World-leading Clusters and Partnerships Roundtable

September 8, 2016—Toronto, ON
World-Leading Clusters and Partnerships
Hosted by Ilse Treurnicht

Area of Focus: Risk Capital

  • How can financing demands of Canada's growth oriented companies best be met?
  • What is the role of private/ public capital and how can collaboration be made more efficient?
  • What needs to be done to create a leading position for Canada?

Highlights

Canada should double down on venture capital (VC) to maintain its momentum in VC investment generated by the Venture Capital Action Plan (VCAP) and the cresting wave of technology innovations in clusters. Delays in expanding VC funds by public/private actors will result in missed opportunities to grow the current tech boom and in the Canadian VC market falling behind international peers.

VCAP's private sector led approach is working well. There is a need to consider using a suite of approaches tailored to the specific needs of target sectors (cleantech, ICT, life sciences, etc.) and stages (seed-stage, late stage, etc). A goal is a patient capital ecosystem with more participation from a diverse set of investor/mentors (providers to high growth innovative firms of investment capital, mentoring, networking, and market access) including corporations, pension funds, and angel investors.

Summary of Discussion

Canada's VC market is shallow compared to international peers, with fewer investors that can provide high growth firms the sizeable capital they need to expand. Canada lacks large sources of capital, such as large VC funds, that can help innovation-based firms scale to $100 million. Canadian investors rarely participate in $30 million investment rounds in Canadian firms. As well, generally across all stages, access to risk capital remains challenging for firms in capital intensive sectors such as clean technology and life sciences.

Canadian corporations should further engage in the Canadian patient capital ecosystem by partnering with VCs with capital and/or providing services such as talent development, networking, mentorship, and procurement. Canada could develop a targeted process to engage Canadian corporations.

There is a lack of robust data on the performance of Canada's risk capital markets and on the financial gaps that exist in its financing markets. Without good data, it is difficult to identify market gaps and to develop targeted policy that can best enable Canada to take a leading position as an innovation nation.

Key Implementation Considerations/Challenges

Lack of Funding: Size of VC firms and large sources of growth capital is lacking in Canada, both in aggregate and relative to competitor jurisdictions.

Sectoral Differences: Innovative high growth firms operating in sectors with larger investment capital levels and timelines (e.g. cleantech, life sciences) face bigger access to risk capital challenges.

Risk Averse Banking Sector: Canada's financial institution sector's approach to lending may not be adequately servicing the financing and growth capital needs of high potential growth firms.

Corporate Buy-In: Canadian corporations are underinvested in Canada's innovation ecosystem, whether in VC investing or in other forms of support. A robust VC market requires corporate support.

Access to Talent: Many Canadian firms lack highly developed talent pools, especially in sales and marketing, which inhibits their ability to expand to the next level. There is a lack of public support for talent development, especially for C Suite talent, in business related skills. As well, Canada can encourage the growth of the pool of VC talent with the skills needed to continue to support the innovation ecosystem.

Top Ideas/Outcomes

Access to Capital: Canada has momentum in innovations, VC investment, and entrepreneurship. More growth capital will fuel new generations of successful high growth firms. Various public funding means could be employed to increase available growth capital including: launching a new phase of VCAP; enhancing procurement policy and establishing an SBIR like approach; establishing a co-investment fund with angel investors; directing funds generated through carbon markets to VC funds; or, directing Industrial Regional Benefit offsets to growth capital funds. A complementary approach is to promote VC community connections to better share investment opportunities and spur syndicated deals.

Pension Funds: Large pension funds play an important role in VC markets and Canada could explore what other countries have done to encourage pension funds to invest in VC.

Complimentary VC Suites: Instead of relying on a 'one size fits all' mentality, Canada should develop a suite of targeted VC programs (targeting cleantech, life sciences, early/late stage, first time investees etc). These would exist in tandem with wider-net offerings, such as VCAP, in a complimentary role.

Corporate Buy-in: Through meetings and networking events, the benefits to Canadian leading corporations to invest in Canada's innovation ecosystem should be highlighted. Those investments could be in the form of capital investments or through partnerships that the corporations undertake with start-ups/SMEs such as: talent development (secondment opportunities); mentoring; domestic or international networking; or procurement (acting as a first customer).

Banking Regulatory Reform: Reform regulations governing foreign bank operations in Canada to enable increased foreign bank investment in Canadian firms to complement investments by Canadian banks.

Build on Programs: Establish a Sustainable Development Technology Canada (STDC)—like program for life sciences.

Linking Firms to Investors: Establish an application that links a company seeking financing to the appropriate source of financing for that company where the financing be a grant, VC, or debt financing.

Encourage serial entrepreneurs and investors: Explore expanded tax rollover policies on capital gains to encourage serial entrepreneurs and serial investors.

Access to Talent: Develop higher profile programs that celebrate successes and that can produce role models for women, aboriginal, and others, to demonstrate that entrepreneurship and risk capital investing can be a great career choice.

Produce better data: Make it mandatory that government program recipients, including VC funds, report metrics on: diversity, gender, environmental responsibility, and in the case of VCs a number of performance measures such as returns. Robust measurement and analysis drives positive change.

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