Think tank urges policies to help startups; A place to start: C.D. Howe institute. Financing entrepreneurship needs a boost

A new and improved venture-capital policy is the "place to start" for Canada to better deliver financial investment to startups, a report from the C.D. Howe Institute said yesterday.

"Canada needs new options for facilitating investment in innovation and entrepreneurship because existing tools for delivering financial investment to startups are not succeeding," said the report, Financing Entrepreneurs: Better Canadian Policy for Venture Capital.

"Financing entrepreneurship and innovative ideas will provide a competitive advantage to nations in the 21st century," said the report's author, Douglas Cumming, associate professor of finance and Ontario research chairman in economics and public policy at the Schulich School of Business at York University.

"Much evidence suggests that small, growth-oriented, high-tech startup companies contribute disproportionately to innovation and economic growth."

Cumming expressed concern that labour-sponsored venture-capital corporations have become a prominent source of venture capital in Canada.

"Evidence suggests LSVCCs are inefficient investment vehicles, charging high fees and yielding disappointing results: very few funds generate positive returns," Cumming said. "Moreover, government tax subsidies to LSVCCs may crowd out private venture investment."

Canadian policymakers should investigate other ways to facilitate entrepreneurial investment, including changes to capital gains taxation and more generous treatment for employee stock options, Cumming said.

"Improving the entrepreneur-friendliness of bankruptcy laws to encourage startups and less onerous securities regulation are liberalizing approaches that may offer important benefits, although with potential costs if, for example, relaxed prospectus requirements increased the incidence of fraud," Cumming said.

"Canadian policymakers can learn from successes and failures abroad and at home."