Entrepreneurs are making steady progress in Bytown
Yesterday’s Prime Ministerial announcement from innovation-focussed Montreal came as a relief. It had been almost 10 months since the Federal government unveiled the $400 million budget envelope designed to help get more capital into the hands of Canada’s entrepreneurs. Sometimes, as far as Ottawa goes, extended timelines mean that the bureaucratic forces of the land have either i) strangled a good idea, or ii) buried it in a sea of “needed” study.
The good news is that the government remains committed to putting the necessary programs in place to fulfill the need to create new LP capital sources in Canada, as Richard and I recommended to 8 Industry Canada staffers in October 2008, to the House of Commons Finance Committee in October 2010 (see prior post “HoC Finance Committee appearance: good news/bad news” Oct. 12-10), in Canadian Business Magazine last April (see prior post “Canadian Business Article – ‘R&D shakeup is good news for Canada’s entrepreneurs’” Apr. 17-12) and in a speech three months ago at the Canadian Leadership Forum. With the loss of so many direct LPs, most venture funds just don’t have enough doors to knock on for a lead order anymore.
No lead order on the next fund means no follow-on fund, no matter how good your returns are.
The time that has passed since the March 2012 Budget has been well spent (see prior post “Feds on right path with Innovation ecosystem consultations” July 2-12). The fact that the PM took yesterday’s tiller himself reminds us that the topic has captured his interest (see prior post “Venture Capital gets on PM’s agenda” May 25-10), and that is the most powerful tool one can wield in Ottawa when Finance Minister Jim Flaherty shepherds the actual details of his plan through the departmental maze of Industry Canada, Finance, Treasury Board and the Privy Council Office. All of whom will understandably feel they have a say in the execution of this element of the government’s Economic Action Plan.
I love the language used in the announcement release. It means they’ve been listening, and recognize that more government isn’t the answer! Just look at this excerpt (I’ve bolded certain parts):
Recognizing the importance of the venture capital industry to Canada’s future productivity growth, Economic Action Plan 2012 announced resources to support Canada’s venture capital industry, including $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.
Over the summer, the Government conducted extensive consultations with key stakeholders on how to structure this support and on how to ensure that the support contributes to the creation of a sustainable, private sector-led venture capital sector in Canada.
Based on the results of the consultations, the Government will pursue a comprehensive action plan for deploying the $400 million in new capital over the next seven to ten years. The Government’s approach recognizes the need to demonstrate that Canada’s innovative firms represent superior return opportunities, and that private sector investment and decision-making is central to long-term success. With this in mind, the Venture Capital Action Plan will make available:
•$250 million to establish new, large private sector-led national funds of funds (a funds of funds portfolio consists of investments in several venture capital funds) in partnership with institutional and corporate strategic investors, as well as interested provinces;
•Up to $100 million to recapitalize existing large private sector-led funds of funds, in partnership with willing provinces; and,
•An aggregate investment of up to $50 million in three to five existing high-performing venture capital funds in Canada.
In addition, the Venture Capital Action Plan will promote a vibrant venture capital environment in Canada rooted in a strong entrepreneurial culture and well-established networks that link investors to innovative companies.
Private sector expertise will be sought in the coming weeks to advise the Government on the selection of the private sector management of the large-scale, national funds of funds, and on the selection of the high-performing venture capital funds to receive capital from the Government.
The Government is currently asking potential investors to signal their interest in co-investing in new or existing funds of funds.
This is pretty much what many of us in the industry hoped it would say.
The largest chunk of money ($250M from the Feds) will be managed by a new private sector player, which gives VCs a new door to knock on, rather than getting stuck in the quicksand at Northleaf or having to navigate the unqiue requirements of the highly successful Teralys Fund. Since CPPIB, OMERS, Teachers and BCIMC stopped providing direct lead venture fund commitments circa 2005, far too much power and responsibility had fallen on too few shoulders. Or, in the case of BDC’s Fund of Fund capital, there was too little action and even less initiative between 2005-2010, preventing good firms such as Edgestone Venture III from closing back when they had the chance.
I understand why folks such as Angel/VC Scott Pelton “wished there were more details” yesterday, and not “still more consultations.” While it is true that this particular fund-of-fund program has been a long time coming (see prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” December 26-08), it’s not as though the Feds haven’t been trying to assist the industry over the past four years. The Section 116 effort (see prior posts “Let’s not declare victory just yet” Mar 5-10 and “If it’s not built, they can’t come” Mar 6-10), the creation of SODA, two different extraordinary funding boosts for the Business Development Bank of Canada’s internal venture capital program (see prior post “Clement moves to fund BDC’s existing venture portfolio” June 15-09) and the $75 million lead order for the Tandem Expansion Fund (see prior post “A bicycle built for two” Oct. 26-09) were each in response to either the CVCA (in the first instance), Ontario MPs or BDC CEO Jean Rene Halde’s personal requests of the Crown.
Clearly, the government came to appreciate by late 2010 that BDC had become a key part of the problem over the prior three years (see prior posts “What happened to the VC $ at BDC?” June 18-08, “Venture Capital advances drop 33% at BDC in fiscal 2010” Sept. 21-10, “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept. 27-10 and “BDC makes further cuts to VC team” Sept. 30-10), and not the vehicle to resolve Canada’s innovation funding crisis. One can only assume this underpinned Finance’s decision to run this $400 million consulation process and program design themselves.
And for that we say a thousand thank yous.
I don’t doubt that the government and its external advisors could have announced most of these details last September, and have been busy trying to put all of the pieces in place for a single, omnibus press release and master strategy…complete with a variety of private corporate partners and provincial allies standing at a press conference. But lining up the private sector and Provincial players can’t be easy given there’s serious money involved, and now that the government’s specific intentions are public, the wheels can turn faster on that front.
As the VC industry has always said, there’s no silver bullet. This fund-of-fund is crucial, and a few direct LP investments will bolster the coffers of those funds that have surived through this much-advertised crisis (see my first post on the swoon “Brutal venture capital stats for H1 2007” Aug. 1-07). But it isn’t the complete solution, just as fixing Section 116 wasn’t either.
There’s still the need to add another $400 million to tackle other key opportunities within the ecosystem: replicate Communitech’s Tannery project in places such as Vancouver, Calgary, Toronto, St. Laurent and Halifax (see prior post “Canadian Business Leadership Forum 2012” Oct. 23-12), address the unlevel playing field between innovation and resource companies (see prior post “Why no flow-thru shares for Canada’s Innovation economy?” Nov. 12-09) and spin-out the BDC venture capital group into its own single LP entity so as to free the team of the internal financial choke-hold that led to a 50% drop in BDC’s VC deal marketshare between 2006 (83 financings of 404 in Canada – 20.5%) and 2011 (45 financings of 444 in Canada – 10.1%).
But for now, this is excellent progress. The Finance team has approached this topic in a collaborative, no-sacred-cows, business-like fashion, and yesterday’s results reflect their desire to fix the problem as best they can.
(disclosure – this post, like all blogs, is an Opinion Piece. And, of course, reflects a personal view and opinion and is not meant to represent the views of the TPA, its Board/Staff or the federal government.)