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IDEAS AS AN ECONOMIC RESOURCE

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Ideas as an economic resource

Introduction

Uncorking the spirit of innovation, Paul Speck

Capturing ideas in the box, Jayson Myers

Tapping into creativity for fun and profit, Tom Wujec

Doubt ignites creative solutions, Rob Guenette

Down home values on the e-frontier, Gary Briggs

Spinning a web to catch ideas, Anton Rabie

Getting the Angels onside, Daniel Mothersill

Creative sourcing...doing business in AsiaModerator: Ian PortsmouthPanel: Michael Bryant, Shailesh Gandhi, Jim Holloway, Theodore Ling, Mohan Thadani and Daryl Yeo

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“The most valuable resource in the world today is an idea”Zeroing in on the theme of the 11th annual Wisdom Exchange, Return on Creativity…Leveraging the Power ofIdeas, Ontario Minister of Economic Development and Trade Joseph Cordiano opened the event by noting that“Premier McGuinty has said that the most valuable resource in the world today is an idea. But even the bestideas are just raw materials. It takes all of us, working together, to develop those ideas into jobs and prosperity.”

The search for insights on how to turn creative new ideas into profits brought together CEOs of some of Ontario’sleading growth firms for a two-day forum in downtown Toronto. Minister Cordiano was quick to acknowledge theirbusiness success and the contributions they make to the province. “You have embraced innovation and changeand are leading the way in growth and job creation,” he said. “Our future economic success will depend on yourability to exploit the creative potential in your companies.”

“The Ontario government wants to share this task with you,” he said. The Minister noted that Ontario has committed $1.8 million to support research and development, launched the Auto Strategy to help secure thefuture of Ontario’s automotive industry and established a new Small Business Agency to make it easier for innovative firms to thrive. “By working together,” he said, “industry and government can create a future inOntario where people and innovation can prosper.”

IDEAS AS AN ECONOMIC RESOURCE

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Innovation has been heralded as the path to 21st century success, but savvy business people know that greatideas do not automatically translate into great profits. The timely relevance of the 11th Annual Wisdom Exchangetheme, “Return on Creativity: Leveraging the Power of Ideas,” drew CEOs of nearly 200 Ontario leading growthfirms to the conference in downtown Toronto to find out how others have transformed the quicksilver of ideasinto bankable gold.

Paul Speck told the conference how his family built an international success based on what was once considereda radical idea: high quality Ontario wine.

Economist Jason Myers described the current paradigm shift in manufacturing, which places higher long-termvalue on knowledge and creative energy than on the products a company ships out the door.

Tom Wujec, from Toronto’s world-leading computer animation firm Alias, shared a little-known secret about freeing the creative spirit within your company: it can be a lot of fun.

TAXI Toronto’s Rob Guenette, whose company dreamed up ground-breaking advertising campaigns for Telus Mobility,Viagra and BMW-Mini, provided an insider’s view of the art and business of creating unconventional solutions.

Gary Briggs revealed how eBay’s phenomenal growth has been driven by the creativity of its customers.

Anton Rabie offered up the Spin Master model for finding product ideas, then separating the truly great ideasfrom the mountain of good ones.

One workshop explored the tremendous potential offered by sourcing in Asia and the pitfalls that lie waiting forunwary entrepreneurs. Another session delved into the critical role Angel investors can play in successfully bringingan idea to the marketplace, and what Angels need to make it happen. A third session, led by improv artist, Rob Nickerson, tested the communication skills of the CEOs. Everyone left energized, if exhausted, by laughter!

It was two days of insights, paradigm shifts, tales of victories and stories of disasters averted. Participants learnedas much from each other as they did from the considerable expertise of the keynote speakers and workshop leaders.

At the end, they walked away with new perspectives on the power of ideas and how to profit by them. We inviteyou to explore in the following pages highlights from the conference.

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INTRODUCTION

They launched a family business in an industry thatwas devastated, at a time when the economy washeading for collapse, and offered a product customersdid not want. It’s safe to say that the Speck familylearned a few hard lessons along the road to interna-tional success.

Paul Speck, President of Henry of Pelham FamilyEstate Winery and the first keynote speaker at the2005 Wisdom Exchange, uncorked the story of thecompany’s growth from its beginning as the dream ofhis father in the mid-‘80s, to their current position asa successful player in the international wine busi-ness. “I think our early successes were rooted in thefact that we really didn’t know what we were doing,”he admitted. “We took a lot of risks and a lot ofchances. We planted European varieties that most of the Niagara vintners didn’t think would grow. Wedared to price our wine over $10 a bottle when onlythe French or the Italians could do that in Ontario.But we succeeded.”

