Allen Lau is co-founder and managing partner of Two Small Fish, a venture capital firm.
The Liberal government is increasing taxes on investment. Anyone with any experience in entrepreneurship or investing knows that this inhibits growth. We are at great risk of losing our best entrepreneurs, along with the highly skilled jobs they create, to other countries.
This is evidenced by a new study conducted after the capital gains tax changes. Only 5.3 per cent of Canadian founders believe Canada is the best place to grow their companies.
As the world moves towards intangible assets, the impact goes beyond brain drain and unemployment. We will lose ownership of the innovation economy’s biggest prize: the companies and technologies that disrupt our industries. This will have a devastating and long-term impact on our country’s economy and reputation on the world stage.
I admit that this latest tax change has not had a significant impact on me personally. Wattpad, a company I co-founded, was acquired by South Korean internet giant Naver in 2021 for his $840 million. Therefore, I have already paid my dues as provided in the budget at the time. But my experience shows how harmful this tax change is to Canada and future generations.
Because I raised most of the capital from outside Canada, only half of the company was owned by Canadians, including the founders, employees, and investors. In other words, his $420 million in economic value was drained from our country when Wattpad was acquired.
Before the tax increase, it was reported that when our nation’s tech startups scale up, about 75 cents of the investment comes from outside Canada. This means that many of these fast-growing companies are already majority-owned by foreigners.
As a venture capitalist, I see this trend playing out all the time. The company I co-founded, Two Small Fish Ventures, has a portfolio of 50 early-stage technology companies. We are the sole Canadian investor in many of our recent investments. Foreign investors, especially those in the United States, are aggressively writing checks to own a large portion of these relatively inexpensive early-stage promising Canadian startups.
Tax increases will only make this problem worse.
When a company’s assets are purely intangible and its largest investors and markets are outside Canada, it is natural for the company to move outside Canada or be acquired by a foreign entity such as Wattpad. , is much easier. Needless to say, post-acquisition economic value creation can also be captured outside of Canada.
Some might argue that these companies still capture some value because they create a lot of jobs in Canada. Again, if most of a company’s assets are intangible, most of the economic value created will come from its intellectual property rather than the jobs it creates. As an example, Wattpad’s salary was about $30 million a year, which wasn’t small, but it was a very small number compared to his nearly $1 billion valuation for the company.
Tectonic shifts are also underway across the innovation economy. The rise of AI and related fields, especially semiconductors, is an order of magnitude more capital intensive than previous generations of technology companies. Canada produces some of the world’s best AI researchers, but 40 of Forbes’ 2024 AI 50 list are in the United States (and more than 30 of them in Silicon Valley); If it’s just the two of us, we have a much bigger pie that we can and should do.
The best example is OpenAI, co-founded by Canadian Ilya Satskeva. The company is based in San Francisco. The majority of our employees are not located in Canada. All major investors are based in the United States. Canada has nothing but bragging rights.
And do I have to remind everyone that Elon Musk is also Canadian?
In the post-pandemic world, capital and talent are more mobile than ever. The desire to move to another country is stronger than ever. Canada is already becoming the best training ground for other countries to capture the value created by companies outside of Canada.
I want Canada to win. It’s true. As an investor, my motivation now is to create more Canadian tech giants and keep them here. My job has become even more difficult.
Higher taxes mean less capital, less investment, less ownership, and less economic profit. period.
Our country is moving backwards at a time when we need more capital to own a meaningful part of our intellectual property-based economy. As the economy shifts more and more towards intangible assets, we will be left behind on the digital breadcrumbs and sell out the next generation.
