All the way back in July, Richard Brubaker over at All Roads Lead to China suggested that General Motors could become a Chinese-owned company….with firms like Anhui Cherry already showing at the…

I’m a big fan of Canadian art, in part because the struggle to succeed as a professional Canadian artist is so similar to that of Canadian business entrepreneurs. A few events to consider in support of Canadian artists this week:

Mistletoe Magic: tonight the John B Aird Gallery (Bay & Wellesley in Toronto) will be hosting its annual silent auction of small (read: very affordable) art works created and donated by some of Canada’s leading artists. Stunning stuff, in support of a great gallery, and great company. Previews today. Great opportunity to buy small works by artists who sell for thousands of dollars.

Out in Edmonton, one of the great longtime supporters of First Nations art, The Bearclaw Gallery, is hosting a Christmas show featuring some of its newest artists. The Bearclaw has a long tradition of fostering new artists, and they have some terrific (and affordable) stuff from a new generation of First Nations artists on display. You don’t need to go to Edmonton to check it out – all is on view at www.bearclawgallery.com.

If the Venture Capital model is broken in the U.S., companies that invest VC funds in China don't seem to have figured it out yet; they're investing faster than ever, according to sources like…

I promised the rest of my firm I’d go back to using this blog for posts about term sheets, and convertible debentures and the like, and I will. But I need one last riff:

I was comparing notes on the state of the start-up world last week with a U.S. colleague. (It’s important to note that since the dot-com meltdown of 2001, it’s become uncool for lawyers to use the term “start-up.” Instead, we call all of you “emerging growth companies” when we talk amongst ourselves.) We both are seeing very little investing in our regions, but my U.S. friend believes Canada is a far better place for emerging growth companies right now. After all, he told me, don’t you have all kinds of government subsidies available?

Here’s the truth about government funding for emerging growth companies in Canada: there is little, maybe none. No government policy or program in Canada today that provides meaningful, direct support for emerging growth companies. What exists instead are a number of job creation schemes that have been launched in the names of “entrepreneurship” and “innovation.” None of these programs have much impact on the economy, because they bet on universities and small businesses as the engines for economic growth.

“Entrepreneurship” is really policy-wonk code for programs to assist first-time small business owners. I’m not going to go into further detail here. “Innovation” is the current buzzword of choice. As Russell Wangersky points out:

“Alberta has an Innovation Fund. Ontario has the Ministry of Research and Innovation. Saskatchewan? The Ministry of Enterprise and Innovation….In Ontario’s 2007 Throne Speech, the word “innovation” is mentioned three times. The 2008 Alberta budget? Seven times. Newfoundland and Labrador’s 2008 Budget? Three times — and Newfoundland has both a department of Innovation, Trade and Rural Development, and an Innovation Strategy. The last British Columbia budget? Seven times, along with the introduction of a $75-million Innovation and Integration Fund….The word is used three times in Alberta’s 2008 Climate Change Strategy, four times in the 2008 federal budget, and on and on.”

In government policy-speak, “innovation” refers to job creation money for pure research. In some provinces, it even extends to real estate development to provide facilities from which that research can be conducted, mentored and commercialized. The underlying rationale for this kind of government financial support seems to be that if academic researchers had more money or prettier labs, they would come up with better ideas. Or, people with better ideas will immigrate from other places to innovate here. (Or Saskatchewan. Or New Brunswick.) Immigration policies are interesting, but they don’t have anything to do with creating emerging growth companies or driving growth of an innovation economy, except in a very theoretical way.

What happens next? Because a focus on pure research does not yield near-term economic results, there is an inevitable policy shift. After all, researchers are not capable of commercializing the results of their new, improved thinking. And so a second layer of innovation-related funding inevitably follows: the creation of government- funded mentors and advisors to support early-stage rollouts of companies. In Ontario, there is even tax incentive legislation proposed to further incent the rollout of university-originated companies to assist.

But what if the ideas are, ultimately not fundable? Governments will move to a third cycle of innovation policy – job creation for investors. At the provincial level, it often starts with a direct government investment program. Form a crown corporation, staff it up and start spending. At some point, many tens of million of dollars later, the province will realize that it is not in the business of investing, and it will hand off its portfolio to an outside manager. Since many investment decisions were driven by political concerns and job retention, the portfolio is often not much of a prize for a manager to acquire.

At this point, the innovation policy cycle usually shifts again – to the fostering of a venture capital infrastructure to support local businesses. Why not allocate government dollars to professional investors like VCs, so that they can properly manage and nurture young start-ups? A fund of funds, like Ontario’s Innovation Fund, is then created to search out desirable VC funds and provide them with capital.

Of course, unless there is a mandate to deploy that capital immediately, it can be years before it makes its way into a VC fund and then to emerging growth companies. As far as I know, there have been no announcements of investment by TD Capital since assuming the management of Ontario’s Innovation Fund. And really, who’s to blame them? Every other fund of funds appears to be standing back from the market – if the Ontario government did not insist that their $80 million be deployed in a timely manner, why go against the market?

Now, with anecdotal evidence such as this as to the negative impact of “innovation” funding on economic growth, you might think that at some point government would look to providing some direct economic incentives to increase growth – things like tax breaks. But the cycle remains ghoulishly popular – Alberta and Saskatchewan currently are at various stages in the formation of their own fund of funds programs. Really, someone should take them out for a drink and speak with them. But will it make a difference? Saskatchewan is like your girlfriend who keeps dating married men even after you try and talk her out of it. Is she ever going to learn?

