In this paper, we examine a Canadian tax-driven venture capital vehicle known as the “Labour Sponsored Venture Capital Corporation” (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that is consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs “crowding out,” or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977–2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frustrating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital.

Though there are some great VCs in Canada, (e.g. Growthworks, Celtic House, BDC, etc.) this study does not bode well for high-potential Canadian companies as, given the shortage of Canadian venture capital, a further reduction in the aggregate pool of venture capital in Canada is exactly NOT what we need.

Thankfully, however, informal venture capital – Angel capital -  has been quietly continuing to drive the Canadian economy forward, providing over double the amount of venture capital as the more formal venture capital industry in Canada.