.
Oxygenating the Technology Biosphere
Establishing an Alberta First Fund with an associated P2P investment platform is a critical component in
establishing an integrated pathway for technology in Alberta. These locally targeted funds have certain
advantages for technology developers, but also for investors.
The Alberta First ‘shotgun’ approach to financing is the key. By raising relatively small amounts (a few thousand
dollars) from many thousands of individuals’ TSFA and RRSP accounts, and providing a CMHC-like insurance for
that investment, an individual investor’s personal risk is manageable.
The fund will take on the early – higher – risk assignment of maturing Alberta technology through the
Starvation Zone (induced by financial incapability), getting them to the point where they’re investment-ready
with a reasonable chance of commercial success.
The P2P members-only platform will be reserved for individuals or institutions that invest in the Alberta First
Fund. They’ll be given priority access to the second stage financing opportunities, when the companies have
proven their commercial viability and need lower risk growth capital.
Setting up this locally directed investment fund could be similar to past Alberta ventures, like Great Canadian
Oil Sands or the Alberta Energy Company: a government-sponsored, private sector capital market initiative
targeting investment to Alberta’s innovation and businesses. The Alberta First Fund could, perhaps, be
marketed through ATB and/or local credit unions.
Albertans could finance the Alberta First Fund directly through a debenture or a conventional equity offering.
AIMCo. and/or other Alberta-based funds could participate at the second stage, like Sun Oil did so many years
ago.
Creating a Tidal wave of Technology Winners
Technology commercialization represents a critical element in any Alberta diversification strategy. Like all
sectors in our economy, technology needs its own nutrient-rich commercial biosphere.
This enriched environment needs R&D, which Alberta scientists and other inventors generate annually. But it
also needs access to vital nutrients including expertise in commercialization, production, global marketing,
sales and finance in order to create the conditions for life.
It is no surprise to learn that Albertans already have many of the ingredients for this biosphere. Alberta is rich in
innovation and has expertise of all sorts, including business development specialists, technology incubators and
related support services. What it lacks is access to finance.
Formal treatment of the (presently invisible) intangible assets on technology balance sheets would provide
management with multiple options for their growth strategy and strengthen many company’s financial metrics;
perhaps help quantify leverage-able collateral.

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If Albertans are to make substantial progress on diversifying their economy they, no doubt, can learn a lot from
their own history, particularly of winners like GCOS or Alberta Energy Company. But we can also learn a few
valuable lessons from the post-war Japanese experience, as well.
Several kinds of reforms are needed to deliver a more diversified economy in Alberta, which we’ve discussed in
this and the previous white papers. Taken together, these reforms will create an integrated pathway for
technology, an oxygenated biosphere for Alberta innovation from lab to market.
This pathway will accelerate Alberta innovation through the Starvation Zone and deliver extraordinary results,
setting the stage for growth in other under-capitalized sectors in the local economy, like health care, rural
development, First Nations’ business opportunities and others. Done successfully, this pathway will help build a
new and much more diversified future for Albertans.

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About the authors
Robert McGarvey: Robert is a consultant economist, geologist and co-founder of the
Genuine Wealth Institute of Edmonton. Over the course of his career, he has held a
variety of senior management positions. Robert began his career as a petroleum
geologist in the oil industry in Calgary, Canada, and went on to become the Managing
Director of Merlin Consulting, a London, U.K.-based consulting firm. Since returning
from the United Kingdom, McGarvey has been the President of Negawatt
International Inc., a Canadian electronics group and Head of Strategy for Beckett
Advisors, a consulting group based in Los Angeles, California.
Robert is a columnist with Troy Media and has been an Executive Committee Member
of the U.K.-based Economic Research Council (ERC) since 1991 (www.ercouncil.org).
Founded in 1943 in London, the ERC investigates economic and political change and
studies their impact on global business.
Joe Batty: Joe is an accountant and associate member of the Genuine Wealth Institute
with a specialty in new asset management. He has a long history in financial management
and is a leading authority on structuring and financing knowledge rich companies.
Joe has held many corporate directorships and senior management positions, including a
three-year tenure as CEO of a Canadian electronics group. During his tenure as VP of
Finance at NAIT (Northern Alberta Institute of Technology), Joe's interest and
involvement in new products and technologies led to his spearheading a technology
transfer liaison program between NAIT professional staff and industry. Two decades
later, the Liaison Program remains a vital source of innovation for Canadian companies.
With more than 40 years of experience in finance and accounting, Joe demonstrates a
proven track record of helping business – large and small – set up financial systems in support of their strategic
goals and objectives. The work Joe has done over the years has made him an authority on the identification,
evaluation, valuation and (where appropriate) capitalization of “Intangible Assets”. His specialty is unique. Every
financial manager today needs to know and understand these principles: The success of their businesses
depends on it.