Why should we care?
Thanks to the success over the past couple of decades of a number of internationally competitive Canadian technology companies, such as Research In Motion, RuggedCom and Sierra Wireless, to name a few, Canada enjoys a world-class technology ecosystem that includes experienced, highly skilled entrepreneurs, scientists, engineers, executives, venture capital professionals and financiers. Unless the federal government moves soon to address the shortfall of venture capital, the ecosystem we have carefully nurtured over the past two decades could disappear very quickly and we will lose the experienced venture capital professionals, entrepreneurs and others that are required to build and develop successful technology businesses. It would take generations to recover from that loss.
Much has been said in the media about the need to increase the amount spent on research in Canada. Venture capital is distinct from funding for pure research, such as the $100-million research fund recently announced by the Ontario government. While research (and research funding) is a vital spur to technology innovation, without venture capital, many of the discoveries made through research conducted at universities and hospitals will not be effectively commercialized. Venture capital funding is a key link between innovation and commercialization.
What can be done to make more venture capital available to promising early-stage Canadian technology companies?
The federal government should provide investment capital to venture capital firms that have demonstrated success in identifying promising early-stage Canadian technology companies. Several provinces have announced similar initiatives. For example, Quebec recently proposed to establish an $825-million venture capital fund in partnership with the Caisse de dépôt et placement du Québec and Solidarity Fund QFL. British Columbia, Alberta and Ontario have established or proposed similar funds. Other provinces have increased the tax credits available for private sector investments in labour-sponsored venture capital funds.
A federal fund of comparable size and structure to that proposed by Quebec would be a sound investment in our country's future as well as a stimulus to a strategically important industry. The federal contribution to the fund would be in the form of an equity investment (not a grant) that would provide for repayment with a return on investment from profitable investments. If investments by the venture capital firms performed comparably to the investments made by venture capital firms tracked by the CVCA in recent years, the government would be likely to see a positive return on its investment.
Why the urgency?
Promising early-stage technology companies are increasingly looking to the U.S. venture capital market for capital or simply failing for lack of capital. Some of those companies will choose to relocate to attract that financing. For each company we lose, of course, there will be an immediate loss of jobs. The individuals left unemployed will migrate to other jobs, potentially in other industries or other countries. Our technology infrastructure will disappear over time. Without immediate action, fewer venture capital investment professionals, entrepreneurs, scientists, engineers and others will be trained and we will lose our ability to turn out world-class technology from world-class technology companies.
Many other major developed countries are about to make substantial investments in technology. The U.S., for example, has included within its economic stimulus package more than $30-billion to be spent on technology projects. Like them, our federal government should recognize the stimulative effect of investment in the sector and take immediate steps to support the creation of the environment needed to keep our most promising innovators and venture capitalists challenged and productive and living in Canada.
Why does it matter if Canadian companies go to the U.S. for venture capital?
In 2008, Canadian venture-backed companies raised, on average, $3.6-million. Their American counterparts raised, on average, $9.5-million. In the same year, Canada's venture capital firms received only about 4 per cent of all funds invested in U.S. venture capital firms. Is this a bad thing for Canada? You bet it is.
Canadian early-stage technology companies are simply not able to attain from the Canadian venture capital community the funds needed to build scaleable, internationally competitive businesses. If Canada's most promising technology businesses are forced to access venture capital from American sources, many of those businesses will be forced by their investors to physically relocate to the U.S. and/or to recruit management from the U.S., with the result that Canada would lose the jobs and training opportunities associated with those businesses. In addition, Canada's venture capital community will continue to shrink, with the result that we will increasingly lose the venture capital sector as a training ground for future business leaders and as sources of capital for promising early-stage Canadian businesses.
Is there anything else we can do to help Canada's early-stage tech companies?
A key challenge to early-stage enterprises of all kinds, but especially technology companies, is making the first significant sale. Even in a strong economy, this is challenging because buyers are unwilling to deal with small new businesses and unproven technologies. It is now even harder thanks to the recession and its impact on budgets. Government spends a great deal on technology and could be the ideal first customer for many Canadian technology businesses. But it can be even more difficult to sell to government than to the private sector. This should not be the case.
The federal government should appoint a chief technology officer to serve as matchmaker between government and the Canadian technology industry and to ensure that promising technology firms get a fair shot at federal government business. The CTO might advise various arms of government on how to use technology to deliver services more efficiently. In addition, the CTO should be charged with identifying and presenting desirable Canadian technology to government to ensure that creators and the government agencies that could become customers are able to find each other.
Barry Reiter is chair of the technology, media and entertainment group, Bennett Jones LLP.