Lessons on the bumpy roadThe learning curve was steep. They bottled their firstvintage in 1988, producing 2,000 cases in their brandnew 5,000-square-foot building. Speck recalled lookingat their first production run and thinking, “How am Igonna sell this mountain of wine?” Today, Henry ofPelham bottles 80,000 cases of VQA wine annually.

There were a few bumps along the road. In the late‘80s, the Niagara real estate market collapsed. TheFree Trade Agreement opened up Ontario’s protectedwine market to products from all over the world. In1989, the bank pulled the company’s line of credit.By the early ‘90s, the Canadian economy haddropped into one of the worst recessions in history,inflation was high and interest rates had passed the 15% mark. Eventually, the company found new financing through a merchant banker. “As tough asthat period was, it was good for us,” Speck said. “Itcreated great discipline within the company. It meantmaking sure that every investment was the best possible one. It meant being frugal, but taking risksand throwing the dice when we had to. We alsolearned that we had to way over-perform to stay in business, we had to really blow our customersaway, really ‘wow’ them, time and time again.”

VQA is bornThat, in itself, presented huge challenges. Ontariowines had a long-standing reputation for poor qualityand that had to be turned around if Henry of Pelhamand other Niagara vintners were to survive. Theirsolution was to form the Vintners Quality Alliance(VQA), a made-in-Ontario appellation system. “Everyfine wine region in the world has an appellation system that governs ingredients and production quality,” he explained. “We looked at systems around

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Paul Speck

UNCORKING THE SPIRIT OF INNOVATION

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the world and picked the best attributes for the VQA.I think the VQA is the single most important factor inthe success of Ontario wines. It focused us as grapegrowers, as vintners, and it focused our customers on what quality wines were all about. It helped us getover the stigma.” The industry also pulled togetherthrough the Wine Council of Ontario to win displayspace in the LCBO and build a wine tourism industry,which now draws 750,000 people each year to theNiagara Wine Route.

Build a culture of qualityIn addition to working with industry groups, Henry of Pelham pursued a series of company growthstrategies, creating unique, Niagara versions of popularwines, rather than trying to imitate the taste of others.They worked hard to get their wines into high-endrestaurants, using that cachet as a form of third-partyendorsement of their product quality, and avoided the“trap” of high volume - low margin production whilefocusing on premium wines to differentiate theirentire product line. The vintner also worked hard tobuild a culture of quality within the company. “Youhave to try things,” said Speck. “You have to allowpeople to make mistakes and learn from them.”

If that sentiment sounds familiar, it should. It reflectsthe same restless urge to try new ideas and takerisks that has marked Henry of Pelham’s 20-yeargrowth from inauspicious beginnings to being anaward-winning producer of fine wines. At Henry ofPelham, it seems that innovation is a tradition.

“We had to really blow our customers away, really ‘wow’ them, time and time again”

“I think the VQA is the single most important factor in the success of Ontario wines. It focused us as grape growers, as vintners, and it focused our customers on what quality wines were all about”

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“Manufacturing is not about products going out thedoor,” said Jason Myers, Chief Economist of theCanadian Manufacturers and Exporters Associationand first plenary speaker at the Wisdom Exchange.“Manufacturing today is about capturing knowledgein the design, product quality and distribution thatprovide solutions of value to the customer.” It’s notthe bits of plastic and metal of the product in the boxthat create competitive value. It’s the quality of theideas. “The challenge,” Myers said, “is to continuouslycapitalize on that evolving knowledge in a businessenvironment that is becoming more global.”

Myers launched the day with that paradigm shift inthinking about manufacturing within a broad vision offuture trends in the Canadian manufacturing industry.He presented the results of a major study conductedby the Canadian Manufacturers and Exporters,20/20: Building Our Vision of the Future. The studyexamined the challenges facing the industry, lookedat how manufacturing was changing and peered intothe future to discern what Canadian manufacturingwill look like in five to ten years. It also reviewedCanadian and international manufacturing data overthe past 20 years. The review team met with morethan 900 senior manufacturing executives and held33 community meetings from coast to coast involvingmore than 2,500 manufacturers and stakeholders.

The Canadian productivity “miracle”Many of the trends identified in the 20/20 studywere positive, “a somewhat surprising result,” Myersadmitted, “to come from traditionally doom-and-gloomeconomists. Three years ago at the Wisdom ExchangeI spoke about the ‘productivity gap’,” he recalled.

