Well, this is actually a really good example of government policy gone incredibly bad in Canada. We had a nascent venture capital industry, and then the government got the idea that they should subside venture capital by setting up labour union-sponsored venture capital funds with huge tax breaks. By setting those up, they drove the existing real venture capital funds out of business. So we ended up virtually with only the labour-sponsored venture capital funds.
Now what does a venture capital fund do? Well, venture capital funds are very good at talking to people with PhDs in things like electrical engineering and molecular biology. In fact, they have their own staffs of PhDs in those areas, and they tend to be quite specialized. So a venture fund in Silicon Valley might specialize in a particular type of electrical engineering. It might have a staff of its own PhDs, or PhDs on call in that area, to evaluate proposals. That lets the venture fund offer fairly generous financing to people with good ideas and to screen out bad ideas.
Now what happens if you put a labour union in that position and ask them to do that job? Well, it's probably going to be very hard for them to screen out the bad ideas and to offer generous terms to the people with good ideas. In fact, they're probably going to have great difficulty telling one from the other. What happens is you're going to get the Canadian firms offering the same terms to everybody. The U.S. firms will offer generous terms to people with good ideas and will turn away people with bad ideas. The Canadian firms will offer roughly the same terms to everybody.
What's going to happen next? All the guys with good ideas go to the U.S., and the Canadian venture capital funds end up with the guys the U.S. ones wouldn't fund. So we end up with huge failure rates and, generally, a devastated industry.
There's a very nice work by Josh Lerner and Paul Gompers at Harvard comparing venture capital around the world, and they discuss the Canadian experience at length.