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Crowding Out Private Equity: Canadian Evidence

Type: Research Studies
Date Published: September 18, 2007
Research Topics:
Entrepreneurship, Taxation

Venture capital is a type of financing provided to new, high-growth businesses by external investors. Typically, venture capital is the primary source of funding for these entrepreneurial companies as they are often deemed too risky to receive adequate funding from traditional financers such as banks. Without sufficient venture capital, the creation of high-growth firms and their associated benefits, including innovation, job creation, and enhanced economic growth, would be lower. In response to the need for more entrepreneurial firms, a number of governments in Canada created well-intended programs to encourage venture capital financing: Labour Sponsored Venture Capital Corporations (LSVCCs).

This Alert examines whether LSVCCs have successfully expanded the amount of venture capital and the number of investments in Canadian entrepreneurial companies. This publication is based on our technical study of LSVCCs recently published in the Journal of Business Venturing. It begins by describing LSVCCs and the cost of the LSVCC program to Canadian taxpayers. It then explores why LSVCCs are an inferior way to organize a venture capital fund and examines the performance of LSVCCs. The Alert concludes by presenting evidence showing that LSVCCs have actually decreased, rather than increased the amount of venture capital available to Canadian entrepreneurs.

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