“That has started to change. People talk about a ‘productivity miracle’ in the United States. We’regoing to see a productivity miracle right here inCanada.” Manufacturing is becoming a larger share of Canada’s GDP, growing at a rate of 7% a year. “Bycomparison,” he pointed out, “manufacturing in China is growing at 8% annually.” About one-third ofthe Canadian growth rate can be attributed to ourexchange rate advantage, the study estimates. Therest has been gained by Canadian companies doingbusiness differently.

“One of the most profound industry changes has been that competitiveness no longer resides solelywithin a company,” said Myers. The impact of purelyexternal events can be huge. A chart trackingCanadian manufacturing shipments over the past twodecades shows dips at expected points -- followingthe 9/11 terrorist attacks and during the 2003 powerblackout in southern Ontario -- but there was also anoticeable downturn in 1998 when the GM plant in Lansing Michigan was shut down during a labour dispute. “The shutdown of that one Michigan plantrippled through the Canadian industry,” Myersobserved. “The competitiveness of a manufacturingoperation is now connected across borders and moreoften on a global scale.”

Global players are changing rapidly“The business model for today and tomorrow is global,” he suggested, “with global channels forsourcing and manufacturing, but the players in thatmodel are changing as well,” he warned. “Today,China is part of the manufacturing supply chain;tomorrow, it will be a technology leader.” This

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CAPTURING IDEAS IN THE BOX

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industry restructuring on a global scale will continue.Business success will depend on companies adaptingto the challenges and opportunities of competitors,partners and customers around the world.

Global access to knowledge and new technologieswill create new and more exacting customer expectations. Continuous innovation and mastery of global value chains will become preconditions forcompetitiveness. The foundation for competitive success lies in how effectively and efficiently a company can exploit the knowledge needed to deliversolutions that customers value. That creativity andknowledge resides in every facet of the manufacturingprocess, from R&D through production systems, distribution and financing.

Innovate, adapt, thriveA range of global competitiveness challenges wereidentified by industry executives and ranked in the20/20 study. When it came to innovation barriersand commercialization constraints, “it was interesting

to see that the cost of R&D was not high on the list,”Myers noted. In fact, it barely made the top ten.

Despite these challenges, Canadian manufacturershave proven that they can innovate, adapt and thrive.More Canadian businesses are becoming global players. Between 1989 and 2004, the stock ofCanadian direct investment in other countriesincreased by 388%. In 2004, the stock of Canadiandirect investment in other countries was $438,439million, or roughly 36% of Canada’s GDP. By comparison, the stock of U.S. direct investment inother countries amounted to only 16% of their GDP.

“While Canada is not perceived as a global player,that may not be a bad thing,” said Myers. “Flyingbelow the radar may be the best way to make money.Twenty years ago, when NAFTA came in, economistspredicted the end of Canadian wine, furniture andautos. Just look at those industries now.”

“Manufacturing today is all about capturing knowledge in the design, product quality and distribution that provide solutions of value to the customer”

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20/20 Study: Top 5 commercialization constraints

• Finding customers

• Lack of internal resources

• Competition

• Availability of skilled personnel

• Product design

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“While Canada is not perceived as a global player, that may not be a bad thing”

For sheer breath-taking imagination, few innovationscan top the computer-generated 3-D special effectsof Hollywood blockbusters like Stars Wars, Lord of theRings or The Matrix. While millions of people aroundthe world have seen those films, few people outsidethe business know that the software that allows thedesigner’s creativity to emerge full-blown on the giantscreen is the product of a Toronto company calledAlias. Their software, Maya, has been used in everyfilm nominated for an Oscar in special effects for thepast ten years. In fact, Alias itself received an Oscarin 2003, for its contribution to the film arts. But Mayais much more than a tool to make monsters jump outof hyperspace. Every car in the world today isdesigned using Alias technology, as are productsranging from BlackBerry to Nike.

Alias creates tools that can unleash the power of theimagination and push the boundaries of innovation.Tom Wujec, Fellow and Principal Consultant at Alias,spoke during the Wisdom Exchange plenary abouthow companies can tap into creativity and turn it intocash. “The basic rules of business haven’t changed in hundreds of years,” he began, “but the businessenvironment has.” The need for continuous innovationis greater than ever before, driven by globalization,the pace of technological change and the increase in information available to consumers.

The pressure to innovate Rampant counterfeiting is putting even more pressureon the drive for constant innovation. Nike, a client of

Alias, used to see counterfeit products six monthsafter a new product was released. Today, the counterfeits are out one month before the officialrelease date. “Quite simply,” he said, “if you don’tkeep up, you are out of the game.” “Besides,” he continued, “innovating is a way to enjoy the gameand it’s more fun to be a market leader.”

