Subsidizing Private Sector Risk Makes Canada Less Competitive

10/15/2015 12:46 EDT | Updated 10/15/2016 05:12 EDT
ChristianChan via Getty Images
Hand with chalk is drawing Risk and reward balance scale on the chalkboard.

In the run-up to next week's federal election, I must confess that OMERS Ventures' John Ruffolo's call for "A Single Voice for the Startup Community" and an assurance that the government (or anyone else within the incumbent "innovation class") is listening got me off my duff. Mostly because it seems almost as out of touch and inconsistent to me as regulating against stock options.

In any event, stepping up on these issues has been matter of fact since my return from China and in my roles as the Founder of Cdling Capital Services Inc. and the Director of Startup Grind Toronto.

I will follow up with some specific recommendations I have in mind, but let me start by highlighting what is out of touch.

There is an economic relationship between risk and reward. If you reduce risk, you can anticipate reduced rewards.

Almost all innovation policy and spending by the Ontario and Federal Governments are focused on subsiding private sector risk, including:

• All programs designed to provide free education or training to unqualified entrepreneurs.

• Program spending on or investments in institutionalized and unaccountable innovation hubs like the DMZ, Communitech, the Creative Destruction Lab and MaRSDD. Every time that government or a fiefdom that government funds directly hires someone in the name of innovation, they are creating a risk-free position to be consumed by a risk avoider and blocking the sale of private sector services by risk takers.

• Free incubators and accelerators (often another budget envelope attached to government funded institutionalized innovation hubs). Funding and mentoring seed stage startups and smoothing their connections to investors and customers is a good idea. Having government paid employees do this as a free or cheaper-than-market service is not.

• Co-investment funds like OVCF, Northleaf Venture Catalyst Fund, Canada's Venture Capital Action Plan. The idea here is that government money follows so called "smart money" so that governments are not accountable for picking winning startups. In practice these programs are a risk subsidy for weak venture capitalists. There can be some merit if these funds lead to the creation of many new private sector venture fund managers who bring new investment thesis', global startup experiences and global connections. But too often they are bail outs of venture investors in Canada who have failed to make a return on investment.

These kinds of government programs create artificial gatekeepers, arbiters empowered to make capital allocation decisions despite never having "been there and done that" or often being less qualified to evaluate a new billion-dollar-plus opportunity than the startup founders they are judging.

Mr. Trudeau's go-to guru Larry Summers understands that "reductions in the price of capital goods and in the quantity of physical capital needed to operate a business" have led to a power shift in how value is created and sustained since the emergence of ubiquitous broadband connections in 2004.

RBC, incorporated in 1869, operates as a government concession in Canada protected from global competition and is our country's most valuable company with a market cap today of roughly $106 billion. Facebook, incorporated in 2004, has a valuation of $238 billion. Ontario and Canada have so far missed the boat entirely in this shift.

Facebook thrives as a decentralized platform, with each person on the network contributing value with every individual engagement, and it is as much of a contrast to a "gatekeeper" model of management as bitcoin's open blockchain ledger is to the RBC monolith.

One voice? That sounds a lot like another gatekeeper. No sir, we need a market approach.


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