The federal government is kicking off consultations on a $400-million sequel to a popular program launched by its predecessor to fund the Canadian venture-capital industry. But the Liberal government indicated it could deploy the money differently than the last program.
Under the Harper government's Venture Capital Action Plan (VCAP), Ottawa committed $50-million to four well-performing venture capital firms and an additional $340-million to four "funds-of-funds," which had to raise $2 from private capital sources for every dollar the government committed. Those funds-of-funds allotted their capital to venture capital funds who then invested directly into emerging technology companies.
Combined with funds provided by private sources as well as the Ontario and Quebec governments, the four funds-of-funds raised a combined $1.35-billion and have committed close to $1-billion of that to 39 venture-capital firms and made direct investments in 29 companies.
But there were some critics of VCAP. Auditor-General of Canada Michael Ferguson criticized the program for excessive fees payable to fund managers, while some criticized VCAP for being slow to put the money into the hands of companies. Some members of the Finance Minister's influential advisory council were cool to VCAP and the group did not recommend a sequel among its suggested list of innovation initiatives, sparking fears among venture capitalists that the government's retreat could lead to a sharp decline in sector activity.
Nonetheless, the Liberal government in the March budget announced a follow-on program known as the Venture Capital Catalyst Initiative, using a different name to avoid "action plan" terminology common to Harper government initiatives.
"The continued support of VC is a key component of the Innovation and Skills Plan," said a government discussion paper released Friday. The paper said Ottawa may consider alternatives to "the well-understood funds-of-funds model," including providing direct matching investments to existing VC funds to money raised from other sources, creating new pools of capital targeted at later-stage capital "or other alternative value propositions."
The government is considering deploying $350-million to an undetermined number of funds-of-funds but indicated that is up for discussion during consultations with industry players.
The government said it wanted to see more venture funding for later-stage startups that need growth capital to "scale up." In addition, venture funds that receive government money may have to raise a predetermined amount before they get funded from Ottawa. Under VCAP, the government sought commitments from corporate Canada to invest in VCAP first before the four funds-of-funds managers began fundraising.
Mike Woollatt, CEO of the Canadian Venture Capital and Private Equity Association, said the industry "believes strongly that the best way forward for VCCI is through a fund-of-funds model" similar to VCAP. "A private-sector led approach like this … is the single best way towards sustainability of the ecosystem."
The program is expected to go before cabinet by end of summer and launched this fall.