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November 18, 2013

Speech of François-Charles Sirois at the Montreal Canadian Club

On November 18,2013, François-Charles Sirois gave a speech on the theme: Catalysing innovation in media and technology. Here it is:

Taking a chance

I would like to approach my topic for today – innovation – by sharing with you a personal anecdote that leads me to reflect greatly on where certain companies stand on this issue and, above all, on risk-taking.

I was in a chic Los Angeles restaurant, which is well known for its exquisite desserts, enjoying a good meal with some business partners. When it came time to choose one of these famous desserts, my eye fell on the very first item on the menu: crepes!

Now, I’ve been making crepes for at least 25 years, and I like to think that I make excellent ones. So I ordered their crepes, just to compare. The waiter went into the kitchen, then returned to tell me that they weren’t serving crepes that evening because they were missing an ingredient. Since crepes only call for three basic ingredients – eggs, milk and flour – I was a little doubtful that they were really short of one. So I asked if I could speak to the chef.

Those who know me are aware that I enjoy challenges, especially when I’m convinced I’ll win. Within earshot of a number of patrons, I embarked on a lively discussion – about crepes – with the chef. Despite my tenacity, he stuck to his guns: The other desserts, in his opinion, were excellent. So I replied, in all seriousness: “How about a crepes competition? Chef versus me, right now, in the kitchen!” The restaurant’s other patrons quickly reacted to this challenge, and waited for the chef’s reply… visibly calculating the impact on his credibility, he agreed to go back into the kitchen to see what they could do. Twenty minutes later, four waiters brought us every dessert item on the menu – with the chef’s compliments. Every item was there, except the crepes!

I started to wonder: Why did the chef prefer to make every other dessert on the menu – on the house – rather than prepare a dish of crepes? Granted, if the combination of ingredients is wrong, the crepes will be awful. Was he really putting his and his restaurant’s credibility on the line? Where was the risk in simply trying?

The answer is easy: He put in a lot more effort, at a higher cost, for zero benefit and a dissatisfied client. In short, I believe that he lost a great opportunity. I have never seen a restaurant where the chef was willing to take up the crepes competition challenge. In looking back on the general ambiance that night and the other patrons’ enthusiasm, I see that this could have led to a series of events ultimately benefiting the restaurant. But we’ll never know.

Whatever the innovation, rule number one is that you have to take a chance… and a risk.

Just like this chef, many companies prefer to continue along a path they’re familiar with, even if it means more work. I’m always surprised to see how entrepreneurs who innovate can destabilize large organizations that won’t even take a chance, and the risk that goes with it.

At Telesystem, three ingredients are combined to form the basis of our strong international platforms:

  1. innovation, which enables operating leverage
  2. scale, an essential component to a big financial and market impact
  3. international acquisitions, for very fast growth

And obviously, partners are essential in the completion of any undertaking, to ensure success, whatever the strategy.

A company can refuse to innovate, but – somewhat like making an omelette, which calls for two eggs and milk – it’s interesting to discover that adding a little flour gives you ten crepes. Innovation is a very powerful lever that lets you do ten times more – for the same amount of human effort and financial resources.

A bit of history

Innovation has been part of our DNA since the beginning… and over the past 40 years, the lever of technology has always formed the underpinnings of our platforms.

In 1972, my grandfather, Simon, founded Setelco, which became Telesystem in 1984. In those early years, Setelco was a call centre and message service for businesses. My grandfather, who was constantly on the lookout for new technologies, launched the first pager network in Chicoutimi in 1974 – a move that directly impacted his operations and operating leverage. Manual message-taking was replaced by subscriptions to an automated pager service. This platform positioned our company to serve more clients, improve the quality of its service and raise its profitability, for the same amount of effort.

When my father bought out Setelco in 1978, the company’s client base didn’t extend much beyond Chicoutimi, but he was able to invest in the existing platform. Armed with this combination of technological and financial leverage, he was able to make more than 30 acquisitions and thus consolidate 65% of this industry in Canada in less than seven years. This growth, which could not have happened organically, came about through the companies we acquired during this period.

