Government programs need to stimulate an industry, not become the industry

The largest contrast between the Israeli and Canadian technology company programs is focus – the Israeli model is focused on supporting a software industry driven by private, professionally managed VC funds while the Canadian model tries to simulate the software industry in a general unfocused manner. I believe that, if there is one MAJOR difference in approach between government programs, it is this underlying issue. And, as you’ve probably gathered, I strongly believe this is the focus that we need in Canada.

The fundamental aim of government VC programs in Israel is focused - to establish professionally managed VC funds. The Yozma program was a $100m program started to try and create an industry of seed and early stage VC funds. The program offered $8m to ANY fund that met various objective criteria in terms of other funds raised, professional management and focus. The funds had a 5 year option to buy out the $8m at predetermined conditions. They quickly established 10 such funds (of which 8 exercised their option and bought out the government). Yozma made direct investments according to a fixed formula with the single aim to create a VC industry. At the end, more than $100m was returned to Yozma, and Yozma was taken private. The Chief scientist incentives, incubator programs, R&D and Investments grants, tax exemptions to foreign investors are all designed with one thing in mind – creating a strong, independent VC industry run by professional investors.

Contrast that with Canadian programs. The fundamental aim of government VC programs is to try and stimulate the industry at every level in a very unfocused way. Some Canadian examples:
- The “SRED” program which helps pay for R&D with tax credits (and often cash).
- The BDC (Business Development Corporation) which as its opening page on its web site says “supports the needs of entrepreneurs at every stage of growth”. At this level, BDC competes with the VC industry. BDC is a Canadian crown corporation that has a group called BDC Venture Capital that describes itself on its web site as “a major venture capital investor”.
- BDC also has a “fund of funds” where it selectively invests in Canadian Venture Funds. These funds are not given to any commercial fund that meets fixed criteria, but are completely subjectively chosen.

Other generalized programs are in place in Canada.  For example, at a provincial level, in Ontario there has been huge impetus behind the MARS discovery district. This is a huge real estate facility which acts as a “facilitator and enabler”. The government of Canada and government of Ontario each donated $20m to the project. And almost $100m has been raised for the project. MARS is undertaking a number of other projects and is trying to directly help young companies.

I am not trying to be negative about the Canadian programs such as BDC and its efforts, or MARS and its efforts. I think that they stimulate the industry in a general way and help companies to become established.

However, the Canadian model has failed to create a software industry. I believe that Canadian government programs could go a long way to help create a software industry if they would become focused. The general approach of government programs should be to motivate professional, independent fund managers to be successful. The model in Israel speaks for itself. In Israel, we find a mature VC industry with more that 60 Venture Capital firms, weekly exits and a thriving industry. In Canada, we have a struggling VC industry. The reason for the difference is that the Israeli model is focused on creating a software industry and the Canadian model is focused on helping individual companies.

Ten years later, we now see that the Israeli model works and the Canadian model is broken. The Quebec programs have taken the first steps to fix this. Let’s learn from this. Let’s stop spending our tax dollars on real estate and government run programs. Let’s create an industry.

Comments

[Pierre Phaneuf]

I'm curious as to what specifically is being done right in Quebec. Could you expand on that a bit?

Thanks!