Where many companies stumble, and where Alias hassucceeded, is in harnessing innovation on a continuingbasis and making it profitable. “The old approach toinnovation,” Wujec explained, “was a linear processwhere a product was conceived, designed, built and marketed. The problem was that it created siloswithin the company.” The Alias approach has similarbeginning and end points but the development phaseinvolves constant feedback loops between the stagesof design/build, field testing, clarification and thenback to the design stage for more tinkering beforefinal release of the product.

Creativity as a fluid processWujec described the Alias process to foster creativityas ‘very fluid’, permitting the give and take of ideasand possibilities. “We don’t have it formally mappedout,” he said. “That just seems to be the way itworks. Imagine it to be something like fly-fishing,” he suggested. “The process begins with a set ofdesign principles such as simplicity, elegance andflow. Of these principles, the most important for anorganization to develop is ‘flow’.”

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TAPPING INTO CREATIVITY FOR FUN AND PROFIT

Tom Wujec

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“Curiously enough,” he said, “budgets do not blockflow. The budgeting process, if you’re constantlybeing asked to justify this or that, can be a killer, but the setting of limits is not usually a problem.”What blocks the flow of imagination? Stress. Conflict.Fear. Rules.

Innovation can be predictable“Above all,” he suggested, “organizations can culti-vate creativity by encouraging passion, curiosity andthe ability to enjoy ambiguity.”

What they have learned at Alias, and what Wujec has experienced by helping Fortune 500 companiesintroduce innovation practices, is that the innovationprocess can be predictable to some degree. Forexample, one of their clients is Pixar, producers ofanimated feature films such as Toy Story, FindingNemo and The Incredibles. “Product developmenttakes them about 18 months,” said Wujec. “A crisis

point comes every time at 18 months.” The storyisn’t working, or a character doesn’t fit properly. The whole project looks like it should be scrapped.“The way they get through the crisis is to take thewhole team away for a weekend of improv. The key,”he added, “is to encourage innovation, pay attention towhat’s blocking it and measure the results by makingthe innovation process visible within the organization.”

Wujec concluded by urging conference participants to connect to the power of the imagination. “At itsbest,” he said, “imagination can change the world.”

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Conditions that help create flow

• Time

• Freedom to pursue ideas

• Conversation with other innovators

• Clearly defined goals

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“Innovating is a way to enjoy the game and it’s more fun to be a market leader”

“Quite simply, if you don’t keep up, you are out of the game”

Rob Guenette’s ideas are judged by the harshest critics in the world: couch potatoes with TV remotecontrols.

Guenette’s company, TAXI Toronto, makes televisioncommercials based on ideas designed to engage theviewer. If they don’t work, the ‘click’ of the remote isreally the sound of a lot of advertiser’s money beingflushed down the toilet. Fortunately for TAXI’s clients,the firm consistently creates ads that breakthrough the clutter and maximize the impact of thosevery expensive 30 seconds of television time. Enoughso, that TAXI, founded in Montreal in 1992 and havinggrown to include offices in Toronto and New York,was named by Strategy Magazine as the Canadianadvertising agency of the year for 2001, 2002 and2003. Their work for Viagra, Telus Mobility, BMW-MINI, Nike and Molson has kept viewers’ fingers offthe remote and built TAXI’s reputation as the ‘go-to’agency for successful, outside-the-box thinking.

Be wary of patternsTAXI Toronto’s President Rob Guenette shared his thoughts on the art and business of creatingunconventional solutions at the Wisdom Exchangeplenary session. “Doubt the conventional, create theexceptional,” he revealed, is TAXI’s six-word mantrafor beginning the search for breakthrough ideas.“Never assume anything,” he said. “Assumption is the killer of creativity. Be suspicious of industry

norms. Be wary of patterns. Disbelieve the traditionalways of solving problems. Doubt even what the client tells you.”

Ferreting out assumptions and doubting the traditionalled TAXI to create its breakthrough television campaignfor Viagra. “Pfizer is a great client,” said Guenette.“When they briefed us for the project, they told usthat erectile dysfunction is a very sensitive subject.The advertising approach had to be serious; it had tohave physician endorsements; there were tons ofrules and regulations about what we could say.” Back at the agency, the creative team started thesearch for a solution. “We began by doubting that the standard, serious message would really work,” he recalled. “We ended up with middle-aged menskipping down the street to the music of ‘GoodMorning’ from Singing in the Rain. The reason thespots worked was that they took this really serioussubject and opened it up, made it human, personableand funny.”

Doubt is like cholesterolIt was this same approach that sparked the develop-ment of memorable campaigns for Telus Mobility(what do lizards and chameleons have to do with cellphones?) and the BMW-MINI. “With the Mini, size was the obvious product differentiator but we wantedto avoid focusing on a shot of a red Mini on an open road,” he said. “Instead, we focused on three

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principle product attributes — fun, legacy and performance -- an injected attitude that would appealto potential buyers.”

