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If you're a business and you rely on government, you are = extremely=20 vulnerable to sudden shifts in policy.

Ontario's venture capital firms learned this to their great = distress in=20 late August, when the province said it would strip away a key tax = break=20 that underpins hundreds of millions of dollars worth of seed = capital.

"This will have the same impact in Ottawa as General Motors = closing a=20 car assembly plant in Oshawa," Borden Ladner Gervais partner Tim = McCunn=20 declared yesterday at the annual Ottawa Venture Summit.

On the face of it, it seems an exaggeration. But only a little. = Ontario's labor sponsored investment funds -- the part of the = industry=20 that relies on tax credits to raise its money -- managed about = $2.9=20 billion worth of assets. (Ontario refunds $750 to taxpayers who = contribute=20 $5,000 to LSIF firms such as Vengrowth or Growthworks.) Nearly 40 = per cent=20 of these assets are controlled by high-tech startups operating in = the=20 Ottawa area.

Ontario's Finance ministry feels the venture capital industry = is mature=20 enough to finance startups without provincial assistance, which = amounts to=20 $40 million annually.

In the past few weeks, LSIF firms have been lobbying furiously = to=20 convince Ontario it made the wrong call.

McCunn yesterday told venture capital representatives these = efforts had=20 failed -- the decision to kill the tax credit is a done deal. = "This isn't=20 about reversing things," he said, "It's about transition."

McCunn uttered his declaration at a rather unusual two-hour = meeting=20 organized by the Ottawa Centre for Research and Innovation. A = couple of=20 dozen venture capitalists and lawyers met at the conclusion of the = Venture=20 Summit to hammer out a uniform position on what should replace the = LSIF=20 tax credit. The deliberations were observed by federal and = provincial=20 officials and a member of Premier Dalton McGuinty's office. The = Citizen=20 also attended.

The big fear articulated by the venture firms was that Ontario = would=20 end the LSIF program precipitously at the end of the 2005 fiscal = year=20 (Feb. 28, 2006). Such a move could force LSIF firms to cut off = funding to=20 dozens of their high-tech startups. When venture firms such as = Vengrowth=20 sink money into a new firm, they typically make assumptions about=20 investing in future years as the startup matures.

But this calculation is based on Vengrowth's continuing ability = to=20 raise fresh capital each year. Without the tax credit, this would = be=20 impossible.

The LSIF program in Ontario alone raised $220 million in = 2003.

The key political players in this drama seem to have been = caught off=20 guard by the loud reaction of Ottawa's entrepreneurial classes. = Ottawa=20 South MP David McGuinty has completed a crash course in the = intricacies of=20 venture financing and has been an important catalyst in addressing = the=20 vacuum created by Ontario's surprise decision.

The premier, his brother, apparently has been listening. The = Liberal=20 leader is scheduled to address the LSIF issue this morning in = Ottawa,=20 where he is expected to reassure the venture industry that the tax = credit=20 will be phased out gradually.

This still leaves the question of what's to replace the LSIF = money. The=20 OCRI attendees generally agreed the gap could be met by Canada's = pension=20 funds if the latter could be convinced to up their venture = investing. The=20 larger funds such Canada Pension Plan and Ontario Municipal = Employees=20 Retirement System have been increasingly willing to hand cheques = to=20 venture fund managers, but hundreds of smaller pension funds are = still=20 averse to the kinds of risks that venture investing entails.

Canadian Venture Capital Association spokesman Richard = Remillard=20 suggested a system of government-backed loans might convince the = smaller=20 pension funds to enter the venture game.

But here, the venture industry's fundamental split emerged. = David=20 Adderley, the chief operating officer of Celtic House Venture = Partners,=20 suggested the pension funds will eventually become important = financiers=20 without government assistance. "Canada Pension Plan only got into = the=20 private equity game a few years ago," he said, "This is still an = immature=20 industry. Give it time."

Celtic House and Ventures West are examples of = privately-financed=20 venture firms. Each recently raised more than $250 million from = sources=20 ranging from CPP to New York-based investment banks. The venture = firms are=20 now investing the money in startups across North America and = Europe --=20 again pointing to an important difference with LSIF companies = which=20 usually invest in provincial startups.

The differences between LSIF and private venture firms will = make it=20 easier for provincial officials to justify their policy choices in = a=20 post-LSIF world.

McGuinty's officials are putting together a panel of experts to = come up=20 with recommendations. But there is something about this exercise = that=20 suggests key decisions have already been taken -- or nearly = so.

The provincial and federal officials gathered around the OCRI = table=20 appeared very well briefed on the general issues, suggesting the = LSIF cull=20 had not been entered into lightly.

Ontario Finance officials had heard the private venture firms' = clarion=20 call that government help wasn't needed. Government is heeding = LSIF's cry=20 for an adjustment period. But the LSIFs look hard-pressed to = capture any=20 further concessions.

James Bagnall can be reached at = jbagnall@thecitizen.canwest.com.

=C2=A9 The Ottawa = Citizen=20 2005

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