The Way I See It… by Michael C. Volker
Budget fails to address weakest link in Innovation Chain
In the recent Federal budget, Finance Minister John
Manley called for
To its credit, our government is heavily committed to post-secondary education and the development of our research infrastructure. The awarding of research grants to some 2400+ projects and the creation of 2,000 Canada Research Chairs will help build the foundation for a knowledge-based economy.
Furthermore, the research ante (i.e. funding to the research granting councils and hence to universities) has been upped by $125 million per year. And another $500 million has been committed to the Canada Foundation for Innovation for infrastructure (i.e. funding for research hospitals).
Substantial support is being given to students at all levels - through improvements to the student loans program and grad student scholarships as well as $41 million to help new Canadians in integrating with, and contributing to, the talent pool.
Having a strong education and research base is essential for developing a knowledge-based economy. However, for that knowledge to be transformed into products and services - hence increasing our GDP - requires entrepreneurs and capital.
Whereas entrepreneurship appears to be a popular and increasingly attractive occupation, there is a funding gap that inhibits the development of new technology ventures. Companies usually get started by a committed entrepreneur who knows how to tap into private equity sources. These consist of “love money”, i.e. family and friends, followed by angel investors, i.e. successful entrepreneurs, followed by large institutional or public investors.
There was nothing in the budget to ensure that the intellectual property and know-how developed at our universities and research institutions can make it past the first stages of commercialization - i.e. the pre-venture financing stages of company development. This is largely the domain of private investors who are willing to underwrite start-up entrepreneurs and take them to the stage where they are attractive to venture capital players.
The problem with attracting private investors is that they have to tie up their capital for lengthy periods of time with no liquidity in the meantime. Our low capital gains tax rate provides some incentive to investors in the form of an exit reward. What’s really needed is an up-front inducement to induce investors to take on more risk. This would also have the effect of increasing the available capital pool.
One way of doing this is through a program such as the popular labor-sponsored venture funds whereby investors receive tax credits. In British Columbia, for example, the Small Business Venture Capital Act, was amended in B.C.’s recent budget to allow individual investors to receive a 30% tax credit for investing in certain eligible (which includes most tech companies) companies. Such investments can be placed in an RRSP thereby creating an even greater incentive.
Another approach would be to allow investors to take a 100% write-off on their investment in the year that the investment is made. Let’s face it, many of these investments fail at which time investors do get the write-off, but that’s many years later. Why not simply give then the write-off immediately? If the investment produces a pay-off, then the investor would use a zero cost base for purposes of calculating tax. This has the effect of time-shifting the investor’s cash flow. The bottom line is that more capital could be put to work. Even some variation on this theme, perhaps with certain limitations, could have a substantial impact on the amount of capital that would flow into the pre-venture, pre-commercial funding vacuum.
The way I see it, creating new intellectual capital is a noble objective but in order to realize any commercial benefits, we need to stimulate private equity investments with some up-front incentives in order to encourage a much higher level of risk taking.
Michael Volker is a high technology entrepreneur and