In 1992, with the help of BCE, Telesystem bought Teleglobe – a very well-established company that was using only 5% of its capacity. In turning toward the global arena, the organization tackled a market that was 50 times larger, with assets presenting growth potential of around 2,000%! The company was already profitable, and its returns were multiplied thanks to a combination of three factors: an under-utilized network, major expansion in the global arena and new fibre optic technologies that enabled us to install the first Internet cable between the Americas and Europe.

Without my going into a lot of historical detail, you’ll understand that our objective was to combine innovation with a strong company, then add a sound global expansion strategy.

Positioning ourselves 15 years into the future

Completing great projects means operating in a great industry. From 1972 to 2005, we worked in telecom – an industry that has seen the greatest growth worldwide. In 1995, we came to realize our overweighting in this industry and that we risked becoming a marginal player with no added value, so we took a chance on content and applications.

Between 1995 and 2010, we invested in more than 100 tech start-ups, so we could still be players when the big wave arrived. Which wave was that? There have been several, and the challenge was being in the right place at the right time. We came to define our long-term growth strategy in highly targeted areas, such as digital content distribution and data analysis, based on the companies we created, acquired and managed during these years.

Although we began to wind down our involvement in venture capital in 2010, we still support organizations that finance start-ups, such as Anges Québec and Notman House. Many people ask us why we exited from this sector. The effort required to support a start-up, versus the benefit and added value of growing a well-established company through innovation and acquisitions, is incomparable.

We therefore chose to grow the companies we already own that showed the most potential for being large media and technology players. At the same time, we co-founded Tandem Expansion – a growth capital fund – in 2010, thus transitioning from venture capital to support for significant Canadian tech companies. Tandem’s objective is to help establish more market leaders and keep them in this country, and to restrict the sales of companies to foreign interests.   Today, Telesystem is a media and technology holding company that focuses on strategic partnerships, international leverage and acquisitions. Our areas of specialization fall into four categories: digital content production and distribution, data analysis, industrial innovation and growth capital.

I am also very pleased to be working with my cousin Denis, who’s in charge of our companies that specialize in IT, more specifically data analysis – a field that many of our key businesses operate in, which is expected to post significant growth over the next 5 to 10 years.

Despite his many corporate responsibilities, I have succeeded in keeping my father involved in some of our industrial technology companies, which is a good fit with Pangea, his agriculture-based venture. He is also very involved with Tandem Expansion, which he co-founded with Brent Belzberg. Our family business dynamic is highly effective: Each of us has his particular responsibilities, and we draw on the expertise of an experienced team that has closed every type of transaction imaginable. This frees me up to spend most of my time on our media endeavours and the abundant opportunities that this field has to offer.

A media and technology tsunami

In the 1990s, Telesystem experienced spectacular growth, through its subsidiary TIW, as a result of its involvement with building mobile networks in the developing world. Since basic telephone infrastructure was non-existent in these countries, the introduction of mobile phones was revolutionary, translating to millions of subscribers.

The opportunities we had in the 1990s pale in comparison to those of the next five years in media and technology. Of the 1.3 billion subscribers worldwide who possess a Smartphone today, 400 million live in the developing countries. By 2019, their number will exceed 5.6 billion, and 4 billion of these people will be in the developing world.

The number of pay TV subscribers is expected to pass the 1-billion mark in 2018. Approximately 10 million are in Canada, accounting for barely 1% of the world market. And all of these mobile/Internet/TV subscribers will want local content, which will lead to exponential growth in the global content production market. All of this represents a tsunami of opportunities with an unprecedented massive impact. On top of that, the distribution of digital content and apps represents an opportunity to offer most services without any local infrastructure, while greatly reducing operational risks and providing for considerable profitability despite low per-subscriber revenues.

Telesystem Media

Our media focus revolves primarily around the production and distribution of digital content. By working with TV broadcasters, cable operators and mobile operators worldwide, our companies are now serving millions of subscribers.

