I wrote earlier about how I thought that the CRTC was hampered in their decision by the Canwest – Alliance Atlantis merger decision from a couple years ago. The CRTC decided in this case that foreign money from Goldman Sachs as the debt and equity holder and controlling owner was preferable than having Egyptian owners, in the form of Orescom. (I’ve heard from CRTC people that national security is part of their decision process – so one wonders whether there was a bit of that here.)

Whether the CRTC was wrong or right in this decision, the CRTC hasn’t been coming off these days as the fearless supporter of the powerless Canadian citizen. Their recent decisions have generally been ones favoured by the lobbyists of the big telecom companies in Canada. A few weeks ago they decided, for the most part, to support the major carriers in a decision which put the burden of responsibility on the consumer to prove the carriers wrong in issues of network neutrality (and we how much know your average consumer knows about internet packet throttling). This week they supported the powerful lobbies of the carriers in the Globalive decision.

By an extension of their own logic, if the CRTC is not supporting and protecting consumers in providing them choice (or assuming that there is enough choice in the market for our consumers) then they have already come to the conclusion (aided by lobbyists) that the Canadian market for telecommunications services is highly competitive – that innovation and new product is high, barriers to entry are low, and prices are dropping and competitive. We, of course, know this isn’t true.

There is an undercurrent going on the techno-telecom crowd in Canada supporting a movement to disolve the CRTC. They better watch out, because it is getting very hard for average Canadians (not the super digerati or highly informed telecom geeks, but those that keep an eye on telecom) to understand the role of the Commission. To those watching from the sidelines, it looks like the CRTC is simply an extra arm of the major carriers to keep the barriers to entry high, competition low, and their cabal tight.

This fund does nothing to help emerging companies in Ontario, but instead funds the bigger bellies of mid-stage companies, and their respective consultants, lawyers and accountants.

In theory the matching fund is a good idea, just badly implemented.

The fund creates an economy with more funding for already established mid-level companies and simply adds fat to their loins, while ignoring the smart, entrepreneurial brains that can drive greater economic growth.

Angels and venture capital companies spend a lot of time doing due diligence in companies trying to figure out whether they will get a return on their investment; whether the team is competent and able, whether there is a market for the product as well as a solid distribution and marketing plan and, importantly, whether the investment is a fit for their personal goals.  This kind of due diligence is something government bureaucrats, or even quazi-bureaucrats working within the government funds could never do, because it’s not their money they invest. This is what creates, fast, market driven investment.

The Ontario Ministry of Research and Innovation decided to to another route, one suspects in part lobbied by the larger consulting and accounting firms who work with larger companies with more fat they can chew off their ‘growth’ clients. The criteria to get access to this fund makes it impenetrable by any company smaller than $2-3M in revenue. It is not clearly not intended to feed the brains who need the develop the fit bodies to compete in a global market, but instead to fund the established companies – or, to be clearer, ones who are well established at finding money within the the government support infrastructure.

This bill provides a strong direct dissuasion from smaller investors getting involved with start-up entrepreneurs. Firstly, the fund is set up with a minimum $1M investment. This predicates any self-respecting entrepreneur taking a serious dilution to get the financing, or just walking away. Most will walk away at that type of deal – the ones who really believe in their company. Many entrepreneurs can make a small amount of money go a long way and, both within Canada and the U.S. angel rounds are often less than $500k.  With that many of them can make significant progress, bringing a beta product to market or implementing early stage marketing initiatives, or simply innovating their product or service.

Secondly, the angel fund required individual registration and applications for each specific investment again raising the transactional cost of the investment. Why not outsource these costs to the angel groups? They are doing due diligence and  often funding it out of their pockets, and they often work with simple legal and share structure set-ups to further reduce transactional costs. The liability for errors can also be moved to the angel groups also, creating a higher level of due diligence within their ranks. Angels do want a return on their investment.

Lastly, there is even a requirement for angels to disclose net worth, to have matching funds applied. This rule makes it clear that the Minister has never met an angel investor in person – I’d suggest he get out more.  We already have angel investment criteria in place. It works.

This bill is designed to support the fat belly of lower growth, mid-stage companies, often well supported by other funds and government initiatives.

But why did the bill end up like this? It makes sense. The people who often influence the minister the most are the consultants, lawyers and accountants who make their living living off Canadian companies too small to leave the country and hire internationally. Their role is to grow their business and they have successfully lobbied to build a fund that does exactly that.

However, the Minister should step back and look at his role. It is not to feed that fat belly of mid-stage companies, but instead support the smart brains – our entrepreneurs – and build them into fit bodies ready to compete internationally.

(Disclosure – I am the President of Home Stars Directory (homestars.com), a company recently funded by a set of Canadian angel investors, most of which would have liked matching funds for their investment, but none of whom would have gone through this process to get it)

Michael Hennessy has responded on his blog WhenDogsRunFree, with an unusual defense of the CRTC, although I love his admission in the head for his blog, that while he loves free market, he makes his income on regulation itself “I now work in an anti-regulatory occupation although without regulation I would be unemployed.Kinda ying yangish”

The interesting thing about this discussion is the fact that we can have it – and it is worth having. Questions like “Why does the CRTC exist?” are real questions worth answering. On the telecom side (we’ll leave it at that for now) we can ask such things as: Is it there to protect us from natural monopolies? To decide where towers should go? or where wires should be strung? how much we, as consumers, should pay for various services? how much companies should pay to each other? or, more broadly, to promote cheap and plentiful communication among Canadians.

The carriers all spend much of their regulatory money on folks like Michael, to promote the notion that the market is highly competitive. And in a competitive market, one assumes we don’t need a regulator. But on the flip side, that regulator ensure that the competition stays minimal. Regulators create nice barriers to entry for new market entrants. Keeping a tight rein on new telecom licencees, issuing tiny pieces of spectrum (yes, that’s Industry Canada, but it’s the same issue), and making sure new phone numbers don’t get too freely given to folks like Skype such that they might tread heavily into the carriers markets. This, for carriers, is highly important to protect.

Rather than get into the nitty gritty of whether the CRTC made a bad decision on wholesale tariffs for TekSavvy, we might stand back and ask broader questions like: What are we protecting? Culture, communications, or profits for an industry. That that’s a bad thing to protect – Bell and Telus employ many Canadians.

We can also ask the question. If we started a dissolving of the CRTC, what would happen? Would new entrants come? or would we revert to natural monopolies? would Global companies offer service at more competitive rates? what would be the downside?

All good questions to engage a discussion.