How to open Canada’s borders to VC

Last week Stephen Hurwitz blogged about foreign direct investment in Canada, and about how difficult our country makes it for others to invest in Canadian startups. The full read can be found on his blog, or you can read it docs if you are so inclined. The article does a great job of summarizing the imbalance between how easy it is for Canadian private equity to leave the country, and how difficult it is for foreign equity to come in. To pull out a highlight:

…while there are neither Canadian nor US restrictions on millions of dollars of scarce Canadian institutional and venture money leaving Canada (potentially in vastly growing amounts) and being invested into the US, Canada makes it extremely difficult for much needed US capital to be invested into Canada. In short, Canada has a “post-NAFTA” position as to the unrestricted cross-border flow out of Canada of capital vitally needed by its own venture capital industry, while maintaining a “pre-NAFTA” position severely restricting the cross-border flow into Canada of capital for its venture capital industry. Unlike Canada, neither the US nor the UK discourages cross-border investments into their respective countries through any similar tax clearance certificate process.

Hurwitz’s article goes on to describe a practical solution to resolve the issue, however the real irony of the situation is that despite the regulatory quagmire that impedes the process, the Canadian government is spending significant funds to attract the investors it so blatantly frustrates. So how is this disconnect happening? More importantly, why was the solution proposed by John Ruffolo ignored?

I’d venture that the reason is the message came from the wrong channel. John Ruffolo is the Chair of the Tax Policy Committee of the Canadian Venture Capital & Private Equity Association (CVCA) – he’s from the private sector, not the public sector. Although this in no way weakens the effectiveness of the solution, it does distract from the message. Furthermore, there wasn’t that much time to present the information – the CVCA presented their findings in January of 2009, and it was in stark contrast to the previous news postings they had throughout 2008 where they essentially said that the VC industry in Canada has little money, but is stable.

I’m sure that the CVCA knows how to lobby the government better than I do, but as an outsider who agrees with the call for change, the methods used are a little frustrating. Rather than having the message posted as one coming from the VC & PE Association, the call for change should be seen as a proposal coming from the right champions, inspired by the public. Perhaps Stockwell Day, the Minister of International Trade, or Beverly Oda, the Minister of International Cooperation, would be the right champion. Both of these individuals are part of the Ministry of Foreign Affairs and International Trade, which is the ministry resposible for the Invest in Canada initiative.

Looking at Ms Oda’s and Mr Day’s web sites, you can easily see that beyond their interest and participation in International Trade, they both have a strong interest and/or history in job creation and the Ministry of Labour. As such, I’d suggest getting the two of them together to discuss this topic, and to do so in an open format (i.e. bring in additional members of government, the funded companies, and the VC industry). Position it as a high-performing think tank session and market it as “The Government Effecting Change” as opposed to the government’s current plan of “throw more money at the problem”. It wouldn’t be that difficult to schedule or to motivate such a meeting – Ms. Oda is the MP for Durham and Mr. Day is frequently in Ontario. Furthermore, I’d recommend housing the meeting at MaRS, which would make it accessible to the funding community and would support Ms. Oda’s background and public interests in preserving heritage buildings. Finally, I would invite John Tully of the Michelin Development Fund and John Tennant formerly of CTT to be part of and/or facilitate the conversation. Michelin is a great example of how the VC and Private Equity sector leads directly to job creation – an area that is both topical in today’s economic climate, and is of interest to both Ms Oda and Mr Day, and John Tennant’s foreign diplomatic history combined with his applicable experience in the economic development sector would make him a great bridge between the two worlds (VC and government).

Either way, it’s a change that needs to happen, we just need to find the right catalyst.

Joseph

VP HCM Products at NetSuite and Founder of TribeHR and Lewis Media. Waterloo Region Enthusiast and active volunteer.

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