The TAXI approach to finding creative solutions isapplicable to other industries, he believes. “When youtackle a problem, begin with doubt.” But, he admits,“doubt is like cholesterol: there’s good doubt andthere’s bad doubt. Being suspicious of the traditionalapproach doesn’t mean you should ignore conven-tions. But part of the creative process is to risk making mistakes. Pfizer had the courage to go withthe Viagra ads and were very successful,” he pointedout. “We risked offending people, which is not a very Canadian thing to do, but we were able to reach people as well.” Guenette summed up his presentation by offering tips for companies that want to improve creativity within their organizations.

“Doubt the conventional, create the exceptional, neverassume anything — assumption is the killer of creativity”

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Top 3 tips to improve creativity

• Recognize creativity as a business tool, not a frill

• Imbue creativity into the fabric of your organization, not just in one or two departments

• Look for creative solutions that are simple, human and emotional

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“We risked offending people, which is not a very Canadian thing to do, but we were able to reach people as well”

In the sprawling, lawless Wild West frontier of theInternet, eBay struck gold by building their businesson small-town community values. Launched ten yearsago in the U.S. and five years ago in Canada, eBay isthe world’s largest online marketplace for the sale of goods and services. While many of its dot.comcontemporaries ended up buried in e-commerce Boot Hill, eBay has become a global phenomenonwith 100 million registered users.

Gary Briggs, Vice-President and Country Manager ofeBay Canada, gave the Wisdom Exchange audience abehind-the-scenes perspective on how the companyhandled its incredibly rapid customer-driven growth.On any given day, millions of items are up for sale on eBay: used cars, clothes, trading cards, antiquedolls -- the list is virtually endless. Surveys show thatpeople spend more time on eBay than any otheronline site, making it the most popular shopping destination on the Internet. More than 4 million people worldwide make their living from buying andselling stuff through eBay. “What we do is enableeconomic opportunity for people around the world,”said Briggs, “like Nan from Saskatchewan who makesreally great jam. Nan paid off the mortgage on herfarm by selling jam over eBay.”

Let the users decideCustomer-focus has become a popular touchstone forbusiness growth strategies during the past few years,but few companies have dared to take that conceptas far as eBay. There, the customer is not king; the

customer is a respected member of a communitywhose opinions drive the company. To illustrate howfar eBay takes this approach, Briggs related how thecompany developed its corporate values: a set ofshared values is one of the hallmarks of any community. Early in the development of eBay, backwhen the Internet was the epitome of the Wild West,potential users were hesitant to register because they had no reason to trust the other party in a transaction. eBay management recognized the needto build that trust among users. One suggestion wasto create a set of community values that everyonecould buy into. But how could they craft a set of values that would resonate with users of all ages,from all backgrounds, located in countries around theworld? Let the users decide, was the answer. “Therewere no executive strategy sessions, no whiteboards,”said Briggs. “We just asked the customers.” Theresult was a set of values that resemble what youmight have learned in kindergarten:

• We believe people are basically good. • We believe everyone has something to

contribute. • We believe that an honest, open environment

can bring out the best in people. • We recognize and respect everyone as a

unique individual. • We encourage you to treat others the way you

want to be treated.Posted prominently on their website, these eBay community values are simple, straightforward andeven idealistic, but by displaying them for all to see

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and encouraging buyers and sellers to honour them, the values helped build trust within the onlinecommunity. “You have to acknowledge that the customer is in charge,” said Briggs. “That means youhave to make yourself vulnerable to your customer.”

eBay has grown by facilitating the creativity and passions of its customers. It has boomed by makingthe process as simple, easy-to-use and comfortableas possible. The eBay website has an open, friendlyfeel to it. Online tutorials give new users step-by-stepguidance through the buying and selling process.Discussion groups abound on a wide variety of topics. A feedback forum encourages buyers to publicly rate individual sellers after each transaction,which creates an instantly available reputation checkon the vendors for future customers. It is a vibrantworldwide community that simply did not exist ten years ago.

High tech twist on a very old businessLike many pioneers, eBay learned some lessons thatBriggs distilled as principles underlying the company’ssuccess. These are simple principles with a quaint,idealistic air about them, but they cut to the heart ofwhat is, in essence, a high-tech twist on a very oldand very simple business: connecting buyers andsellers in an open marketplace. “It’s a very efficientbusiness model,” said Briggs. “We have no inventories,no warehouses filled with products.”

