Prosperity happens when “matchmakers” put together talented people with capital. Start with capital. Its sources are: (1) private savings (families) domestic or foreign; (2) capital markets; and (3) government. When capital markets shut down, whether by decree (as under Communist regimes) or inadvertently (as during recent crisis, as governments and financial sector mistakes compound), government becomes a main source of capital, taxing, regulating then subsidizing.
Looking at companies and institutions involved in the matchmaking process, we can get a clear picture of what happens bottom up, rather than drowning in macro-astrologers’ mismeasured aggregates.
The Seed Stage: Financing Entrepreneurial Dreams
People can start a business by using their own savings (and put up their assets as collateral) or that of families and friends: these two groups are the matchmakers.
The capital needs vary, with the average estimated to be in the $100,000- $250,000 range. At this stage, entrepreneurs rarely access either capital markets or government agencies because they have no track record. A few may meet Peter Theil, for whom university degrees do not count, with good reason. Family and friends know the potential entrepreneurs best, and are well-positioned to hold them accountable.
The ability and willingness of families and friends to be early matchmakers depends in significant part on tax rates on income and capital gains. The higher the income tax rates (or the lower the brackets at which the higher rates come into effect), the smaller the savings and the ability of family and friends to accumulate such “risk capital.” The fact that even in the U.S., with the deepest capital markets in the world, 80% of new businesses either fail or no longer exist within five to seven years of formation means that providing seed capital is a risky business indeed. When high income taxes prevent families from accumulating savings, and high capital gains taxes reduce expected returns, it is no surprise that high-taxed countries – be it Canada, France and many others – have few start-ups, and very few “angels.”
What if governments use money raised through taxes and borrowing to fund such experiments? The facts are it rarely works. Matchmaking bureaucrats are not likely to know much about the people seeking funding. Disbursing capital based on nepotism or tribalism is not what governments in “democracies” are expected to do though.
The Start-up Stage: A Step beyond Dreams
The start-up stage is the next step, when anywhere from $250,000 to $5 million may be required. The entrepreneur is one step beyond the seed stage, has come up with a prototype, along with ways to market and sell a product or service. The main sources of capital available at this point are “business angels,” government funds, and, in rare cases, foundation grants and venture capitalists specializing in early stage.
“Business angels” are private investors with experience in corporate settings, as entrepreneurs, or both. Along with their capital, they offer the advantages of “smart money” – the various Silicon Valley experiments now prime examples. They are capable of vetting, and in some cases improving, the business plans the entrepreneur puts forward. They also evaluate their character: Do they listen to advice? Are they disciplined and determined? Can they delegate so that the business can grow? When “angels” take an interest in an entrepreneur, they bring to the table their networks of contacts along with their managerial, operating, and mentoring experience—in many cases on a daily basis.
The number of angels and their willingness to invest money, time, and effort—depends on a number of conditions. Income and capital gains taxes are important, but having access to critical masses of talent and to credit down the line – matter too. If, because of high taxes, and burdensome regulations, young, highly skilled people – “vital few” - move out of the country (Canada prime example), there will be fewer start-ups.
Recall that the rise of the “Celtic Tiger” had a lot to do with Polish migrants at the time. At its peak, Ireland had succeeded in attracting some 400,000 immigrants, mostly young Poles and other Eastern Europeans, many with entrepreneurial ambitions and skills. Ireland, along with Britain and Sweden, allowed unrestricted migration to their labor markets from the ten European nations that joined the EU in 2004.
Ireland also made major cuts in public spending in the late ’80s; and by 1993, government non-interest spending had declined to 41% of GNP, down from a high of 55% in 1985. Ireland reduced income taxes and cut its corporate tax rates to 12.5% at a time when the lowest tax rates in Europe averaged 30%, and the U.S. rate was at 35%.
Ireland boomed, but then, with migrants returning to their home countries, the boom stopped (the country had to be bailed out in 2010), though the very low taxes on intellectual property rights continued to help, with Apple, Google, Meta having shifted these rights to Dublin.
Right now Ireland has a – misleading - highest GDP per capita in the world at over $140,000. However, this is due to that 12.5% corporate tax distortion. The money that actually stays in the country reduces the number by half. Still, the country is highly prosperous.
Briefly, drastic changes in taxes, regulatory burdens, combined with policies to attract and retain talent (not to be confused with certificates from academia), all of which leaves more savings in the hands of people who are and can be held more accountable, are keys to prosperity. What you’ve read draws on my testimony before a Canadian Parliamentary Committee whose task was to examine the impediments to start-ups, venture capital, etc.
For brief update: 2025 marked the worst year for Canadian VC fundraising since 2016, and further deterioration in 2026. There has been an almost total absence of venture-backed IPOs, and as back between 2000-2010, a growing "returns gap" with the U.S. led Canadian founders to reincorporate or headquarter in the United States to secure growth capital.
