Over half of Ottawa’s startup procurement program money comes from the defence department

The defence department is the biggest customer for Ottawa’s startup procurement program by far, data obtained by The Logic shows.

Innovative Solutions Canada (ISC) was set up to allow small Canadian companies to bid for government contracts, following years of complaints from those firms that the procurement process favours big incumbents.

The program has an annual budget of $108.3 million, but three quarters of that comes from just three participants, according to documents obtained by The Logic through an access-to-information request.

The Department of National Defence has budgeted $65 million annually for ISC. Public Services and Procurement Canada (PSPC), the government’s main buying agency, and Shared Services Canada, its IT department, are next at $8.8 million and $7.6 million, respectively.

The program was announced in the 2017 federal budget and launched in December 2017. The government plans to spend $100 million through ISC by March 2020. “This program is really about government being a marquee customer to help Canadian companies grow and scale,” said Innovation Minister Navdeep Bains at an Ottawa launch event in December 2017.

Startups that sign government up as a first client via ISC get cash and feedback to develop their products and services, and a valuable reference for future sales. And, the program shuts out the big firms that normally dominate government procurement—companies must have fewer than 500 employees and do their R&D in Canada.

The 20 departments and agencies selected to participate are required to allocate one per cent of their annual spending on procurement and research and development.

Participating departments have so far issued 42 “challenges”: tenders for new products and services to solve their problems. The defence department leads the way with nine. But some smaller-budget agencies have been active participants, as well. The National Research Council of Canada—which has the fourth-biggest ISC budget, at $5.5 million—has issued seven challenges, the second most. In December 2018, the council awarded three companies a combined $435,041 for a 3D printing challenge, the program’s first contracts.

Innovation, Science and Economic Development Canada (ISED) and the Canadian Food Inspection Agency—which both have budgets of $1.3 million, the smallest in the program—have each run three challenges. In August 2018, ISED gave $300,000 in grants to two companies working on connected car technology.

Employment and Social Development Canada, Global Affairs Canada and Indigenous and Northern Affairs Canada, which have a combined ISC budget of $4.8 million, have yet to participate in the program.

Challenges based on blockchain and artificial intelligence (AI) were particularly popular. Nineteen companies expressed interest in building a question-and-answer platform for the Public Health Agency of Canada, while 12 registered to bid on an ISED project to track the steel supply chain. Another eight signed up for a Canadian Space Agency (CSA) challenge to automate large-scale data analysis.

Some of the problems the government is trying to solve require mechanical engineering. The most recent challenge involved stabilizing the coal mine waste contained behind the Victoria Junction Tailings Dam in Sydney, N.S.; 10 companies expressed interest in the contract. The Coast Guard, meanwhile, is looking for a way to harvest the kinetic energy created by the rotation of its ships to reduce power consumption on board.

Business interest in the program has increased over time. “We see a growing number of proposals per challenge,” said Chris Brosinsky, the defence department’s acting director for science and technology innovation strategies.

Funding for challenges is capped at $150,000 to develop a proof-of-concept and $1 million for a working prototype. The defence department is the only ISC participant allowed to exceed those maximums, and has upped the first phase budget to $200,000 for seven of its nine challenges so far. For comparison, the U.S. Small Business Innovation Research (SBIR)—on which ISC is modelled—caps projects at US$252,131 and US$1.68 million for the first and second phases, respectively.

Canada’s $150,000 cap for the first phase “probably isn’t enough,” said Philip Reece, CEO of InDro Robotics, a Salt Spring Island, B.C.-headquartered unmanned aerial-vehicle company. The firm is waiting for the results of a Correctional Service Canada challenge to prevent contraband from being smuggled into prison via drone drops or bags thrown over the wall.

“I would hate to think that they wouldn’t look at the best solution regardless of the cost … especially when you’re dealing with Correctional,” said Reece.

All the executives that The Logic spoke to said the second-stage budget was enough to pay for prototype development. “It’s kind of like getting a million dollars [in] funding, and no one taking equity,” said Pedram Pejouyan, managing director of DataFinery Consulting, a four-person AI startup. The company applied unsuccessfully to the CSA’s data analysis challenge.

But many of the executives at small technology firms who spoke to The Logic  said it’s still taking too long to process ISC applications and award funding.

The CSA challenge closed in April 2018, and DataFinery was told in November it hadn’t been selected, Pejouyan said. And, 11 months after the deadline, the government hasn’t made public the awards or contracts related to the tender. Pejouyan said that’s a problem for startups who want to make government their first customer. “If you’re counting on this as your only form of revenue, then you’re going to go broke, because you have to last about a year,” he said.  

For most challenges, the funding is meant to cover six months of development for the proof-of-concept and up to two years for the prototype. That’s a reasonable amount of time, according to Dan Wasyluk, CEO of Blockchain Foundry, which submitted proposals for both the steel supply chain and public health information contracts. With a new technology like blockchain, it’s important that “there’s room to iterate,” he said.

The government has also simplified its typical request-for-proposal (RFP) process for the program, making it more accessible to smaller, less resourced firms.

“It was a questionnaire,” said Pejouyan, compared to the “200 pages” a typical RFP requires. The sections on the form are limited—bidders get just 3,000 characters to explain how their solutions would meet the key requirements of the challenge, and 2,000 characters to describe the entire prototype development plan for the second phase.

Applicants don’t normally require a security clearance, nor does that give them an advantage, even for defence department challenges. “These demand-pull programs, like Innovation Solutions Canada, [are] meant to be in the open,” at least in the initial phase, said Brosinsky.

While the government gets to keep any prototype built with its money, companies typically retain the IP. “I think it’s really beneficial for the company to be able to exploit the results [of the proposal] and to really generate the market benefit of that first-mover advantage,” said Patrick Mandic, CEO of Mavennet, a Toronto-based blockchain company that applied to an ISED steel supply chain challenge.

Some firms are applying as a way to fund and advance product development, in addition to the marketing value of having government as a client. CloudConstable—which is developing an AI-based tool that monitors online activity for cyber threats—applied to a PSPC challenge to make it easier for language interpreters to participate in meetings and events remotely. It plans to use the project to improve its videochat tool, CEO Michael Pickering said.

The program does include the option of a third phase, in which a department buys the technology from the company for regular use. Blockchain Foundry is hoping its participation “either turns into a long-term relationship like that, or we come out of with it a product that we can sell to other markets,” said Wasyluk.

The SBIR, the U.S. program on which ISC is modelled, was established in 1982, and counts chipmaker Qualcomm and pharmaceutical firm Amgen among its alumni. But that program has a significantly larger budget—even accounting for the tenfold population difference between the countries—at US$2.5 billion in the 2015 fiscal year; the U.S. defence department contributed US$1.07 billion.

The ISC funding is a small fraction of what the Canadian government spends on technology. The Logic previously reported that IBM alone had been awarded more than $1.9 billion in federal government contracts between February 2016 and June 2018, while BCE and Microsoft were second and third among IT companies, at $1.6 billion and $514 million respectively.  

Still, some innovators are happy to see the government give less well-resourced firms a chance at procurement opportunities. “It opens the doors so that guys like IBM are not the only one taking the projects,” said Pejouyan.