During the dot.com boom, many investors scoffed at eBay’s profit potential. By tapping into people’screativity and letting the customers shape the business, eBay has not only proven the nay-sayerswrong, it has given them a place where they mightfinally be able to get rid of some of their worthlessdot.com share certificates.

“You have to acknowledge that the customer is in charge”

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“You have to make yourself vulnerable to your customer”

Some principles of eBay’s success

• Listen to the community

• Supply follows demand

• Keep a level playing field

• Focus on people, not wallets

• Enable, don’t direct

When your best customers have the attention span of a six-year old, developing new products that arebright and shiny and do really cool things is a life-or-death struggle. That’s the challenge faced every dayby the amazingly successful Canadian toy company,Spin Master. Unless you have young kids at home, you may not have heard of Spin Master or their best-selling Air Hogs and Mighty Beanz, but thosetoys captured the hearts and minds of enough six-year olds to turn a company that started ten years ago with $10,000 into one of the largest toycompanies in Canadian history with worldwide revenues of more than $100 million. Along the way, it has become one of Canada’s 50 Best ManagedCompanies -- for three years running -- and expandedits brand to launch lines of kids furniture, room decorand outdoor products.

Spin Master President and co-founder Anton Rabiecaptured the attention of the Wisdom Exchange participants with his insights into how to find andqualify great ideas. “It’s not rocket science,” he reassured the crowd.

Where do ideas come from?“First,” he suggested, “find out, based on history,what part of the world generates the best new ideasin your industry.” In the toy business, he revealed, thebest ideas for new toys come from the U.S., Japanand Germany. To catch those ideas when they arefirst emerging, Spin Master sends people to live in

those target countries so they are actually on theground sniffing out new products every day.

Secondly, since you never really know where the nextgreat idea will come from, you need to encouragepeople to come forward with them. At Spin Master,employees are rewarded with a monthly contest forthe best new idea. “And in that spirit,” he told thecrowd, “if any of you have a great idea for a new toy,I’d love to hear about it. I’ll be around this afternoon.Come tell me about it.”

Thirdly, think about how you treat people with ideas. Spin Master actively builds relationships withinventors. They treat inventors with respect, payingthem high royalty rates and taking them on all-expense-paid retreats. “The result,” he said, “was that inventors come to us first,” making Spin Master a magnet for toy innovations.

Finally, simply ask your customers. “It’s gotten to the point now,” he said, “that when I walk into a customer’s office, they know the first thing out of my mouth will be, ‘What have you seen lately that hasreally surprised you?’ If it catches their attention, it’sworth looking into.”

Picking winnersSorting the wheat from the chaff, the good ideasfrom the truly great ones, calls for a different butequally simple process, said Rabie. “An idea is only

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Anton Rabie

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as good as it plays in the marketplace and you needto stay up-to-date. We go to every consumer tradeshow in the world and I walk retail almost every day.People say I am obsessed with walking retail.” That in-depth understanding of the marketplace pro-vides a foundation of knowledge and, hopefully,answers to a series of key questions.

For toy manufacturers, speed to market is critical,partly because of the short attention span of the customers. Perhaps more importantly, speed to market is the best defense against one of the biggestheadaches in the industry: counterfeiting. Knock-offproducts can start appearing almost as soon as a

toy becomes hot. Rapid manufacturing, sales and distribution are keys to profitability.

Spin Master has been a roaring success but, likeevery company, it has made mistakes and learnedfrom them. “Our three biggest mistakes,” Rabie confided, “have been people, People, PEOPLE. I spend a lot of my time deciding who shouldn’t be on the bus, who should be, and whether they aresitting in the right seat.”

“Learn from your mistakes” and “know your market”may seem to be childishly simple ideas to drive a successful global company, but sometimes truths docome from the mouths of children or, at least in thiscase, a kid’s toy maker.

“An idea is only as good as it plays in the marketplace and you need to stay up-to-date”

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Key questions to qualify great ideas

• Is this product truly, recognizably different?

• Can it be Number 1 or Number 2 in its space?

• Can we develop and build key drivers within the organization to make it work?

• Can we get it to market fast enough?

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“We go to every consumer trade show in the world and I walk retail almost every day”

Ideas, it used to be said, were a dime a dozen. In ourinnovation-obsessed, knowledge-based economy,what is an idea worth today?

“The net sum value of an idea is zero…unless you can commercialize it,” says Daniel Mothersill,President of the National Angel Organization and presenter at a workshop on Angel investing tips forboth entrepreneurs and potential investors. “We don’t need more innovation,” he contends. “We’vegot barrels full of it.” University research labs havehundreds of new technologies sitting on the shelfgathering dust and hundreds more small companiesare trying desperately to get their innovative productsto market. The problem is not a shortage of ideas; it’sa shortage of the entrepreneurial early-stage fundingneeded to commercialize them, to bring the ideas tomarket and make money.

