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We Need to Invest in 21st Century Innovation Infrastructure

10/16/2015 08:02 EDT | Updated 10/16/2016 05:12 EDT
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In the run up to next week's federal election who is really listening to the startups that make our economy healthy?

Dear Mr. Trudeau, Mr. Harper, et al ...

You should subsidize what you want more of.

Almost all government spending and policy on innovation in Ontario and Canada is designed to subsidize private sector risk.

You do not want any more unproductive risk taking on copy cat, domestically insular startups.

You really don't want to reduce risk.

Because risk is the only authentic arbiter that will effectively sort great Founders and startups from unproductive investments.

You want more winners.

You want new domestic champions to carry on from the Nortels and Blackberrys as creators of high value jobs and generators of tax revenues.

You want market events that make millionaires out of thousands of employees like the PayPal Mafia and Facebook Friends, who exercise their stock options and start investing in the next wave of value creating startups.

How about Canada's version of, "To Get Rich is Glorious"?

Seasoned investor Howard Morgan told us that New York's emergence as the second biggest startup ecosystem in the world is primarily due to successful startups that grew and sold.

You cannot find it surprising that your appointed leaders at government funded startup hubs are advocating for bigger government funded startup hubs.

Let's be clear -- I understand the need to listen to an array of voices.

However, while we like to think of ourselves as having a market economy it is virtually impossible to do a startup in Ontario without running into the distortion of a government funded gatekeeper. You better be blessed by one. Angel investor organizations are subsidized by governments. Wealthy insiders are subsidized by governments. BDC touches over 90 per cent of early stage deal flow.

It has a chilling effect, leaving startups in fear of speaking out to shape government policy.

If you want different results, try doing things differently.

You have already proven that your current approach does not lead to the desired increases in productivity.

Canada needs market oriented reforms and initiatives that are focused on unleashing real innovation, value creation and increasing the rewards of risk taking.

I would be more than happy to discuss in more detail any of these recommendations:

1. Match or beat SEC regulations related to crowdfunding that enable startups to raise up to $50-million from anyone. Whereas, U.S. crowdfunding markets are closed to only U.S. incorporated companies, set out to make Canada a single market and global hub for crowdfunding.

2. Copy or better the B.C. Angel Investor Tax credit that returned $2 in provincial tax revenue for every dollar of tax credit. (Mr. Garneau, will you forget us?)

3. Create a capital gains exemption for Founders and early stage employees who reside in Canada.

4. Create the Canada Seedling Market, make it open and global, designed to attract the best global investors and attract the best startups to incorporate in Canada.

Many say that Israel's Yozma program is the only example of a successful government intervention in venture capital. First and foremost, it supported many small funds. Second, it did not try to pick winners. Third, it fostered relationships between Israeli and international venture capitalists.

In 2015, angel investor syndicates (this week AngelList & China announced a $400-million syndicate seed fund) are the best way to stimulate competition for deals, ensure market arbitration of deal selection and connect early stage companies to international investors who can help with later stage financing and customer development.

5. Organize OFFICE HOURS to support the Canada Seedling Market across Canada in London, New York, Boston, Silicon Valley, the UK, Hong Kong, Shanghai and Singapore to attract the best investors and startups in the world to Canada.

6. Match or beat New York State's Startup New York tax exemptions.

7. Commit 10 per cent of government procurement to startups, i.e. new businesses that are less than three years old. Challenge all provincial and municipal governments and government concession businesses like banks and telcos to do the same. Change the culture and discourse of procurement in Canada to recognize that buying from startups is the best way to acquire innovation while outsourcing risk. This is a completely different strategy than "hiring IBM".

The Cdling platform can be used to manage the markets that I have recommended above and we can work with a variety of private market platforms like AngelList to facilitate transaction syndicates.

You might be tempted to view recommendations four and five as offhanded self-service.

Who has convinced you that government spending should solve these market problems, when there are private companies providing the solutions?

I invite you to take a moment to consider the challenges of overcoming the social structure of innovation as you attempt to sort quality signal from insular noise to support your decision making. In short, even Larry Summers can find it hard to recognize world changing innovation when it walks through the door.

With Canada teetering on the edge of the "Best. Recession. Ever," mainly because commodities like oil are in the tank. It is easy to agree when Mr. Summers says, "the global economy is in serious danger".

Whoever takes power in Ottawa on October 19th, as the global slow down continues we are bound to see deficit spending.

The question is if we are going to make the largest investment in infrastructure in Canadian history, will we invest in 21st Century infrastructure or are we literally turning back the page to Mr. Chretien's 1993 Red Book.

Who is really listening?

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