A typical government technique to increase prosperity in economically less developed regions is: provide financial assistance to technology-based businesses. The aim of this intervention is to deal with the market failures causing financial shortages in such places.
The purpose of these interventions is increase innovation, create high-value jobs and increase the tax base. However, attributable to the high failure rate of entrepreneurial ventures – even among firms fundraising from business angels and enterprise capital funds – this strategy involves greater risk than other forms of aid.
When government-backed firms fail, they often face criticism from each political opponents and the media. Often, critics suggest that it was a waste of money or that governments shouldn’t do it attempting to “pick the winners.” But is this narrative really correct?
Our latest research intended to reply this query. We found that the value of government investment in technology ventures does not depend solely on the company’s business success. This is because the skills and knowledge developed in these firms – which are reflected in their employees – they do not disappear when they close. Instead, they are going to likely be recycled, which can profit other firms in the ecosystem.
The rise and fall of Consilient technology
Our research involved conducting a case study of Consilient Technologies based in Newfoundland and Labrador, one of the most geographically distant and economically underdeveloped provinces of Canada. In 2020 and 2022, we conducted 28 semi-structured interviews with Consilient founders, former Consilient employees, investors, industry experts, government officials and board members.
Founded in 2000, Consilient developed direct-to-mobile email delivery software to deal with compatibility issues with email and telephone systems in the emerging wireless mobile device market. One of its key partners was Research in Motion, the manufacturer of the BlackBerry smartphone.
(AP Photo/dapd, Oliver Lang)
Then, Newfoundland and Labrador has sought to diversify its economywhich was highly dependent on resource-based industries. The technology sector was dominated by small consulting firms, and Consilient was one of the few firms developing its own products, expanding into international markets and showing significant growth potential.
However, attributable to a lack of local funding sources, Consilient relied heavily on grants and loans from federal and provincial governments to finance its development, with direct financial support totaling tens of millions of dollars.
The company quickly grew to roughly 100 employees and previously opened international offices in Silicon Valley and Singapore ceasing operations in 2008. Its failure was quickly met with criticism that the public money received to support its development was a waste of taxpayers’ money.
Consilient wave effect
Over time, it became clear that the government’s financial support for Consilient had not been wasted: its failure helped seed the province’s fledgling tech ecosystem.
Consilient has turn out to be a magnet for software engineers, attracting young, inexperienced, technology-trained graduates, many of whom would otherwise have left the province.
Former employees we interviewed said they were drawn to the “cool” and “cutting-edge” technology, the global reach of the company and its work environment, and the opportunity to achieve latest expertise, skills and knowledge. Consilient developed employed talents and provided employees with opportunities for rapid profession development as much as management positions.
Our research found that after Consilient closed, most employees moved to other local tech firms that desired to hire them for their skills and knowledge. Many former employees have gone on to hitch Verafin, the most significant technology company to emerge from Newfoundland’s entrepreneurial ecosystem.
(Shutterstock)
At the time of its closure, Consilient Verafin had 35 employees, making it one of the larger technology firms in the ecosystem. Verafin was a huge success and it was acquired by Nasdaq for $2.75 billion in 2020.
Some former Consilient employees we talked to have began their very own firms. Despite the closure, the company is setting a strong example for aspiring entrepreneurs, showing what will be achieved in the technology sector.
Key lessons from Consilient’s history
Our case study has two implications for governments. First, if governments intend to offer financial support to modern enterprises, they need to be prepared for the failure of some of these enterprises. Such programs will not be 100% effective.
Second, governments should recognize that even firms that fail can still generate positive economic outcomes. The funds Consilient received were invested in the skills and competencies of its employees, who then moved on to other firms in the ecosystem, contributing to their success.
While these advantages are not easily quantifiable, the overwhelming consensus in the Newfoundland and Labrador tech startup community is that the returns on government investment in Consilient have been positive. However, there is a key caveat: this is not a carte blanche for governments to offer massive support to businesses.
Consilient’s positive impact on the Newfoundland and Labrador entrepreneurial ecosystem was attributable to the incontrovertible fact that it was a globally focused, technology-intensive company that provided wealthy learning experiences for its employees.
Governments must subsequently select the types of businesses to support, basing their investment decisions on the characteristics of the businesses that, if unsuccessful, would still have a positive impact on the Canadian economy.