© Douglas Cumming (2012)Entrepreneurship and Venture Capital Public Policy for Entrepreneurship and...

© Douglas Cumming (2012) Entrepreneurship and Venture Capital

Public Policy for Entrepreneurship and Venture Capital

March 6, 2012 Turning Research into Action:Symposium of Ontario Research Chairs in Public Policy

Panelists:

Bogdan BuduruSenior Economist, Industry Canada

Douglas CummingProfessor 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 PullenPartner, Concert Partners

1


Ontario versus Peers: GDP Per Capita

Ontario and Canada are Behind

Sources of Canadian Inefficiency

Policy Remedies

Topics for Discussion

GDP / Capita

Venture Capital / Capita

2

US $47,482

California $51,914

New York $57,423

Massachusetts $58,108

Canada $47,605

Quebec $40,394

Ontario $46,303

Alberta $70,826


Ontario versus Peers: Venture Capital / GDP



Policy Remedies


GDP / Capita


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.


VC / GDP: Ontario versus Massachusetts



Policy Remedies


GDP / Capita


• 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.


R&D / GDP – Access to Capital Essential



Policy Remedies



Gazelles – Access to Capital Essential

0 0.5 1 1.5 2 2.5 3 3.5 40

1

2

3

4

5

6

Venture Capital Linear (Venture Capital) Loans Linear (Loans) Linear (Loans)

Gross domestic expenditure on R&D as a percentage of GDP

Entr

epre

neur

s w

ith

inno

vativ

e bu

t ri

sky

proj

ects

can

ge

nera

lly fi

nd v

entu

re c

apit

al a

nd lo

ans

in y

our

coun

try

(1 =

not

tru

e, 7

= t

rue)

Germany

Denmark

SwitzerlandJapan

Korea

Finland

Swedenv

Correlation (Access to Venture Capital, R&D/Capita) = 0.39Correlation (Access to Bank Capital, R&D/Capita) = 0.26

SlovakRepublic

Poland

Turkey HungaryItaly

Spain Czech RepublicPortugal

Ireland

Luxembourg

Norway

Netherlands

Canada

UKBelgium

France

Australia

Austria

USA

Iceland


Canada is Behind in Share of Gazelles - Access of Capital Essential



Policy Remedies



Gazelles – Access to Capital Essential

0 20 40 60 80 100 120 140 1600

0.5

1

1.5

2

2.5

3

3.5

Share of Gazelles in Manufacturing Linear (Share of Gazelles in Manufacturing)Share of Gazelles in Services Linear (Share of Gazelles in Services)

Country Rank for Access to Credit

Shar

e of

Gaz

elle

s in

Sect

or

Canada

Correlation (Access to Capital Rank, Manu Gazelles) = -0.24Correlation (Access to Capital Rank, Services Gazelles) = -0.19

Canada ranks 24th in the World in Access to CapitalBehind peers: Australia, New Zealand, US, UK, Ireland, etc


Types of Policy Responses



Policy Remedies


1. Legal / Regulatory / Tax

2. Government Venture Capital Funds

3. Innovation Centers





World Bank Doing Business Reports: Country Rankings

EconomyEase of Doing

Business Rank

Starting a Business

Dealing with

Construction Permits

Getting Electricity

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across

BordersEnforcing Contracts

Resolving Insolvency

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

New Zealand 3 1 2 31 3 4 1 36 27 10 18

United States 4 13 17 17 16 4 5 72 20 7 15

Denmark 5 31 10 13 11 24 29 14 7 32 9

Norway 6 41 60 12 8 48 24 27 9 4 4United

Kingdom 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 11Ireland 10 13 27 90 81 8 5 5 21 62 10Finland 11 39 45 25 25 40 65 28 6 11 5Saudi Arabia 12 10 4 18 1 48 17 10 18 138 73

Canada 13 3 25 156 41 24 5 8 42 59 3






Policy Remedies






Policy Remedies





LSVCCs became dominantwith massive tax breaks, not

performance (next slide)

Sources: Cumming and MacIntosh, 2006, 2007; Cumming and Johan, 2009.

0

5

10

15

20

25

92 93 94 95 96 97 98 99 00 01 02 03 04

$Can

(bill

ions

of 2

004

dolla

rs)

Year

Figure 9.1. Venture Capital Under Management by Investor Type in Canada: 1992-2004

Corporate Government Institutional Direct / Foreign Labour Sponsored Private Independent





Policy Remedies





-200

0

200

400

600

800

1000

1200

1400

Ind

ex V

alu

e (A

dju

sted

to

Sta

rt a

t 0

on

Sep

tem

ber

199

2)

Date

Figure 9.3. Selected Indices 1992 - 2005

Globe LSVCC Peer Index Globe Canadian Small Cap Peer Index

TSE 300 Composite Index / TSX Total Return Index US Venture Economics Index

30-Day Treasury Bill Index

LSVCC tax incentives in Ontario phased out in 2011.This figure helped push us in the right direction!

Sources: Cumming and MacIntosh, 2006, 2007; Cumming and Johan, 2009.





Policy Remedies





• 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


Sampling of Topics for Discussion



Policy Remedies


• 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 Public Policy for Entrepreneurship and...

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