Coming Home to Cleantech - Lesson #2: Show Me The Money!

This is Part three of a four part series - check out Part I, Part II and stay tuned for Part IV tomorrow.

Creating an innovation engine to drive the economy requires coordination between the many levels of government to attract capital. Startup magic will occur only when our tax codes are sprinkled with incentives that make it more attractive and expedient for capital to invest in homegrown talent.

One of the cornerstone events in creating the phenomenon that is now Silicon Valley is the 1978 Steiger Amendment, which reduced capital gains taxes from 49% to 28%. These rates were still further reduced to 20%, unleashing massive technology investment and innovation in the late 1980’s. Likewise, the Taxpayer Relief Act of 1997 can be credited (at least in part) for greasing the wheels of the Internet boom by restoring rates to 20%.

Although numerous federal and provincial programs have at various times attempted to untangle the regulatory knot choking venture investment in Canada, the effort has been piecemeal and unsatisfactory. According to a recent Financial Post column, Canadian venture capital fundraising fell to its lowest level in 13 years in 2008, while venture capital investment in Canadian companies hit its lowest level in 12 years. For Canada’s fledgling cleantech startups, this is disheartening news indeed.

So let me spell out in plain words what we need in order to revive our stagnant venture sector: a) a tax rate of no more than 20% on capital gains to encourage domestic investment, and b) a much simplified cross border regulatory system so that foreign investment isn’t discouraged by complicated and burdensome filing obligations.

Canadian businesses such as Utility Gateway Systems that have clawed their way to the commercialization stage find that they are up against better-capitalized American competitors. Some will see market losses to competitors whose technology is less functional or whose management less able but that have solid venture support. That’s why it’s so critical that Canada have a healthy venture capital community and that companies like Utility Gateway Systems have access to venture capital – Canadian cleantech needs a level playing field against the throngs of U.S. competitors backed by the deep pockets of Silicon Valley. These proposed changes will have the dual effect of greatly increasing the amount of domestic and foreign capital available for venture investment and simplifying the investment process – in other words, creating a robust, efficient use of capital that can foster the next big thing in Canadian cleantech.

This is Part three of a four part series - stay tuned for Part IV tomorrow.