Wednesday, March 03, 2010

Budget 2010: Innovation or Incubation Economy?

Stephen Harper has scheduled the roll out of his federal budget for tomorrow, so that it coincides with the start of "Roll Up The Rim" time at Tim Horton's. I am trying to figure out what this means.

For the last two years, I've started each day with an extra large coffee in a cup bearing the discouraging words, "Please Play Again". Frankly, the messages I've been getting from the federal government haven't been all that different, either.

Now, things seem to be changing: two days in, and already I have won a donut from Tim's. Will the budget be giving out innovation sugar, too?

Early signs are that "innovation" and the "digital economy" will be important parts of the plan. That's the good news. The bad news: there remains the lurking fear that the government will continue to starve less popular parts of these sectors - venture capital in particular. Which could mean that, on the heels of the decline of the past few years, this budget will deal the final blow to the existence of venture capital in Canada in any meaningful amounts.

In the last two years, the preponderance of "innovation" spending has been allocated to pure research, in universities and by larger corporations. In other words, our tax dollars have supported ideas. Commercializing those ideas is traditionally performed using venture capital dollars. And here, we continue to let ourselves down.

Rather than providing funds to VCs for investment,the government has channeled money to Crown corporations EDC and BDC to do the job. The result is that today, Canada may well have the largest government-managed start-up portfolio in the world.

It's understandable how we got to this point. Lord love them, the venture capital community are just not successful advocates for themselves. Their pleas for tax reform have been unanswered for years (although stay tuned on that matter). And their positions on issues have shifted with the markets; you will hear many today bemoan the loss of labour-sponsored funds. However, 4 or 5 years ago (when there were too many funds competing for deals), the CVCA was promoting the LSIFs' demise.

But you need to support all parts of the ecosystem to be competitive. There will always be a need of some kind for local venture capital. And in times such as these, when the markets will not support it naturally, government support is required.

The alternative? We can continue to incubate ideas at the expense of developing businesses that can commercialize those ideas. If we do so, we may well become, as one of my larger foreign clients has said, "just a good place to buy an alogrithm."

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