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
director of