A common government strategy to increase prosperity in economically lagging regions is to provide financial assistance to technology-based businesses. This intervention is designed to address market failures that cause financial scarcity in such places.
The objectives of these interventions are to enhance innovation, create high value jobs and grow the tax base. But because of the high failure rate of entrepreneurial businesses — even among companies raising finance from business angels and venture capital funds — this strategy has higher risks than other forms of assistance.
When government-supported businesses fail, they often attract criticism from both political opponents and the media. Often, critics suggest it was a waste of money or that governments should not be trying to “pick winners.” But is this narrative actually correct?
Our recent research aimed to answer this. We found that the value of government investment in tech ventures doesn’t exclusively depend on the commercial success of the firm. This is because the skills and knowledge developed within these firms — which are embodied in its employees — don’t disappear when they close. Instead, they are likely to be recycled, which benefits other businesses in the ecosystem.
Rise and fall of Consilient Technologies
Our study involved conducting a case study on Consilient Technologies, a firm based in Newfoundland and Labrador, one of Canada’s most geographically remote and economically underdeveloped provinces. We held 28 semi-structured interviews with Consilient’s founders, former Consilient employees, investors, industry experts, government officials and board members in 2020 and 2022.
Incorporated in 2000, Consilient developed software to deliver email directly to mobile devices to solve email and phone system compatibility issues in the emerging wireless handheld device market. One of its key partners was was Research in Motion, the maker of the BlackBerry smart phone.
(AP Photo/dapd, Oliver Lang)
At the time, Newfoundland and Labrador was seeking to diversify its economy, which was heavily dependent on resource-based industries. The technology sector was dominated by small consultancy companies, and Consilient was one of the few companies developing its own products, pursuing international markets and showing significant growth potential.
However, because of a lack of local finance sources, Consilient relied heavily on grants and loans from the federal and provincial governments to finance its growth, totalling millions of dollars in direct financial support.
The company quickly grew to around 100 employees and opened international offices in Silicon Valley and Singapore before ceasing operations in 2008. Its failure quickly attracted criticism that the public money received to support its growth had been a waste of taxpayers’ money.
Consilient’s ripple effect
Over time, it became apparent that the government’s financial support for Consilient had not been a waste: its failure helped to seed the province’s fledgling tech ecosystem.
Consilient became a magnet for software engineers, attracting young, inexperienced, technology-trained graduates — many of whom would have otherwise left the province.
The former employees we spoke to said they were attracted by the “cool” and “state-of-the-art” technology, the global reach of the company and its work environment, and the opportunity to acquire new expertise, skills and knowledge. Consilient developed the talent it hired, and gave employees opportunities for rapid career growth into management roles.
Our research found that, following its closure, most of Consilient’s employees moved to other local technology firms who were keen to hire them for their skills and knowledge. A number of former employees ended up going to Verafin, the most significant technology company to have emerged from Newfoundland’s entrepreneurial ecosystem.
(Shutterstock)
At the time of Consilient’s closure, Verafin had 35 employees, making it one of the larger technology companies in the ecosystem. Verafin became a major success story and was acquired by Nasdaq for US$2.75 billion in 2020.
Some former Consilient employees we spoke to went on to start their own businesses. Despite its closure, the company serves as a powerful example for aspiring entrepreneurs, demonstrating what can be achieved in the tech sector.
Key lessons from Consilient’s story
Our case study has two implications for governments. First, if governments are going to provide financial support for innovative companies, they must be prepared for some of these businesses to fail. Such programs will not have a 100 per cent success rate.
Second, governments should know that even businesses that fail can still generate positive economic outcomes. The funding that Consilient received was invested in the skills and competences of its employees who subsequently moved to other companies in the ecosystem, contributing to their success.
While these benefits are not easily quantifiable, the overwhelming consensus within Newfoundland and Labrador’s tech start-up community is that the returns from the governments’ investment in Consilient were positive. However, there is a critical caveat: this is not a carte blanche for governments to provide indiscriminate support for businesses.
Consilient’s positive impact on Newfoundland and Labrador’s entrepreneurial ecosystem arose because it was a globally-oriented, technology-intensive company that provided rich learning experiences for its employees.
Governments must therefore be selective in the types of companies they support, basing their investment decisions on the attributes of companies that, should they fail, will nevertheless still have positive effects on Canada’s economy.
