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CBC Canada: Solon Angel, Sharif Verani and Alan Nealbreak down impact of federal budget on the tech sector

 full voice interview available here

ALAN NEAL [00:00:00] After the federal budget dropped last week. At least one measure in it caught the attention of some entrepreneurs across the country, including here in Ottawa. That’s the decision to increase the taxes on capital gains targeting corporations and wealthy Canadians. That measure has been drawing a lot of criticism from entrepreneurs like my next guests. Shareef Virani is the Ottawa tech entrepreneur and head of growth for Real Life Robotics, and Solon Angel is managing partner with Fresh Founders and a co-founder of several fintech startups, including Taxpay AI, which of which he’s now the CEO. Hello there.

SOLON ANGEL [00:00:30] Hi there. Thanks for having us. Hey, Alan. Thanks for having us.

ALAN NEAL [00:00:33] Solon, I’ll start with you. Some of your businesses are tax oriented. How do you see the capital gains measures affecting your companies?

SOLON ANGEL [00:00:42] Well, with the gain rates effectively increasing overall. I mean, people agree on the numbers. I work with a lot of accountants, and the number that keeps coming back, it’s effectively a 30% increase on what you should pay. So obviously when you look at early stage ventures, they rely heavily on angel investors to get off the ground. Those angel investors aren’t angel.

ALAN NEAL [00:01:06] Like your name, but Angel, I guess.

SOLON ANGEL [00:01:07] Not. Angel investors, yes I understand. Not the whole ecosystem relies on me LOL

SOLON ANGEL [00:01:12] But those angel investors actually don’t. Very. You know, when people think of angel investors, they think people with monocles and, you know, pipes driving Bentleys. But that’s not the reality at all, right? Most of them do not make a return. I was talking to one yesterday in my network, who is on the cap table of 20 companies, invested hundreds of thousands of dollars and has haven’t seen a cent in over a decade. Right. They’re doing it really on an act of giving back to the economy, giving back to the ecosystem and anything that affects potential. It’s very hard to make a return as an angel investor. So when you know people can argue on the numbers, at the end of the day, this completely diminishes the capacity to have returns for the investment. And it just is one more mental, emotional thing to consider. It’s not just about the amount, it’s just you’re sending a message to them, say, hey, you’re already doing something very risky, but the chances that you get a return are lower. Now, you know, after what happened in the last 18 months in the tech sector, it doesn’t take much more to, you know, give them cold feet.

ALAN NEAL [00:02:18] Okay. I’ll come back to that in a moment. Sharif, what are you most concerned about right now? Well, I.

SHARIF VIRANI [00:02:22] Think I’m going to talk from a little bit from a from a newer and younger founder. But the costs are already too high mentally, financially and physically. You know, we’re seeing a decrease in new entrepreneurs across the board, a decrease in self-employment. But you’re seeing a growth in Ontario about 350% in tech. Where’s that coming from? I’m doing a raise right now. And, you know, almost every investor or investment we’ve got has come from someone like Solon. You know, someone that’s had an exit, that’s reinjecting, you know, their time, their mentorship and their money into the ecosystem. We’re punishing these people right now. And as a whole, it’s a very myopic kind of approach to what we should do to be saving the economy. Um, you know, we need to be focusing on these true tried and tested entrepreneurs who have the ability to inject their time and wealth into the ecosystem. We need to be empowering them. And we’re doing the exact opposite there. And, you know, the data already shows us that the new entrepreneurs, it’s just the cost too high to do it. So why are we not doubling down on these people that we know are growth minded and resilient? And, you know, they exemplify what it is to be a Canadian business owner, and we’re just kind of slapping them on the hands. And it’s another example of tall poppy syndrome, if you will, and kind of the government taking a loading dock approach and just really talking at us but not listening to entrepreneurs.

ALAN NEAL [00:03:32] Do you think there’s are ways of achieving what the government is trying to do through this measure and not I mean, I’ll come back to the idea of because I think some people will argue with the idea of it being a punishment, but but not having it, it affect some of the individuals we’re talking about the same way, but still get at the end goal of what the government’s trying to do.

