Wynne's pension plan would evicerate government's venture initiatives

You might have read somewhere that Ontario Premier Kathleen Wynne is a fan of the province’s innovation economy. Strangely, she doesn’t seem to appreciate the damage she will do to that very same sector with her proposed ORPP pension plan. I heard her on an Ottawa radio station last Friday, telling the cabbie and I that she believes that Ontario workers deserve an enhanced pension plan, and that the businesses that employ them can “afford” increased payroll taxes.

Not if you are one of those early stage start-ups she says she is so deeply fond of. For all of the fanfare around the Liberal’s $50 million commitment to the second generation of the Ontario Venture Capital Fund (see prior post “Northleaf’s Venture Catalyst Fund gets to work” Feb. 27-14), the government is giving with the one hand, while taking back four times as much with the other.

Here are some simple facts (data from a June 2013 CVCA study).

– The average Canadian VC-backed firm has 68 employees
– Ontario’s average VC-backed firm has 105 employees
– # of VC-backed companies in Ontario (2009): 193
– Total employment of VC-backed companies in Ontario: 20,316
– Average wage for ICT firm: $83,000
– Average wage for VC-backed firm: $66,000
– Size of average Canadian VC round in 2011: $3.3 million

With these figures in mind, Premier Wynne’s new pension proposal would mean that a newly-funded ICT firm would have to set aside $497,000 of the average $3.3 million VC financing round to pay for this new pension. I arrive at that figure by taking $83,000 (average wage) times 1.9% (the new pension tax that employers would have to pay under Wynne’s program), and spreading that across the 105 employee figure (the average Ontario VC-backed company employment). Being fiduciaries, the VC will have to imagine that the company will need to set aside (mentally at least) funding for this new Liberal pension scheme to satisfy perhaps three years of payroll deductions. Almost half a million bucks comes off the top of the $3.3 million VC round — a whopping 15% — just because the Premier said so.

Out of the gate, Premier Wynne’s pension scheme reduces the amount of capital available for entrepreneurs to spend on research and development, marketing the new software release or hiring new staff. The $3.3 million VC round, which is already just 40% as large as the average equity round raised by American entrepreneurs from their VCs, isn’t enough to begin with. And Premier Wynne believes that entrepreneurs can “afford” to see it reduced by 15% (the $497k that will be required to fund the ORPP).

If she’d ever met a payroll herself, she’d know that half a million bucks cuts into hiring, R&D and marketing. Something has to give. The size of the average Canadian VC round hasn’t changed much over the past five years, so we can’t count on venture capitalists throwing in another $500k to satisfy the financial burden of three years of Premier Wynne’s pension tax. Canadian VC funds are getting smaller than 10 years ago, not larger. They have less money to invest than ever before in the short history of the industry.

For all their press releases about supporting the sector, the Liberals are actually taking out far more than they’re putting in.

The recently announced NVCF included a $36.5 million first commitment from the Ontario government; that capital, which may grow to $50 million, will be deployed over the next 5-8 years. With the cancellation of their $250 million ETF vehicle just two years into a five year mandate (see prior post “Ontario government puts $250M Emerging Technology Fund on ice” June 21-12), this is all Premier Wynne has set aside for entrepreneurs looking to the VC sector for support.

And yet, Ontario employs 20,316 people in VC-backed companies. Given the average sectoral wage ($66k), a new 1.9% payroll tax to pay for her pension scheme will require $25.4 million in deductions per annum. Over the next eight years, the Premier’s NVCF commitment will put up to $50 million into Canada’s innovation economy, while taking out $204 million ($25.4M/year for 8 years) from Ontario’s VC-backed firms through her new payroll pension deduction.

As important it is to save for our future, Ontario needs innovation jobs today. A robust economic future is not a forgone conclusion. And Premier Wynne’s pension plan will clearly undermine Ontario’s innovation sector.

MRM