VENTURE CAPITAL PROPOSAL FAILS TO
ADDRESS PROBLEMS WITH REGIONAL
Government could increase the use of venture capital in Atlantic Canada, at little or no cost to itself, without embarking on yet another government subsidy program, concludes an Atlantic Institute of Market Studies paper on venture capital.
The Atlantic Investment Fund (AIF) proposed by the four Atlantic Premiers fails to address the root causes of any lack of venture capital in the region, and could make the problem worse, say the authors of the study, Fred McMahon, AIMS senior policy analyst, and Dane Rowlands, Carleton University economics professor.
“Our research shows that a considerable amount of venture capital is now available for investment in Atlantic Canada,” McMahon says. “The problem is that government policies both discourage its use and make it more costly for entrepreneurs.”
The study recommends immediate rethinking of government subsidy programs, which suppress the use of venture capital, and reform of the region’s securities regulations, which have made it more difficult and expensive for entrepreneurs to obtain investment capital.
The study notes that the availability of grants and government subsidized financing in Atlantic Canada discourage entrepreneurs from tapping other sources of capital, particularly when market costs are high as they are for venture capital.
Yet government programs have had little success in promoting economic development while venture capital-supported companies across Canada have experienced rapid growth.
The study points to a number of reasons for this disparity. Government financing does not come with the management expertise venture investors bring to a young company, it changes the incentive structure for both workers and managers, and companies often have to restructure their planning to fit into government programs.
Government is now rethinking its economic development programs. Reforms need to be structured to remove impediments to the use of private capital in the region, the study says.
As well, the fractured and difficult securities regime in the region increases the cost of capital. Each of the four provinces have their own, very different, regulatory regime, splitting up an already small market.
The AIMS paper recommends that the four provinces quickly move to create a common regulatory regime, one that opens the door to listing by the typically small companies in Atlantic Canada. The premiers should continue to pressure Ottawa to introduce a national securities regime.
“Governments could increase the use of venture capital at almost no cost by reforming securities regulations — and that’s a lot more cost effective than pumping $20 million of government money into a venture capital pool,” McMahon says.
The AIF proposal calls for the four provinces, the major banks and the Atlantic Provinces Opportunities Agency each to contribute $10 million to the fund, which would be run on a commercial basis to justify the use of private sector money.
But if regional businesses are not tapping into currently available sources of venture capital, it is unlikely they will fully utilize the fund if it provides capital solely on a commercial basis, the report says.
This will put pressure on the fund to finance investments which do not meet commercial criteria and for government to absorb the losses. In this case, the fund becomes one more government-supported market distortion, the report says.
“Governments can do a lot to help Atlantic business by removing impediments to capital formation,” says Brian Lee Crowley, AIMS president. “But, one more government program subsidizing business is not going to help.”
In the event that the AIF does proceed, the AIMS report makes a number of recommendations which would help maintain the fund’s goal of commercial viability and protect it from political interference.
For more information, contact:
Brian Lee Crowley, President, AIMS, 902-429-1143