Ontario Government as V.C.? part 2

I have this image of well-meaning people sitting at some big boardroom table at the Ontario Department of Finance. The topic is: how do we restart the venture capital engine in this Province?

Someone suggests, maybe at the Director or Director General level: “why don’t we call industry and ask them what would work?” The Deputy Minister frowns: “we must protect budget secrecy”.

Another public servant wonders what the staff at the Ministry of Research and Innovation would have to say on the topic. The response from the Deputy Minister is clear: “we already know what the Premier has in mind. We have an envelope of $50 million/year to spend, but we have to keep that info close to our vest.”

A third public servant makes a truly bold, if naïve, statement: “if we grandfather the four or five large Ontario-based Labour Sponsored Investment Funds, $50 million of tax credits would attract $333 million of new investment capital from retail investors to go into Ontario’s start-up and growth capital industries. We wouldn’t need any new infrastructure, the investment teams already exist, and there are dozens and dozens of great portfolio companies to use the money, not to mention all of the new ideas that are pitched each and every day. At an average of $3 million per investment, that 110 new company fundings over a 12 month period!”

The Deputy Minister will hear none of it: “In 2004, some of the traditional venture capital funds, not to mention Roger Martin, told us that LSIFs had an unfair cost of capital advantage, and that if we shut them down then the pension funds would open up their wallets and start putting new capital into the asset class. We told the Premier that the LSIF model doesn’t work, that some guys got rich off the structure, and that Pension Funds wouldn’t put new capital into the sector until we shut them down for good. That may have turned out to be the wrong decision based upon flawed data, but we can’t be accused of flip-flopping now!”

Deputy: “Why don’t we create a new $50 million/yr. fund, hire some VCs of our own to co-invest in existing deals, and focus on a few core sectors?”

Assistant Deputy: “$50 million? Isn’t that a drop in the bucket? That’s about 10% of a decent year of new VC deals in Ontario. Wellington Financial alone did more than that amount on average over the past two years. But $50 million is better than nothing, and it gives us great cover.”

Deputy. “Exactly.”

Assistant Deputy: “But to be able to co-invest in deals, we still need the existing VC industry to be able to meet us halfway. And they don’t have enough capital as it is. We announced the $205 million Ontario Venture Capital Fund in 2007, and it has yet to invest a single dollar in a Canadian-based VC fund.”

Deputy: “Really? You mean we’ve almost killed the Ontario LSIF industry, even though the B.C., Saskatchewan, Quebec, New Brunswick, Nova Scotia and Newfoundland governments are all pushing and enhancing LSIFs in their own provinces? And our 18 month-old OVCF program to save the rest of the venture capital sector hasn’t even started yet?”

Assistant Deputy: “No, it hasn’t. And the Canadian Venture Capital Association wrote to the Premier earlier today, repeating their ideas about how we can help the Innovation Economy. And this fund concept isn’t one of them.”

Deputy: “Yikes. The media are bound to call and ask why we aren’t working with them to solve this crisis. What a PR nightmare! Let’s leak this $250 million fund tomorrow. We’ll figure out the details later.”

Assistant Deputy: “Righto. What will the industry do? Complain? Bite the hand that might feed them? Not likely.”

Deputy: “Let’s figure out how to make this work. Call Andrew Wahl at Canadian Business Magazine, and Reuters, and get them primed. We don’t want those VC bloggers to beat us to the punch.”

MRM