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March 6, 2012 Turning Research into Action: Symposium of Ontario Research Chairs in Public Policy Public Policy for Entrepreneurship and Venture Capital Panelists: Bogdan Buduru Senior Economist, Industry Canada Douglas Cumming Professor and Ontario Research Chair Schulich School of Business, York University Maxx-Phillippe Hollott Manager, Access to Capital Secretariat Ontario Ministry of Economic Development and Innovation Jim Pullen Partner, Concert Partners © Douglas Cumming (2012) Entrepreneurship and Venture Capital 1 Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion GDP / Capita Venture Capital / Capita Ontario versus Peers: GDP Per Capita Canada $47,605 US $47,482 Quebec $40,394 California $51,914 Ontario $46,303 New York $57,423 Alberta $70,826 Massachusetts $58,108 2 © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion GDP / Capita Venture Capital / Capita Ontario versus Peers: Venture Capital / GDP Investments for Funds Focused in Seed, Early Stage and Expansion Stages in Canada by Province, 2004 – 2008 This figure summarizes investments per GDP for funds focused at the seed, early and expansion stage investments relative to GDP by all types of investors for all industries in select US states and Canadian provinces, January 2004 – December 2008. Data source: Thompson Financial SDC VentureXpert. © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion GDP / Capita Venture Capital / Capita VC / GDP: Ontario versus Massachusetts • 12.8 times the amount of new capital commitments to newly established VC funds in Massachusetts on a per GDP basis than Ontario. • Required an additional $37.5 billion of new capital committed for Ontario to be at the level of VC per GDP that is comparable to Massachusetts-based VC funds. © Douglas Cumming (2012) Entrepreneurship and Venture Capital R&D / GDP – Access to Capital Essential Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion Gazelles – Access to Capital Essential R&D / GDP – Access to Capital Essential Entrepreneurs with innovative but risky projects can generally find venture capital and loans in your country (1 = not true, 7 = true) 6 Norway 5 Finland Luxembourg Slovak Republic Ireland 3 Spain Turkey Hungary Swedenv Belgium UK Poland USA Australia Canada 4 Denmark Netherlands France Portugal Czech Republic Switzerland Austria Germany Japan Iceland Korea Italy 2 1 Correlation (Access to Venture Capital, R&D/Capita) = 0.39 Correlation (Access to Bank Capital, R&D/Capita) = 0.26 0 0 0.5 1 1.5 2 2.5 3 3.5 Gross domestic expenditure on R&D as a percentage of GDP Venture Capital © Douglas Cumming (2012) Loans Linear (Venture Capital) Linear (Loans) Entrepreneurship and Venture Capital 4 Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion R&D / GDP – Access to Capital Essential Gazelles – Access to Capital Essential Canada is Behind in Share of Gazelles - Access of Capital Essential 3.5 3 Canada ranks 24th in the World in Access to Capital Behind peers: Australia, New Zealand, US, UK, Ireland, etc Share of Gazelles in Sector 2.5 Correlation (Access to Capital Rank, Manu Gazelles) = -0.24 Correlation (Access to Capital Rank, Services Gazelles) = -0.19 2 1.5 1 Canada 0.5 0 0 20 40 60 80 100 120 140 160 Country Rank for Access to Credit Share of Gazelles in Manufacturing Share of Gazelles in Services Linear (Share of Gazelles in Manufacturing) Linear (Share of Gazelles in Services) © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion 1. 2. 3. Legal / Regulatory / Tax Government Venture Capital Funds Innovation Centers Types of Policy Responses 1. Legal / Regulatory / Tax 2. Government Venture Capital Funds 3. Innovation Centers © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion 1. 2. 3. Legal / Regulatory / Tax Government Venture Capital Funds Innovation Centers World Bank Doing Business Reports: Country Rankings Economy Ease of Doing Business Rank Singapore 1 4 3 5 14 8 2 4 1 12 2 Hong Kong SAR, China 2 5 1 4 57 4 3 3 2 5 16 3 1 2 31 3 4 1 36 27 10 18 4 13 17 17 16 4 5 72 20 7 15 Denmark 5 31 10 13 11 24 29 14 7 32 9 Norway United Kingdom 6 41 60 12 8 48 24 27 9 4 4 7 19 22 60 68 1 10 24 13 21 6 Korea, Rep. 8 24 26 11 71 8 79 38 4 2 13 Iceland 9 37 34 1 11 40 46 35 81 3 11 Ireland 10 13 27 90 81 8 5 5 21 62 10 Finland Saudi Arabia Canada 11 39 45 25 25 40 65 28 6 11 5 12 10 4 18 1 48 17 10 18 138 73 13 3 25 156 41 24 5 8 42 59 3 New Zealand United States Dealing Starting a with Getting Registering Business Constructio Electricity Property n Permits © Douglas Cumming (2012) Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Resolving Contracts Insolvency Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion 1. 2. 3. Legal / Regulatory / Tax Government Venture Capital Funds Innovation Centers 2. Government Venture Capital Funds LSVCCs became dominant with massive tax breaks, not performance (next slide) Figure 9.1. Venture Capital Under Management by Investor Type in Canada: 1992-2004 25 $Can (billions of 2004 dollars) 20 15 10 5 0 92 93 94 95 Corporate 96 97 Government © Douglas Cumming (2012) 98 Year 99 Institutional Direct / Foreign 00 01 02 Labour Sponsored 03 04 Sources: Cumming and MacIntosh, 2006, 2007; Cumming and Johan, 2009. Private Independent Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion 1. 2. 3. Legal / Regulatory / Tax Government Venture Capital Funds Innovation Centers 2. Government Venture Capital Funds Figure 9.3. Selected Indices 1992 - 2005 Index Value (Adjusted to Start at 0 on September 1992) 1400 LSVCC tax incentives in Ontario phased out in 2011. This figure helped push us in the right direction! 1200 1000 800 600 400 200 0 -200 Date Globe LSVCC Peer Index Globe Canadian Small Cap Peer Index TSE 300 Composite Index / TSX Total Return Index US Venture Economics Index Sources: Cumming and MacIntosh, 2006, 2007; Cumming and Johan, 2009. 30-Day Treasury Bill Index © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion 1. 2. 3. Legal / Regulatory / Tax Government Venture Capital Funds Innovation Centers 3. Innovation Centers • Centers like the Investment Network of the Innovation Synergy Center, Markam (now “ventureLab”), facilitate strong entrepreneurial outcomes – $6,545,000 in financing, while the program costs were totaled at $662,360, thereby giving a ratio of financing raised per dollar of cost at only $0.10. • Empirical evidence needs to control for endogeneity and selection effects. – Cumming and Fischer (2012 Research Policy) – Causal relation between mentor hours and sales and angel capital – Correlation, not causation, between mentor hours and patents and alliances © Douglas Cumming (2012) Entrepreneurship and Venture Capital Ontario and Canada are Behind Sources of Canadian Inefficiency Policy Remedies Topics for Discussion Sampling of Topics for Discussion • Which polices best stimulate gazelle entrepreneurs and more R&D in Canada so that we can catch up to competing jurisdictions? • How successful should will the Ontario Venture Capital Fund (OVCF) be, as well as companion programs such as the OETF and IAF? • Should Ontario provide tax breaks to large companies to invest in venture capital funds? – Should Ontario provide tax breaks to top tier venture capital funds? – Lower tax rates overall for everyone? Or capital gains tax rates? • How to best design programs like the Investment Network at the Innovation Synergy Center, Markham (now “ventureLab”)? How much funding to allocate to early stage programs relative to others? © Douglas Cumming (2012) Entrepreneurship and Venture Capital