Canadian venture capital doesn’t need government handouts

| January 19, 2013 | 0 Comments

Conservatives spend your children’s tax dollars on wealthy venture capital funds

Bruce Stewart

Photo: Bruce A. Stewart

By Bruce A Stewart         

Hard on the heels of handing out a quarter billion dollars for “innovation” in the auto sector — a sector where all the key decisions are made outside the country and where “Canadian innovation” is as welcome as a skunk at a pool party — the Harper Government has continued to throw your children’s tax dollars around to “stimulate growth”.

I say “your children’s” tax dollars because, of course, Canada is awash in red ink, thanks to a government that figures balancing the budget somewhere out around 2015 (or will that be 2016?) and sticking future generations with the bill rather than actually have to make choices, focus their attention on a few files, and live within the means they’ve chosen for the country. You know, govern.

There’s a time and a place for deficits. Sir John A. Macdonald knew it well: going into debt to build infrastructure that would pay off down the road, and thus allow the debt to be paid down, too.

 

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Stephen Harper and his advisers, on the other hand, think that shovelling $400 million into Canada’s venture capital managers’ hands is a really good idea.

Now, understand: people who run venture capital pools don’t usually look like they’re trying to scratch out a living. Some of the ones I knew in Vancouver last decade were more inclined to sliding fresh oysters dunked in Cristal champagne (several hundred dollars a bottle at a restaurant like Il Giardino di Umberto) than to the drive through at McDonalds between deals.

But really: venture capital funds are supposed to be raising money from well-heeled investors — the kind the securities commissions call “sophisticated” — and promising returns on that money. They’re supposed to be making investments in start ups that will prosper, looking for the ones that return a thousandfold and more.

So if they need money, is that because Canada is fully invested — there’s just no more sophisticated investor money left because it’s all at work already funding innovative new business to replace the names we’ve lost — or is it because these clowns can’t manage to find their hat when it’s on their head?

Let’s talk about how Canada’s venture community really thinks, eh?

First, if a start up hasn’t already soaked up all the government assistance they could possibly get, they’re not inclined to invest in it. Why should they risk other people’s money (and their fee potential and paydays at cash out time) if the taxpayer hasn’t already ponied up to the bar?

The start up that comes at them with their heads held high, doing it on their own, without soaking the rest of us, is laughed out of the boardroom halfway through the presentation. What, you expect us to bear a risk?

Then, if they do invest, they put in a minimal amount. Enough to finish product development, and to alert the market that there’s an innovation here, but nowhere near enough to go to market and sell intensely.

A second round or a third? “We already have too much at risk — how about selling the firm?” This question they can ask in the boardroom, since in Canada the “risk takers” prefer to take control of the board through common shares (instead of taking preferred shares as American venture firms do).

Nine times out of ten, founders find their companies sold out from underneath their feet, by the very “risk takers” who they finally got to make an investment in them, for a quick pay day rather than build a business. It’s as though Sequoia or Venrock, the early venture firms that put money into Apple, had decided to sell the firm for spare parts in 1979 rather than let their money do its job and actually build a firm.

Sell out to a foreign buyer for quick cash? Sure! Shut it down and seize the assets in bankruptcy? Sure! Install a buddy to run the business into the ground for more “advisory fees”? Sure! Just about anything, in fact, other than build a new major Canadian employer.

That you can count, on the fingers on your hand, the number of true success stories for risk money in Canada producing a firm that lasted and stayed here ought to tell you something.

Canada’s venture capital community already has tax breaks galore to help them raise money. They don’t need a fill-up from the taxpayer.

But there went $400 million of borrowed cash into their maw, thanks to the Harper Government’s need for a daily “good news” event for the media. (It’ll end up costing our children nearly $1 billion by the time the interest is all paid and the principal finally paid off — that’s money they could have used for their needs then that’ll be spoken for.)

I’m not against investing in future enterprises. I am against the attitude that throwing money at the problem with lots of it being scraped off into salaries, bonuses and expense accounts helps anything. I’m militant about doing it with borrowed money.

If Canada’s well-heeled would rather buy real estate at the top of the market, or clip coupons on bonds, well, who’s problem is that? Shouldn’t it be the venture capital managers who have to figure out how to change their minds? Maybe do something differently to change the prospects for a big win for their investors?

As long as we keep up the attitude that without a handout nothing will happen, nothing will change.

Certainly as long as we keep throwing taxpayer dollars at people who live well and produce little, it won’t.

Bruce Stewart is a national columnist and management consultant currently located in Toronto.

 

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Category: Opinion

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