SHARIF VIRANI [00:03:53] Yeah, I mean, I understand what the goal is here, but if you’re looking at our Canadian economy and what it needs today, you know, we’re two business owners sitting here when you’re growing a business at the start, you need to look at, especially when you’re hiring. You need to look at what your business needs today, our economy, we can treat it like a business. What is our business need today? Not what are we doing to, you know, recruit things that are going to grow into potential. You know, we’re in a pretty urgent situation in Canada right now. We’re experiencing brain drain. We’re experiencing funds going to the US. We need to take action now and not really punish these people that are taking these bets. It’s very risky. It’s you know, it’s it’s it’s it takes a toll on people to, to become an entrepreneur. And we’re not really encouraging that when we send these messages.

ALAN NEAL [00:04:36] Solon, what do you think is the risk of having those sorts of rules?

SOLON ANGEL [00:04:41] Well.

SOLON ANGEL [00:04:43] the signal it sends to the largest funds… So I moved from California, I have a French accent from France. I moved from California here. And, you know, there was something interesting when I fundraised from my last company, when I realized that a single fund in California had more assets under management than the whole Canadian ecosystem. Right. There’s a big difference between US funds and Canadian ecosystem. Sure. And so when you have a scale up, you want to attract the largest funds to invest in your country and in your startup as simple and as easy as possible, sending the right message to them that you are open for business. And I’m not sure that merger does that. Um, very effectively I see what they’re trying to look. I’m not against tax. In fact, my business is here to facilitate tax payments. And I’m, you know, coming from.

ALAN NEAL [00:05:31] Taxpay AI. Yes.

SOLON ANGEL [00:05:33] And and I’m really believe that society should be fair and equal. And I really believe that a good run government serves the community. And you know, taxes are there to pay for roads, education, health that is in need. We but I think that measures are implemented. And remember a lot of my accountants are my partners in this in the business, and I think they took an approach that actually puts the entrepreneurs that are value creators and that try to attract capital in the same bucket that multigenerational wealth that, you know, may be abusing of the system or just for a long time have used loopholes that are just stagnating the flow and, you know, blocking what I call the social elevator. Right. But people like the gentleman on my side here are not that position. They’re trying to make that elevator going upwards in terms of social mobility, creating opportunities and create quality jobs, which we really need in this economy in Canada.

ALAN NEAL [00:06:27] So, I mean, you talked about the idea of wanting things to be fair, and I’m sure there are listeners right now who are saying, okay, when we make money, we pay our fair share in taxes. Uh, CBC interviewed economist Armine Yalnizyan about the measures, and she was talking about how she thinks the government is actually on to something here. Here is a clip of Armine Yalnizyan.

ARMINE YALNIZYAN [00:06:49] There trying to ding private equity, which is coming in. Private equity usually holds an asset from 4 to 7 years, generates profits, flips it, and keeps stripping profits out of it with every rinse and repeat cycle. That’s what they’re going for. And that will affect, as they say in the budget, roughly 40,000 people and a handful of corporations, about 10%, one out of ten businesses that are in this kind of vulture economics. What we want to do is attract and keep productive investment. This is just extractive investment and we don’t need it and we should tax it.

ALAN NEAL [00:07:26] Solon, what do you think of what she.

ALAN NEAL [00:07:28] Has to say?

SOLON ANGEL [00:07:29] That is very misleading. I’ve been through those cycles. There’s no it’s not only 40,000 people that are affected. There’s more than 40,000 entrepreneurs in Ottawa, in Canada today that are trying to grow a business. And over the course of, you know, more than a decade in average it takes to materialize value in the business. The taxation happens to be at the end of that cycle. But for ten years you’re doing and sweating and working hard at sub market rate salaries or no salaries at all. When you start right. The second CEO of Marla’s company didn’t pay himself for two years waiting for that day where you can have a return on those sacrifices. So it’s not and it’s not just there’s not. This is way more than 40,000 people today. They wake up every day in Canada, pay themselves or scrapping their savings, and they are affected by that. It’s not just the few vultures. You describe it. And by the way, I this if they listen to this, I’m thinking about some of those people I know in the US that take a bet in Canada, they believe in the Canadian workforce that come here and uplift and provide training and skilled executives, which we don’t have that much in Canada that provide a know how in this economy to enhance the capacity and build success. Global success stories like the last company I was part of. That’s an insulting statement to them. Again, that’s sending the wrong signal. You actually when you. So I went through the cycle of that in my last company and another one before. When those people come in, it’s not just the capital they bring. They create value by bringing a network of qualified executives from Silicon Valley, from Boston, from other places that lift up the organization, make it profitable. And the Canadians that work in those businesses can go work after that at global logos and global brands and essentially create that scale up material that we’re lacking in that country. Right.

