A crucial component of a functioning tax system is that it should establish a level playing field, and should not arbitrarily pick “winners and losers”. I happen to believe that the tax system should rarely be used to drive policy, but that is obviously a minority view. But a tax system that perversely favours some over others for no policy reason at all is clearly flawed.

Our HST system is trapped in 19th century mercantile thinking and is such a flawed system. We levy HST on services provided by Canadians for Canadians, but we do not levy HST on the same services if they are provided by “non-Canadians” for Canadians. It defies belief that Google can direct Canadian search queries to google.ca instead of google.com, while at the same time evading any responsibility to levy HST on its advertising (the real service it sells and thus its core business, not the free service it provides to support its advertising business), while domestic advertisers must charge and remit HST is ridiculous. It is also an instance of massive tax leakage.

Google, Netflix, Amazon … the list goes on. They must be forced to levy HST on the services that they provide to Canadians – otherwise, they gain an enormous (i.e. roughly 13%) advantage over Canadian competitors for no reason, all to the detriment of Canadian companies and Canadian taxpayers.

Neil

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If you want to move the needle with economic development, it is services that matter the most. Manufacturing and resource extraction may be easy, but they are not the core of a first world economy. The challenge – and it is a very serious one – is that to improve standards of living, we must figure out how to improve productivity in services. Services make up >75% of the economy, and yet, most are still conducted much as they were a century ago. Think of education or health care or accounting – are they really ‘more efficient’ or delivered differently than 100 years ago? In the main, they are still the same services delivered the same way. This must change if we are to create wealth and grow GDP per capita in the years ahead.

Neil

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In the spirit of the season, a Rant and best wishes.

Happy Festivus, and All the Best for 2015.

Neil

The post Seasonal Rant appeared first on Miltons IP.

Zero to One by Peter Thiel.

Peter Thiel was one of the co-founders of PayPal (along with a ridiculous number of other very successful folks including Elon Musk of Telsa and SpaceX fame, and Reid Hoffman of LinkedIn). Much of his early ranting was of the ‘libertarian loonie’ variety (everything would be better if there were no government), which is a sentiment I think only someone who is rich, young and utterly devoid of empathy and introspection can truly ascribe to. However, perhaps with age comes wisdom, because this is an excellent little book. It is short, pithy, and insightful. I strongly recommend it.

Most books on entrepreneurship and technology start ups are not worth the paper they are written on. This one is worth paying for the hardcover version.

Two thoughts in the book stand out. The first is that when there is perfect competition, marginal profit is zero. As an entrepreneur you must look for a niche where there is less than perfect competition, and thus try to capture some form of ‘monopoly’ profit. I have made this mistake myself several times – looking a large markets with large numbers of incumbents and assuming that I because we had a better offering, we would grow quickly. Instead, I should have understood from the level of competition that marginal profits for the incumbents were low – and that this should be a clear warning to me to ensure that I had something radically different and better to have strong margins. Something that is just a bit better will not have the margins to support the sustained and expensive effort of building market share.

The second, and related, point, is that you should start by trying to dominate a modest niche – and after you have done that successfully, you should find an adjacent niche and dominate it. This is a very apt point, and in direct conflict with the usual “advice” that you should target a massive total addressable market from the get go. It is, in fact, in direct conflict with the usual VC metric of looking for a company that from the get go can scale to be “a $100M business in a $1B space”. Of course, it helps if there are obvious adjacent niches that you can transition into readily after your first success – but that is a far cry from the target being one large market.

When you put the two together, a good start up will be very focused on a small identifiable niche and will have very strong margins early on, and thus will rapidly start generating cashflow from which to fund its growth.

Happy reading.

Neil

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Investing is a low-barrier to entry, poorly-regulated business so it should come as no surprise that many fund managers say crazy things when talking about their historic returns. Similarly, retain and angel investors prefer to glorify their returns even if it does not benefit them financially.

Recently, I have heard a number of investors refer to their ‘cash-on-cash’ rate of return. When this is specified without any reference to “the time period” it is utterly meaningless, and likely deliberately misleading. Investing is about ‘rate of return over time’. If you fail to mention the time period, you are talking gibberish, and trying to mislead. A very common retail example of the same behaviour is people talking about how much they have made owning their own home, but without any reference to the duration of the investment or its annualized real rate of return (after inflation).