Using music as our template, we created a subsidiary – Telesystem Media, based in Los Angeles – in 2012. Its mission: to set up a direct relationship with the music industry and world-renowned artists, for the benefit of our media companies.

To accomplish this mandate and gather our companies around a shared objective, we brought on board an entrepreneur who amply represents Telesystem’s values: Frédéric Lavoie, who is responsible for our Los Angeles office and team. We also decided to set up partnerships with some agents of recognized artists, in order to bring more specific expertise into the group, along with closer ties to some of these artists.

While the Telesystem Media project is a blend of vision and execution, everything is in place to make it a success and create leverage for our own companies. Like most of our historic successes, we are proactive and take risks in trying out new concepts, even if we start out small.

Monopoly or Risk?

Every large company has a duty to work with innovative entrepreneurs within their ecosystem to find their next business lever. The larger and more mature a company, the more results-driven it will be and increasingly less inclined to take risks. This also applies to our large media companies in Canada, notwithstanding our exceptional economic climate and regulatory environment.

For a reason that escapes me, however, most Canadian media groups operate only in this country. The greatest risks they take involve primarily the acquisition of well-established assets, which they trade back and forth as if they were playing a game of Monopoly, where the game is restricted to the number of properties on the table… There are way too many opportunities in international media to warrant staying within Canada’s borders. We need to change things up.

In the game of Risk, any player who has too many forces in a single country must send troops to other countries in order to try and conquer the world. Every Canadian media group needs to develop an international arm and use its strong assets locally to benefit from the enormous growth that will materialize in years to come.

I’m not looking to criticize my colleagues in the media industry, but rather to get all players to realize that opportunities in play today will last no more than another five years. Nor am I trying to get every media group to make a decision to plunge into the international music scene. Although this is the niche we have chosen, many others obviously exist. Each Canadian media asset can be run on an international scale.

“Adopt an entrepreneur”

No, it’s not a new UNICEF program – rather, it’s an image I would like each of you to recall when you come across an entrepreneur who needs you. To the extent that our Canadian media groups need to make their mark worldwide, the responsibility for creating and establishing partnerships with our entrepreneurs and, eventually, setting up major new head offices in Canada rests with our institutions and large companies, not with our entrepreneurs! Here’s why.

I recently read an article about an entrepreneur who had a solution that was perfect for a large company. Close to a year later, after eight meetings with various stakeholders, he had yet to speak to the right person in the organization (even though it was clear that this company needed the solution he was offering).

Many of our large companies view projects created by entrepreneurs as an irrelevant diversion or, worse, as a potential threat to one of their existing profitable services. I strongly believe that large companies can win big by developing an innovative project outside of its own offices.

The opposite side of the coin is that I’ve seen way too many great projects that were developed but could not break through in the industry or be put into place in the large company, despite its almost-immediate benefits for them.

Any large company that makes a move and awards a contract, allocates the funds for an order, starts up a pilot project, shares its customers, promotes their ideas, etc. is directly helping the entrepreneur prosper and, in so doing, gets an opportunity to develop a new platform or partnership based on novel ideas and ways of doing things!

This is why I believe that, if you’re the president or a vice-president, director or employee of a large company, you need to adopt an entrepreneur in your industry.

The entrepreneur’s risk

I would now like to talk about a crucial element that directly impacts the creation of large businesses: entrepreneurial risk.

For an entrepreneur who’s just launching a company today, financing options are few and far between. Most often, he must turn to venture capital funds. Through their investments, these funds rank at the top of what the entrepreneur is building, however long the term and whatever the capital amount invested. So everything the entrepreneur has created is at risk.

Additionally, most small companies don’t automatically think about making acquisitions or even anticipating which companies to buy and when. The balance between innovation and acquisitions is a very delicate one. From the very early days, when a company is first launched, acquisitions need to be anticipated and included in its business plan. Many entrepreneurs wait too long to forecast their acquisitions and face a shortage of funds that are critical to the business.