Angel cash and first growthThe first steps in moving innovative products andtechnologies out of the labs are usually taken by theresearchers themselves. They come up with the idea.They envision a big market for it. They start a companyand develop a workable prototype. Up to this point,they’ve been drawing on a combination of governmentfunding and money they’ve raised from family andfriends. However, researchers need more cash totake it to the next level, to develop full-scale technol-ogy demonstrations, detailed commercialization plansand market-ready products. They go to the venturecapitalists, who typically say, “Great idea. Call uswhen you get lead financing.”

Enter the Angel investors. “Angel is second-stagemoney,” says Mothersill. “We come in before the VCsbut after the owners have maxed out their creditcards, mortgaged their homes and sold their kids formedical research.”

Emerging companies with innovative products are the wellspring of Canada’s future wealth. If they can commercialize their product successfully, they willjoin the ranks of small and medium-sized enterprises(SMEs) that generate some 85% of Canada’s GDP.The launch of an overwhelming number of SMEs have depended upon capital invested by Angel investors.

“But there is a crisis in commercialization,” saysMothersill. “There’s a gap of an estimated $5 billionannually between needs of emerging companies andfinancing available through Angel investors. We needto encourage more people to become Angel investors,we need to encourage the development of local Angelgroups and we need to better reward Angel investorsfor the risks they are taking.”

Lessons from an AngelMothersill is the first to acknowledge that Angelinvesting is high risk. As an Angel investor, “I gotkilled on a browser technology,” he admits. On another investment, he learned a different but equally painful lesson: “After you give someone a cheque for $250,000, you would think they wouldat least return your phone calls.”

GETTING THE ANGELS ONSIDE

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“The days of passive Angel investing are over,” hesays. Investors need to be willing to contribute notjust money but also their business savvy to helpemerging companies succeed. Mothersill offered anumber of tips to potential investors and entrepre-neurs hoping to raise Angel money.

If the fit is right, the numbers are right, the timing isright and the product is great, Angel investors canreap rich rewards. To encourage more privateinvestors to step forward and help fill the $5 billionannual funding gap, Mothersill and the National AngelOrganization want the federal and provincial governments to help mitigate the risk by providing a30 percent Innovation and Productivity Tax Credit.“What we’re proposing is similar to what is offered in B.C. and what has been in place in the U.K. for ten years,” he says. “SMEs are the lifeblood of oureconomy and our communities. Angel investors playa critical role in their success. There are sound public policy reasons to use incentives to encourageAngel investors to invest in commercializing innovative products.”

Now there’s an idea with a net sum value far greaterthan zero — if he can make it fly.

Tips for potential investors and entrepreneurs hoping to raise Angel money

• Know the risks. Out of every ten invest-ments, two will be write-offs, six will do okay with help and two will be home runs.

• Be prepared to get personally involved. One strategy is for the pool of Angel investors to form an advisory board to the company and meet with management a minimum of once a month to go over profit-and-loss statements and check the progress against marketing milestones.

• Invest in things you understand. “I see a couple of hundred ideas a year,” he says. ”They probably include some great prod-ucts in the biotech area but, if I don’t understand it, I can’t help commercialize it effectively.”

• About 60% of investment decisions are made on management strengths, not science. Most new companies will not achieve their objectives without serious entrepreneurial input.

• What’s the exit strategy? As an investor, the company is not a lifetime investment. A common exit strategy is to go public or sell the company within three to five years.

• Finally, ask yourself, “Is this someone I want to do business with? Have a beer with?” If you’re going to be working with the company for a few years, make sure the fit is right.

“The net sum value of an idea is zero...unless you can commercialize it”

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If a Canadian companywas to crack open a fortune cookie for adviceon doing business in Asia,the message would bedouble-edged: “Greatopportunity. Be wary.”

The company would getthe same advice from the panel of expertsassembled at the WisdomExchange for a lively and

candid discussion of the opportunities and the issuesthat companies need to understand before outsourcingor building new markets in China and India. ModeratorIan Portsmouth, Editor of PROFIT magazine, launchedthe session by giving the panelists a word associationtest for the phrase “opportunities in Asia.” Theresponse was immediate: “awesome,” “immense,”“dramatic” and “getting better but still risky.” The latter, of course, came from the lawyers.