One of the most significant trends of the past generation has been the ‘democratization of capitalism’. What I mean by that is that we are all, by necessity, required to try to ‘make money from money’ (which is the essence of capitalism). We are all investors now. Ands everyone has much more stake than ever before in a) saving, and b) investing these savings successfully, for retirement – and all taxpayers, as guarantor of various public sector pension plans, also have a much higher stake in understanding the liabilities that flow from weak investing returns. Sadly, the financial literacy of most people – including of most people who are nominally “investors” – has not kept pace with this transformation. We need the financial equivalent of mandatory high school – a mass education program that improves financial literacy among all adults.

Neil

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Here are some fundamental truths:

• Patents are not self-enforcing, nor does the state enforce your patent rights;
• A patent is nothing more than a call option to sue, and unless the patent owner enforces its rights, a patent is worthless;
• Enforcing patents is hard and requires expertise, resources, tenacity, and capital;
• No business can be good at everything; every business needs to focus on a few core competencies; and,
• Very few businesses have expertise in patent enforcement.

Accordingly, as long as we have patents, it is inevitable that we are going to have businesses whose core competency is in patent enforcement.

Moreover, for additional reasons – such as ‘reputation management’ – entities that produce a lot of patents (like universities and research labs), have a lot to gain by outsourcing the dirty work of enforcing their patents to third parties.

So it is well past time that we got past calling patent licensing and patent assertion entities nasty names, and learned to love our favorite trolls.

Neil

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Moneyball by Michael Lewis is an excellent piece of financial journalism, vastly better and more insightful than you would glean from the movie starring Brad Pitt.

The premise of Moneyball is that the Oakland As revolutionized baseball by abandoning heuristics and instead analyzing the data very carefully: and what the data told them was the teams that won baseball games could be assembled more effectively and with much lower payrolls than teams built by buying expensive free-agents.

The Moneyball thesis is the dominant trend of professional sports team management of the past decade, and has had a dramatic impact on MLB (baseball) the NBA (basketball), and now the NHL (hockey is always a bit behind the curve).

However, the thesis – that you should look very carefully at the data is more relevant than ever in virtually every business. We have more data at our disposal than ever before, and much of it will provide insights that overturn old heuristics and make it possible to win more games with smaller budgets. Or at least, that’s what I keep telling myself when I look at my meager budget.

Neil

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Staples has done a brilliant job of holding Office Depot out of the Canadian market, and one factor must be its skillful use of the BUSINESS DEPOT trademark which it acquired when it bought a beachhead in the Canadian market.

This is a great little story of two American titans battling it out in Canada, with one besting the other, and using Canadian trademark law very effectively as a weapon on its behalf.

Neil

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We face a crisis of ignorance about intellectual property – seriously, more people know less about IP than any other core business discipline. IP is not the be-all or end-all of business. Lots of other disciplines like marketing, sales, finance and HR are more important for more businesses than IP. But the knowledge gap in C-suites between what folks do know and what they should know is greater, in my view, for IP than any other core discipline of business and that is why I have devoted so much energy to trying to explain the basics of IP to people.

That is why it drives me bonkers when people who should know much better say stupid, deliberately misleading things about patents in order to lobby for their pet position. In this rant, I talk about some recent foolishness from the new CEO of AbbVie Canada, who happens to be a Frenchman. I am sure that his PR firm was delighted to get his speech featured in the Globe & Mail, but shame on him and shame on the Globe for mindlessly repeating drivel. Put charitably, if this came out of a four-legged animal, it would be fertilizer. Here is the article in the Globe..

Here is the key point: patent law makes it possible to ‘invent anywhere, and patent everywhere’. Whatever pharma companies may think about the scope of Canadian patent protection, it has no logical nexus to whether or not they conduct pharma R&D in Canada: none.

Sadly, there are many more examples of this self-interested misinformation about IP. In Rants to follow, I will try to highlight some choice idiocy from Google and others.

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One of the key challenges for entrepreneurship and innovation in Canada is that so much of the economy is dominated by de facto oligopolies, often regulated ones. For instance, banking and telecom, are dominated by a few titans protected from foreign competition. So, while they may compete fiercely with each other, they are significantly protected from the real gales of creative destruction.

It is tough to innovate in any industry dominated by a few monsters in which the access of entrepreneurs to foreign capital is severely constrained as it is, for instance, in telecom in Canada.

The trouble is, oligopolies rarely innovate, and as a result they sit at home and never venture abroad.

Neil

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