Where are emerging growth companies in the midst of this? Government seems to bet that the markets will take care of them – if enough venture capital is fed into the system, this and SRED will provide adequate stimuli. This may well work if there’s no market meltdown. Many of our clients have been the unintended beneficiaries of government programs that are intended to develop and drive growth in specific industry verticals such as nanotechnology, genome research and clean tech. There is a tremendous amount of money available, provided you can match government money with private sector funds. And it is here that the absence of capital grinds growth of emerging companies to a halt.

The one exception to Canada’s policy cycle grind appears to be Quebec (although recent revelations about the Caisse may suggest otherwise), where the government and its financing institutions seem to have determined that spending on high risk, high tech companies will provide more economic stimulus to the region. I grow fonder of the province each time I do business there. If Quebec were a man, I’d buy it a drink and flirt with it in front of my husband.

But, in the current climate, with innovation funding tied up in policies that bank on some distant future, emerging growth companies in the rest of Canada have few options. As the government considers an economic stimulus package for January, it’s time to ask whether innovation policies should be re-worked to preserve and stimulate growth for current innovators, rather than focus on developing possible future classes.

Of course, asking questions is a rhetorical exercise if one has no voice. And I’m not sure emerging growth companies in Canada do. We have relied on related bodies such as CATA and the CVCA to advance some kind of policy that will assist. We’d be much better off if we coaxed Buzz Hargrove out of retirement. Sure, the speeches would be longer, but we’d be heard.

• plaYce: A New Virtual World for Online Gamers
  plaYce reconstructs the entire world in 3D and offers an API to allow developers to create social gaming content.

The China Law Blog pointed this out to me. Mastercard has come out with its list of the key cities "driving growth in emerging markets worldwide." Of the 65 cities that made the list, 15 are…

The numbers are clear: since 2007, hundreds of millions of dollars have been invested by VCs in new companies, or follow-on investments made in existing portfolio investees. Equally clear is that a number of VCs are in stasis; either they are not succeeding in raising new money, or they are winding down their current fund and shuttering operations to wait out the current market. Either way, the implications are clear: a number of portfolio companies must either grow organically without new funds, or find an entirely new investor syndicate to (a) support further growth, and (b) battle with incumbent VCs who will wish to retain their stake. In parallel, investees may find themselves with an entirely new set of investors if a retiring VC sells it sposition in the secondary markets – probably at a discount.

A question I am increasingly asked is whether, given the circumstances, it makes sense for management to pursue a buyout of a VC investment, rather than wait to see who shows up at the next board meeting. For later stage investees, I can understand the appeal. If a VC has limited follow-on funds to support its investment, management must slow growth and bridge the business through cost cutting and hardship. (This leads to what I’ve come to call the fundamental “Achievement Gap” between Canadian and American venture capital – backed businesses.) In this scenario, it makes more sense for management to perform if they own signficantly more of the business. Likewise, if a VC is discounting its equity position as part of a portfolio liquidation, managemetn may well want to offer the same money for better autonomy.

The key driver of any MBO is a belief that a placing more equity in the hands of management will drive more value in a business, through a combination of financial engineering (cost cutting) and strategic growth. At a thousand-foot level, it’s easy to see how this might appeal. And, until teh market collapse this fall, the TSX Venture Exchange was a regular vehicle fo choice for achieving liquidity for VCs and increased holdings for management. Now, private debt might be necesssary. Certainly there are a number of companies that might have the early revenue, together with leverageable assets, that might attract the kind of debt that would finance an MBO. How will this play out? Something to watch.

It was interesting to listen to the testimony provided by several hedge fund managers on Capitol Hill this week. Although I do not agree with all of the support toward more regulation, it was nice to see and hear from some of the more secretive hedge fund managers who do not typically show their faces in public. One thing is clear, the government does not really know anything about the hedge fund industry – there was no rhyme or reason why they chose those managers instead of others. And it was even more clear by the varying testimony that the managers themselves did not know exactly why they were testifying.

Do hedge funds need more regulation and disclosure? Definitely not. A hedge fund is nothing more than a pool of money that is used to make money by any means necessary through a hedged strategy. It really does not make any difference if it is a hedge fund or an individual person that has billions to throw around. I certainly do not want to have to report all of my transactions to the government on a daily, weekly, or monthly basis. And I certainly do not need to tell anybody how much margin I am using and what I am buying or selling.

Regulation is necessary to keep a fair marketplace intact and to ensure that rules are followed. Regulation cannot control greed or risk. You cannot regulate speculation. You cannot regulate irrational exuberance. And you definitely cannot regulate bearishness or short selling. If I want to bet the farm that a company is going down or going up, I am allowed to do so by the rules of the SEC and by the margin limits of my brokerage. Any additional regulation would amount to nothing more than a Sarbanes-Oxley type of thing for the hedge fund industry. And you know what SarOx did for the new issues market.

All regulation will do is make people leave. And this is not the time to get dollars flowing out of the USA. Financiers are smart enough to figure out a legal way around the rules.

If hedge funds had anything to do with the bringing down of the market then perhaps it is good they were around. They did all Americans a favor by exposing the overleveraging of the financial system and have helped weed out the companies who should not survive. In every cycle there must be a boom and a bust. We are definitely in the bust but it is all a set up for the next wave. If the government sets up too many rules, then there will not be another booming wave. Or perhaps it will occur somewhere else.

• TechCrunch has it backwards: What really broke the VC Model?
  You don’t want to accuse Adeo Ressi for falsely crying wolf, if the wolf is really coming. The VC Industry is in trouble – let’s try to understand why.

TechCrunch ran a piece today on the ratio funds raised to invests with vs. economic value created by venture capital firms (measured by what VC companies have gotten back on exiting their…