ALAN NEAL [00:09:20] I’ll come back to that again. Sharif, your reaction to.

SHARIF VIRANI [00:09:23] What you heard Solon hit the nail on the head. You know, we’re punishing everyone while trying to, you know, police one small group. And, you know, I’m a firm believer in entrepreneurial and creative approach to problem solving. But beyond that, I’m a firm believer in pluralism. And I believe, you know, just like in nature, you know, a diverse economy is a more productive, productive economy. And we need to empower all those groups equally. Um, you know, that’s not happening right now. We can’t treat all entrepreneurs like that big kind of tech entrepreneur that has that big exit. Not all exits are created equal. I’ve been a small business owner. I’ve had a small, small exit in the past. It’s not like it is in Hollywood and in the news.

ALAN NEAL [00:09:56] So if, if, if it’s a pluralist approach that we’re talking about, what? What? What? dMarc. Different streams, so to speak. What would be indicates this person should get this be taxed this level. This person should not.

SHARIF VIRANI [00:10:07] Yeah. I’m not going to pretend to to know that exact answer. But what I can tell you is it starts with a conversation. And those conversations, you know, there’s two of us here. We’re pretty active in fresh founders. You know, uh, you know, there’s a group in Ottawa, in West Ottawa that’s kind of tasked with economic development. I don’t think anyone’s talked to me. I don’t think anyone’s talked to you about. And, you know, that seems to fall under their mandate, whereas I’ll tip my hat to some other groups, you know, Communitech down in Toronto that’s released a survey for entrepreneurs on what they’d like to see happen in that ecosystem. You know, there’s Michael Anthony on the other side of the river, talking to Brazil and some other groups about what they can do to, you know, bolster the economy there. But it all starts with a conversation. We’re having these conversations on a pretty much almost daily basis, weekly basis, but they don’t seem to be having those conversations. And that’s where that starting point happens. You know, if you want to put those data points, you got to go gather the data first. And that doesn’t seem to be happening. They’re just kind of making a very prescriptive, prescriptive approach.

ALAN NEAL [00:11:03] If the capital gains regulations are left as announced by the government, because I know Finance Minister Chrystia Freeland’s in Montreal this afternoon announcing different tax credits and incentives for entrepreneurs. Uh, and there is a special focus on, on younger business owners there. But if these capital gains regulations are left as announced by the government, what do you predict is at stake for the region’s entrepreneurs?

SOLON ANGEL [00:11:26] Well, so first of all, here’s what has happened already. So I have eight LPs in that angel group that we that I’m overseeing. And already in the last two years, the amount of investment they’ve made because of the Ukraine crisis and the geopolitical instability and then the meltdown of tech in public markets have dropped by half, but now they’re just frozen. Any change of the game. So you imagine you enter a game and there’s rules in that game. And all of a sudden the master designer of the game tells you, hey, the rules are about to change. But we don’t. We’re not sure, but you might be impacted significantly. Well, they just hold their breath. So right now if you go on my LinkedIn feed, you’ll see all of them Solon we’re going to pause on investing for now. And if it goes forward like that, well, I’m just going to leave my money with wealth management firms to be placed in stocks and reinvested without being taxed on capital gains. So they will leave their money on the money market and not reinvest it in the real economy, where the real jobs are needed because there’s no incentive anymore. You’ve just made the incentive negative to them to do that. This is very important and this is why I agree with the government. Everyone needs to be paying their fair share. We need to do something about some cases where there is abuse in the system and aggressive tax planning. But what we’ve done here by a lack of sophistication in the in the implementation, is that we’ve created a negative incentive for some of the most important sparks in the economy of innovation. To play a role here.

[00:12:57] I have to hold it there, unfortunately. But thank you very much, both of you, for being here today. Thank you for having us. Shari Ferranti, Ottawa tech entrepreneur and head of growth for Real Life Robotics. And Solon Angel is manager of managing partner with fresh founders and co-founder of several fintech startups, including Taxpay AI.

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