Are Shifting Rules and Government Investment in Canadian Firms the Real Obstacle to Foreign VC Funding?

“Every time we make an investment in a Canadian company or do some sort of transaction with a Canadian company we have a whole set of “surprises” (and I put quotes around the word surprises) that we have to figure out each time, so there is always a new set, or different set of rules that we have to go through . . . often times there are Canadian Government entities that have some sort of ownership position in the companies or the entrepreneurs have raised some capital from Government sponsored entities and there are always a set of things that come up that are unexpected not because they are necessarily wrong, but because they are different.”

Brad Feld, leading US high tech entrepreneur and investment expert

As I had indicated in my previous post regarding Section 116, it is often times the over-simplification of the “causes” relative to a particular issue that ultimately does more harm than good.  What is the saying about the road to . . . being paved by good intentions?

In my interview  this past Tuesday with Brad Feld, we discovered that while a Section 116 Clearance Certificate requirement can contribute to creating unwanted friction relative to foreign investment in Canadian high tech firms, it is by no means the only, or for that matter primary reason for unrealized capitalization aspirations.

In reality, there are multiple factors that must be taken into account.

For example, Feld’s reference to shifting rules in which his past experience in terms of investing in Canadian companies have been marked by a different set of requirements with each and every transaction is noteworthy.  This would lead one to conclude that a broader view of historical dealings, and the origins of the corresponding “surprises” (re rules) would be more practical as it may lead to identifying points of disconnect between policymakers, private enterprise and potential investors.  In essence, dealing with the foreign investment issue as a whole rather than on a somewhat disjointed one at a time reactionary basis may not grab the headlines, but it presents a viable resolution along the lines of taking preventative measures.

While I will be delving into these issues in much greater detail over the next few weeks, by taking a more holistic view of the investment landscape, we may discover that a collaborative approach – at least to a certain extent, may very well lead to the avoidance of conflicting policies or laws in the future.

After all, I find it hard to see the government as the enemy as it relates to foreign investment in that the inflow of  foreign capital will only help to stimulate the economy and create needed jobs in the emerging and essential Tertiary and Quaternary sectors.  Especially given the fact that domestic funding is problematic, and early stage investing on the part of US-based firms in Q3 2009 was robust.

Another point that Feld raised about which I would like to learn more is his reference to complications based on “Canadian Government entities that have some sort of ownership position in the companies,” or situations where “the entrepreneurs have raised some capital from Government sponsored entities.”

Given CATA’s somewhat significant and vociferous position in terms of promoting Government involvement (including funding) for Canada’s high tech community, one would think that they would not only be aware of potential challenges in this area, but would also be able to point to their involvement in resolving said issues.

I am not certain what CATA does or doesn’t know in this regard.  I must admit that after some research (and yes I will keep looking) there is very little information beyond the high profile Women in Technology and China Portal announcements that are designed to grab brand-building headlines versus delivering substantive insight.

Perhaps Suzie Dingwall Williams was right, instead of relying on “CATA and the CVCA to advance some kind of policy that will assist” emerging growth companies, we would be much “better off if we coaxed Buzz Hargrove out of retirement.”  As Suzie see’s it, “the speeches would be longer, but we’d be heard.”

In the end, I would suggest that you listen to the Feld interview in its entirety at your leisure, and draw your own conclusions as to the “state of the union” relative to what may or may not impede foreign capital investment in our high tech sector.

However, I can safely say that there hasn’t been, nor is there now, a single reason such as Section 116 that has in and of itself presented an insurmountable barrier to foreign investors.  In short, we need to take a step back and look at the picture as a whole, including what we are doing in our own backyard to stimulate investment from and for Canadian firms.

Use the On-Demand Player below to listen to the Brad Feld interview from December 14th.

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