They increase their risk even more when they take on the responsibility of proving their innovation is a technological success and then making it a commercial success with too little funding. As a result, any offer to purchase – no matter how low – prompts the entrepreneur to reassess his or her personal risk and deal with pressure from investors who simply want to sell.

Each time someone wants to buy one of our companies, I ask myself, first of all, if it should be bought. Canadian entrepreneurs and the institutions that support them need to ask themselves this question as a matter of course.

You need to operate from a position of strength in the local market if you want to make acquisitions abroad, either with a strong partner or as a profitable company that’s in control. Additionally, you need to know exactly where operational synergies lie, to avoid “buying yourself” a load of problems – hence the importance of platform and focus. But many entrepreneurs find themselves in this situation and decide to sell anyway.

We need to realize that risk is different for the entrepreneur versus the investor institution. It’s entirely normal for an entrepreneur to ask for capital to buy a business abroad while seeking to sell a portion of its shares in order to cut his or her personal risk and focus on the integration challenge that awaits.

When it comes time to do business, funding for our small companies must come from our institutions. The importance of waiting for the right opportunity at the right time is often mentioned, but when it’s time to complete an acquisition, we need to move fast – sometimes very fast – and our institutions owe it to themselves to be at the table.

The support that large companies provide to entrepreneurs looking to make acquisitions and create a large-scale head office is essential, just as it was for us on several occasions. I extend a special thank-you to National Bank, which has always supported Telesystem. This was the first institution that made it possible for us to make a number of acquisitions in the 1980s and continues to support us today in many of our undertakings. I would also like to thank BMO, which along with NB, is supporting Stingray Digital, as well as the Fonds de solidarité FTQ and Investissement Québec, for having supported us during the most recent Stingray acquisition attempt in the U.S. Finally, on the topic of Stingray, I must thank Novacap – an excellent partner – and Eric Boyko, our “super-entrepreneur” whose motto is “go go go”.

To all of our other partners and entrepreneurs, you’ll understand that I’m unable to single you out for thanks, but you know that we are extremely grateful to you.

Building from our Montreal base

I remember being in my father’s office in the mid-1990s. Serge Godin, an entrepreneur of that era, called him to finalize the purchase of an insurance IT company owned by Teleglobe – a transaction worth approximately $150M. As he hung up, my father explained to me that the activity in question was no longer a strategic one for Teleglobe, but it was important to Serge. It was probably a huge deal for CGI at the time. They now make acquisitions worth billions of dollars, and their annual economic spinoffs are probably much higher than that $150M transaction in the 1990s.

What would be the impact for Quebec if Serge and CGI hadn’t received any institution funding at the time? In 1995, the whole thing would probably have been positioned as excellent news – CGI sold at a profit. Yet we can all understand the economic benefits of keeping CGI in Quebec today.

This month, four Quebec-based tech companies (IBwave, Créaforme, iWeb and PCO innovation) were sold. I don’t blame the entrepreneurs for selling – in fact, from what I see, they have done an excellent job. But could any of these companies have become a major tech head office? Did at least one group offer to invest and keep them in Quebec?

Do any other Canadian media and tech companies – aside from CGI – enjoy worldwide influence today? Have any of them bought out their foreign competitors? I checked QG100, a list of Quebec’s 100 largest companies abroad, of which we are founding members. After some reflection, I discovered that there are no major players – at least in Quebec. A city that boasts of having one of the best pools of tech and multimedia resources should be home to more Canadian companies…

Let’s make it our goal to add at least six international companies, based in Montreal, Quebec or Canada, by 2020 – all of them clearly supported by our institutions and our large Canadian organizations.

Take a chance… and a risk. Go global, support our entrepreneurs and give them a reason not to sell their businesses. This is what we will do every time – as we have been doing for 40 years.

And don’t doubt it for a minute – Telesystem understands the value of Risk all too well… and that Monopoly doesn’t go far enough!