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Government incentives have almost no impact on creating startups: study

Just days after Ottawa asked for input on how to spend $400 million in new venture capital funding, a new study suggests government programs have almost no influence on entrepreneurs launching startups in Canada.

Only two percent of small and medium sized business (SMBs) surveyed by Toronto-based Wave Accounting say government incentives influenced their decision to launch a startup.

Related Story | Government invests seed funding into STEM startups

The release of the findings – obtained by Wave in an online survey of 1,386 if its SMB customers in Canada and the U.S. – coincides with federal finance minister Jim Flaherty's call last Friday for public input into how Ottawa should allocate $400 million in new VC funding announced in the federal budget in March.

“Responses seem to suggest that government efforts to encourage small businesses are falling flat,” Wave Accounting declared in a report detailing the survey results.

The report finding also comes on the same day the federal government invested nearly $5 million in startups across the country. In Ontario, the Ontario Centres of Excellence was given $1.1 million to invest in 30 startups in the science, technology, education, and medicine fields.

"It's incumbent upon us in government to make sure these young entrepreneurs are supported," says Kellie Leitch, a Conservative MP (Simcoe-Grey) who made the funding announcement on behalf of the Minister of State for the Federal Economic Development Agency for Southern Ontario.“We also need to make sure its collaborative with the private sector and the academic support.”

Startup culture is often at odds with government bureaucracy, says Startup Canada executive-director Victoria Lennox.

“The findings really don't seem surprising,” said Victoria Lennox, executive director of Startup Canada, a non-profit group touring across Canada to gather ideas about the type of startup support needed in Canada.

“This is one of the top three issues we've heard from startups,” Lennox said. “(Entrepreneurs) are not aware of them or they find the (government) support is very cumbersome and very difficult to access and it's better to just get on with it than wait to apply.”

Besides encountering bureaucratic red tape in the application process, startups have overwhelmingly complained during the Startup Canada tour about the lack of a one-stop clearing house for information on all the startup programs offered by federal, provincial and municipal governments, she said.

“There's no one place to go to. Whenever they call a 1-800 number they get passed on so many times they just go on with it (themselves),” Lennox said.

There's also a disconnect between the hyper fast pace of entrepreneurship, especially in the competitive technology sector, and the understandable desire of governments to ensure all public funds are allocated with the proper degree of oversight and diligence.

“There's a lot of red tape. That's nothing new. The government has a fine line (to tread) between having to balance the use of public finance and the need for entrepreneurs to move quickly. It's two cultures,” Lennox said.

Lennox said some headway is being made, however, with Ottawa setting aside the $400 million in the budget, and the fact that the government wants that funding initiative to be led by the private sector. A news release sent out with Flaherty's call for public input by July 27 says the $400-million VC program is intended “to help increase private sector investments in early-stage risk capital and to support the creation of large-scale venture capital funds led by the private sector.”

Related Story | Harper jumps on Startup Canada bandwagon

Ideally, any program aimed at helping entrepreneurs must be led by them and other members of the private sector rather than government, Lennox said.

“My hope is that entrepreneurs are stimulated by each other and by their passions and government stimulus would not be the main reason you'd start a company,” Lennox said. “They're not going to found a company because there's a new government program, they're going to do it because they see a gap in the marketplace.”

Among other findings in the survey:

-although government incentives don't create entrepreneurs, a bad economy seems to; 18 per cent of owners who launched SMBs in the past year said they started their businesses after finding themselves unemployed or unable to find work; among SMBs started over six years ago (before the current economic downturn), only nine per cent gave the same answer

- 73 per cent plan to expand their product offerings or initiate new marketing campaigns in the coming year

- Canadian SMBs are more optimistic than their American cousins on some fronts, but less so on others; just 38 per cent of Canadian SMBs see a bright future for their company vs 47 per cent in the U.S.; yet 43 per cent of American SMBs see the next 12 months as being harder for SMBs overall compared to just 34 per cent of Canadian SMBs


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