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Canada's technology seedlings - the start-up companies that could some day become our next Nortel Networks Corp. or Research in Motion Ltd. - report that growing conditions have never been worse. Financing is scarce, and industry insiders are urging government to do more to help turn small firms into global competitors. But while these leading-edge companies are vital to Canada's future, the emphasis should be less on direct financial support and more on measures to improve access to private-sector investing.
As reporter Simon Avery revealed in Saturday's Report on Business, Canada's venture capitalists - early investors in start-up companies - raised $995-million last year, the lowest level of financing since the mid-1990s. In other words, Canadians haven't invested so little in technology start-ups since before the creation (and collapse) of the dot-com investing bubble.
Some of last year's modest financing was undoubtedly a temporary problem, as investors retrenched after the 2008 market crash. More worrisome, however, is the longer-term trend, which has seen junior tech firms in Canada routinely complain about having less access to financing than their counterparts in the United States. The gap is no doubt exacerbated by historically weaker returns for venture capital in Canada. But it is also blamed on differences in culture among both investors and entrepreneurs.
Mr. Avery found that industry observers complain entrepreneurs aren't willing to aim high enough. Instead of dreaming of becoming the next RIM, many are dreaming of growing just big enough to cash out and sell to bigger companies. But entrepreneurs also complain that investors are too risk-averse, favouring mid-tier companies with proven technologies, and leaving the small start-ups unloved by financiers. While Canada's banking sector has been praised for its prudence, there is a dark side to a national culture of investment cautiousness - and it is most evident in funding for small companies.
The recent federal budget contained modest help for technology companies, making it easier for foreign venture-capital investors to provide financing without undue bureaucratic requirements to file tax returns when no tax is payable. The budget also included funding to help small and medium-sized companies commercialize new technologies, and revealed plans for two new initiatives: a "digital economy strategy" to help some technology companies develop new projects, as well as a comprehensive review of federal support for research and development spending.
The outcome of the reviews is uncertain. But the best reforms will be those that help business and investors without requiring unsustainably large direct investments by government, which too often are wasted or wrongly directed. Canadian companies have proved they can compete globally when they have bold vision and brave backers. Government support will help the process - if it is smart and targeted.