My post on Sunday discussed my dismay at seeing good Canadian entrepreneurs being told that they would have better chances getting funding if they became good US entrepreneurs. As an example of how blogs are really pulpits, my issue was picked up by Liberal MP Scott Brison, who addressed the point in Question Period yesterday. (See the Hansard, #32 for 24 March 09).
The Honorable Stockwell Day responded with facts about EDC and how it is facilitating $85 billion in financial activity etc…. While EDC does good work and I would recommend their services to exporters, I’m not aware that EDC provides any Venture funding. BDC would have been a better example. So I don’t find the answers of any help, but then perhaps I’m expecting a lot out of Question Period.
The point that the VC community is in trouble is not new. In its latest report (January 2009), Why Venture Capital is Essential to the Canadian Economy: The Impact of Venture Capital on the Canadian Economy, the Canadian Venture Capital and Private Equity Association outlines some of the key issues:
- Wishing to move to a knowledge based economy, the government has, in the past, created a vibrant VC community with tax incentives, government venture funds and massive R&D investments.
- The VC funds have not generated sufficient returns to attract new investment and (in the last four years) the government (both provincial and federal) has moved to indirect support while reducing the direct funding and tax credits. Both these factors have significantly reduced the ability of VC funds to raise new capital.
- The loss of Canadian funding, which declined by 35% since 2003 until the start of the financial crisis in Q4 2008, has been compensated by an increase in US based funding but that this sometimes results in a shift of company activities to the US. (US VCs will invest in Canadian companies if there is a majority Canadian investor. A majority US investor will want the company located in the US, usually within a hour’s drive of the VC’s office.)
Why is it important to fix the VC situation? The relatively large amounts spent on R&D in Canada produce results in terms of innovation. For this innovation to have any impact on the Canadian economy, it needs to be turned into businesses and this requires funding. Venture Capital is an important part of the economic ecosystem that facilitates the creation of these businesses. Without it, the innovative technologies developed in Canada will find their way to other countries.
What is to be done? Find innovative ways to develop the funding and do so quickly. If VC funds develop such poor returns and yet are so critical for the economy, perhaps it would be prudent to consider increasing direct funding from the government, not as an investment but as infrastructure for the economy. Let’s start a conversation on the topic.
