Photo: Craig Haney of Canadian Tire (left) chats with Greg Rickford, Canada’s Minister of State for Science and Technology, at the Communitech Hub on Nov. 13, 2013.

‘Government funding’ is one of those terms that can inspire instant cynicism, especially when the business community is the beneficiary.

It’s often associated with less savoury terms like ‘handout’ or ‘bailout’, and typically raises the argument that the best thing government can do for business is get out of the way.

These bleak sentiments fly in the face of a pair of upbeat announcements in Waterloo Region’s tech sector in recent days: Ontario’s $15-million pledge to fund Communitech over the next three years, and the federal government’s five-year, $8.75-million contribution to the Canadian Digital Media Network (CDMN), Communitech’s national initiative to boost connection and collaboration between the country’s tech hubs.

If government funding is such a bad thing, why is this such good news?

The short answer is, because it works – in some cases, better than venture capital.

The longer answer addresses why it works: because in Canada, which lacks the scale of venture capital available in the United States, government funding helps new companies to hatch and survive until they can sustain their own growth.

The numbers behind the two announcements provide compelling evidence of the value of public support for tech entrepreneurship.

In the four years since the CDMN was launched, with $10.7 million in federal funding, to help commercialize Canadian entrepreneurs’ efforts,

  • 967 new companies were created
  • $500 million in venture capital was generated
  • 6,122 jobs were created
  • 25 partner hubs were connected from coast to coast
  • 47 companies landed in 17 foreign markets and identified more than $30 million in new business and investment

These returns on the government’s initial investment have exceeded all expectations laid out when the CDMN was formed in 2009. To CDMN Managing Director Kevin Tuer, Wednesday’s announcement of a further $8.75 million to continue this work constitutes “validation that we’re on the right track, that we’re doing the right things.”

Communitech’s results are equally impressive. In the first three years of its five-year digital strategy, launched with $26 million of Ontario funding in mid-2009,

  • $394.2 million in equity investment flowed to local tech companies. The five-year target was $100 million.
  • 1,189 companies were created, more than eight times the five-year target of 100 companies.
  • 2,421 new startup jobs were created, exceeting the five-year goal of 2,000 jobs.
  • 5,254 new jobs were created at existing companies, exceeding the five-year goal of 5,000 jobs.
  • Eight multinational firms invested here; the five-year target was three.

A study released by Deloitte earlier this year found a $14 return to Waterloo Region’s GDP for every dollar of public money invested.

Does that sound like a handout or bailout to you?

As Greg Rickford, Canada’s Minister of State for Science and Technology, explained at Wednesday’s CDMN announcement, “We believe that the long-term sustainability of centres like this don’t involve the government. What we do believe in is making investments in research and development and innovative solutions for startup communities, in centres that can create a hub or a hive of activity, for its long-term sustainability.”

In this context, ‘government funding’ is not a cost to taxpayers, but an investment on their behalf that returns outsized benefits to them. The success that flows from these these invested dollars in turn attracts private capital, world-class talent and smart entrepreneurs to the region, fuelling a virtuous cycle.

“If the government can play a role as a progenitor of this, then that’s what we ought to do,” Minister Rickford told me following the CDMN announcement.

After we spoke, I ran into Tim Ellis, CEO of the Accelerator Centre in Waterloo, one of the CDMN’s partner hubs, and Craig Haney, Manager of CT Innovations for Canadian Tire, which took out development space in the Communitech Hub this year in a bold effort to update the retail experience for the company’s customers.

I asked them why government funding is a good thing for the tech sector, when it’s so often derided – particularly in the U.S. – as a needless handout at best and a harmful impediment at worst.

“I think our governments, both federal and provincial, have realized which ecosystems and organizations best serve the entrepreneurial community, and they empower them,” Ellis said. “They don’t set mandates, they don’t dictate, they don’t get involved. They just give us the resources that we need to help (entrepreneurs).”

Based on 20 years of experience as a six-time startup entrepreneur before he joined the AC, Ellis knows the difference government support can make to a young company.

“I think it’s absolutely necessary in Canada for the government to play a role,” he said. “In the United States . . . a startup can raise $10 million, and acquire all the assets and all the resources they need to make that company a success. In Canada, we can’t do that, so we need both the federal and provincial governments to play a role so that it mitigates the risk and increases the amount of the very, very finite amount of investment dollars that we have.”

Without government involvement, Ellis said, “We’d be nowhere as an innovation economy, because we just do not have the capital here.”

And besides, he added, government investment doesn’t dilute a young company’s value in the way venture capital so often does – and when that venture capital is foreign, the value flows out of Canada when a company exits.

“(Public investment) allows the founders to hang on to more equity at the end of the day, which ultimately gets redeployed back into the communities,” Ellis said, “as opposed to investment dollars that buy jets and things like that for venture capitalists.”

From Haney’s perspective, it’s all about infrastructure – the conditions government is best positioned to create to enable business to experiment, to innovate, to collaborate.

“Government is great at building infrastructure, building the plumbing, building railroads, building the things that companies need to grow and succeed,” Haney said. “Part of that is doing the hard stuff that no private businesses want to do, and then getting out of the way of the stuff that private businesses can do well.”

By funding the Communitech Hub, he said, government enabled Canadian Tire to suround itself with some of the best engineering students and entrepreneurial talent in the country.

“Without this space, without this ecosystem that’s supported by government and big business as well, it doesn’t happen in the same way,” Haney said.

Cynics will always be cynical, but when you consider all of this, ‘government funding’ never sounded so good.

Anthony Reinhart is Communitech’s Director of Editorial Strategy and senior staff writer. View from the ‘Loo is a weekly look at the issues, people and events that shape Waterloo Region’s technology sector.