Feds show some love for VC funding program; could a sequel be in the works?

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The federal Liberal government is strongly hinting to the tech sector it may launch a sequel the previous Conservative government's Venture Capital Action Plan.

The venture capital industry has been clamouring for a repeat of the program, introduced in 2013, which saw the government commit $340-million to four venture capital "fund of funds" firms, alongside another $112.5-million from Ontario and Quebec. To get the government money, the fund-of-funds firms – which in turn disburse money to venture capital firms that directly back early-stage companies – had to raise another $900-million from private investors, which they did. (Ottawa provided another $50-million directly to four venture capital firms).

That fulfilled an objective of the late finance minister Jim Flaherty to get more Canadian institutions to pony up risk capital to fuel the country's tech sector.

The venture capital industry has already hailed the first VCAP program a success – the sector is having one of its busiest years ever – and said it needs at least one more VCAP to make the industry self-sustaining. The Canadian Venture Capital and Private Equity Association has been making its case as the government prepares to unveil its innovation agenda in the coming months.

While the government hasn't committed to VCAP II, it evidently likes what it's seen so far. On Wednesday the feds will release the initial results of the program, which show it received solid support from financiers and that money is already quickly moving toward where it is intended to go.

In the release and related backgrounder, obtained by The Globe and Mail, the innovation, science and economic development ministry says more than one-third of the $1.36-billion raised through VCAP has already been invested by venture firms into 126 Canadian companies, more than 80 per cent of which are in Ontario and Quebec.

"As a result of this important joint effort involving both public and private sector capital, we are helping to build a more innovative Canada where globally connected and competitive Canadian companies are able to prosper," small business and tourism minister Bardish Chagger says in a release.

Innovation minister Navdeep Bains is equally effusive, saying that "by helping Canadian businesses gain access to capital, we are helping innovative companies grow" and creating "winning conditions" to help the middle class thrive.

With the Liberals showing much eagerness in their first year in power to dismantle the legacy of the Harper government, this sounds like one plank they plan to keep for their own as an initiative to grow prosperity in Canada. (Mr. Bains has previously called VCAP "a very strong program.") The data shows "VCAP takes a market-oriented approach to steering Canada's venture capital industry on a path to sustainability, while increasing the availability of venture capital financing for innovative Canadian firms," the release says.

Well over half of the money raised through VCAP ($783-million) has already been either been directly invested in companies or committed by the fund-of-fund companies to venture funds. All but 5 per cent, of the VCAP money came from 27 Canadian investors, including governments. Pension funds kicked in $187.5-million, financial institutions ponied up $207.5-million and high net-worth individuals put in another $202-million. They were joined by an asset management firm, an endowment, corporations and retail funds.

The money is also finding its way not just to early stage funds but also those that make later-stage "growth" investments (accounting for 35 per cent of the VCAP capital committed), a realm where available funding is in short supply. Another concern for some in the tech sector is that VCAP is overly weighted to information and communication technology (ICT) firms; while 79 per cent of the money committed in Canada has gone to ICT, the government said the energy and clean tech and life sciences should get a heavier share of the remaining money than the 21 per cent earmarked so far.