The dynamics have changedMuch of the discussion focused on China, wherethere has been a dramatic increase in the amount of activities by Canadian companies. The panelistsagreed that doing business there has changed significantly in the past few years and will continue to evolve quickly. “The dynamics have changed,” said Mohan Thadani, President and CEO of GramPrecision Inc., whose company sources industrial digital scales in China. “Sourcing via the Internet isgreat and there are a lot more smaller companieswho are willing to deal in smaller volumes. You nolonger have to order by the container load.”

Another fundamental change is that Asian companiesare no longer content to be suppliers. They are lookingat world markets for their own products and comingto North America to compete head-to-head for marketshare. As they develop products for global markets,Chinese companies find they have their own Intellectual Property (IP) they need to protect, which

has helped turn the tide on the persistent and headline-making issue of counterfeiting and theft of intellectual property in Asia. Michael Bryant, CEO and Managing Director of Matrex Company, had first-hand experience with that problem when he began selling his road repair technology in China. “Our standing joke was that by the time weflew back from a sales mission and got off the plane,our prospect had already gone onto the Canadianpatent website, cracked our formula and knew moreabout our product than we did.”

“The IP situation is improving,” Baker & McKenzie’sJim Holloway noted. “Chinese anti-counterfeiting laws are now actually tougher than the Canadian laws. The big issue today is enforcement.” Also from Baker & McKenzie, Theo Ling said, “China has madecommitments to the WTO and it knows the world iswatching, but it will take a few years to train theirjudges on the implications and expectations of thelegal issues involved with international trade.”

IP protection criticalThe panel’s advice was that the prudent businessowner should go to great lengths to protect the company’s IP assets before doing business in Chinaor India, particularly if the relationship is outsourcingrather than exporting. Over the past few years, com-panies have become quite creative in protecting theirassets. Sharp Electronics, for example, takes a ‘blackbox’ approach to outsourcing their manufacturing toChina. They simply keep a key piece of the technologyat home in Japan. Bryant revealed that Matrex simplydoesn’t patent its technology unless it can’t hide itany other way. And if they do have to patent it, about 30% of their R&D effort goes into planting red herrings in their formulae so that anyone trying to crack them would waste huge amounts of time and money. “To avoid the IP issue altogether,” suggested Deloitte’s Shailesh Gandhi, “Canadian companies can set up their own operations in China. It’s much easier than it once was to own your own assets.”

CREATIVE SOURCING...DOING BUSINESS IN ASIA

ModeratorIan Portsmouth, Editor, PROFIT: Your Guide toBusiness Success

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But while China is changing rapidly, the importanceof personal relationships remains critical to businesssuccess. “We’ve found that the best approach isthrough representation,” said Bryant. “In China,everything is about relationships: families, cousinsand friends. For anyone thinking about doing busi-ness over there, I recommend building a connectionwith someone who has great relationships in the market you are after.” Thadani took this advice onestep further by urging companies to treat theirChinese counterparts as equals in a mutually profitable business arrangement. “Make sure youknow how they are making their money on the deal,”he suggested, “because they are going to do it and, if you don’t know how, it may be by cutting corners at your expense. You need to have a strongrelationship with a degree of trust to give you theleverage to fix problems.”

The panelists agreed that, above all, you don’t wantto get involved in litigation in Asia. In China it can behorrendously expensive. As one panelist put it, “If you thought Canadian lawyers were expensive, wait‘til you get a bill from Beijing.” In India, the problem is time. It may take years and years and years for acase to wind its way through the courts. Despitethese dire warnings, the panel was unanimous in itsagreement that Asia offers tremendous potential.

Moderator Ian Portsmouth ended the workshop byasking each panelist for their advice in a nutshell forCanadian companies contemplating business in Asia.

Bryant: Relationships are important. Let people see you as contributing to the community, not just as an exporter there to make a profit.

Ling: Have good peripheral vision and a good long-term vision that includes your implementation, maintenance and exit strategies.

Holloway: Make sure you practice good legal hygiene before going into Asia. Spend the money upfront to make sure you have protected yourself.

Yeo: Asia offers a huge opportunity but don’t be blindsided by it. Be mindful of the impact it can have on your business back home.

Gandhi: Outsourcing is not a short-term decision. Do your homework and make sure your objectives are clear because, once you go into it, you’re going to be stuck with it for a while.

Thadani: Go in building trust, but be wary.

Michael Bryant

CEO and

Managing Director

Matrex Company

Mohan Thadani

President and CEO

Gram Precision Inc.

Shailesh Gandhi

Senior Manager

Deloitte

Jim Holloway

Partner

Baker & McKenzie LLP

Theodore Ling

Partner

Baker & McKenzie LLP

Daryl Yeo

Vice-President

Global Trade

RBC Financial Group

Panelists

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