Friday, March 24, 2006

Ontario budget - supporting startups?

In its budget yesterday, the Government of Ontario announced that it will spend $160 million over the next four years to "accelerate commercialization and growth of innovative startups."

At first blush, it sounds great that the province is paying attention to the needs of startups -- and I'm still hopeful that this will help in the creation of promising new companies -- but some of the details have me wondering if the government has allocated the funds in the most effective way.

Of the $160 million, the biggest chunk -- $90 million -- has been earmarked for direct investment in early-stage companies "in partnership with venture capital funds, pension funds and the federal government."

The problem is, there's no shortage of VC money out there now waiting to be invested. Startups can find it difficult to reach the point where there are VC-fundable, but once they get there, there's more than enough money to go around. I don't see the point of allocating money to co-invest with VCs. If a company can clear the bar of VC fundability, then the money is already there, and no additional government funding is needed.

VCs certainly aren't going to start investing in companies they otherwise would have judged unfundable just because the province will kick in some funds -- and we wouldn't want them to do that.

If a VC, or group of VCs, was ready to invest $2 million in a company, and now can put in just $1.5 million with the balance coming from the government, I don't see what has been achieved. The end result to the startup is a $2 million investment one way or the other. All it seems to do is delay when a VC fund will have to go back to its LPs to raise another fund. Not harmful, I suppose, but not really helpful either.

The province also allocated $46 million over four years to help startups "become more investor-ready by acquiring business management and entrepreneurial skills and to help them move a product or service idea further along the commercialization process, from the technical feasibility stage into the market feasibility stage." This sounds more encouraging. We'll have to see what the government means by helping people acquire skills. Does this mean subsidizing continuing education classes? I don't see that as a priority either. If they want to put money into efforts like WatStart that immerse very-early-stage managers into an entrepreneurial environment, where they can learn from other entrepreneurs and local resources I can see that being worthwhile, but I suspect that's not what they have in mind.

Getting companies to the point where they can attract investors by achieving some very-early-stage milestones is the piece of the budget that sounds the most promising. I'd want to see how this money will be allocated and managed first, but I think this is looking in the right direction.

But we don't need the government to become a VC, or to top-up VC investments, and it was disappointing to see the bulk of the $160 million being announced for that purpose.

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