BC new media tax credit still alive, still growing

A tax credit program launched in 2003 for BC-based new media small businesses has survived a provincial election – and its own success – to grow to serve nearly twice as many firms this year. "Initially, in the first year it was a resounding success, and actually the program oversold and we actually had to claw back some credits, which the businesses weren’t too happy about," says Todd Tessier, vice-president of private capital markets at Leading Edge British Columbia, the arm’s-length, not-for-profit technology investment marketing unit of the provincial government which administers the Equity Capital Program on behalf of the Ministry of Economic Development. "So the next two years, including this year, we’ve managed the allocation a little more carefully." Under the Equity Capital Program, the BC government sets out to attract $67 million worth of investment in small businesses each year by offering tax credits. The program targets angel investors, or individual providers of venture capital (VC) for newly founded firms, with a 30% refundable tax credit on money loaned to small businesses. Corporate investors have a 30% non-refundable tax credit for qualified VC investments, but Tessier estimates that 95% of the program’s applicants fall under the individual investor category. Of that $67 million, $16.67 million is earmarked specifically for new media companies, meaning the province will either mail cheques to investors (in the case of individual refundable credits) or offer tax reductions (in the case of corporate non-refundable credits) to the tune of $5 million. For their part, small businesses can attract direct investment – bypassing the paperwork and cost associated with setting up a VC corporation, otherwise necessary to woo investors with tax credits – if they qualify as an Eligible Business Corporation (see table below). Maximum investment per firm is capped at $5 million under the program, and firms must file business plans and projected financial statements in order to prove their eligibility. Once accepted to the program, firms put out a request for funding up to the $5-million cap, but Tessier says it’s not a good idea to get too greedy: a company might be granted permission to attract the maximum, but if investors weigh a company’s business case, find it wanting, and provide less funding than the firm asked for, it can negatively affect future allotments under the program. "The main point there is don’t take off more than you can chew, and the second thing is basically only ask for what you really think your company will need in the next 18 months," he says. That exuberance was partly to blame for the program’s oversubscription in the first year, and the reduction of credits as a result. "It’s very difficult to get an estimate on how much money they’ll actually raise," Tessier says. Now, the program has a mandatory reporting period starting in October of each year that he says allows Leading Edge BC and the government to more accurately gauge the demand for, and supply of, eligible companies and capital. "Last year we were right on, and this year we hope to have the same result again. very frustrating for the clients, but the power of the credit definitely requires the finance people to make sure we have these controls in place." Approximately 140 businesses in three industry categories – ICT/wireless/new media, life sciences and medical technology, and energy technology – receive an average of $200,000 in funding through the program each year. Tessier says that in 2003, 15 of the companies registered were new media firms; this year, new media accounted for 28. "That’s the biggest gap probably facing most technology companies these days, the under-million dollar financing range," he says. "So the program here in BC was designed exactly to tackle that." The new media component of the program was brought into being in February 2003, when the province’s Ministry of Competition, Science and Enterprise extended eligibility to firms engaged in "development of interactive digital media product in BC." However, the province’s political landscape changed earlier this year, with Liberal election victory in May; as a result of government restructuring, the Ministry of Competition, Science and Enterprise was reorganized into the Ministry of Economic Development the following month. Happily, the new government saw fit to continue the program. New media and technology in general are vital to employment and economic growth in the province, Tessier says, and the tax credit program helps to further their contribution. For instance, most firms applying to the program have fewer than six employees, he says, "but within two years the employment base of these companies goes up to an average of 19 people. These companies are very skill-based and skill-intensive, as opposed to capital-based – it’s all about people," adding that the ICT-wireless-new media industry segement accounts for three out of every four technology-related jobs in BC. In addition to firms like Electronic Arts – which has its Canadian headquarters in Vancouver and which, as the world’s largest gaming software firm with $3 billion in annual sales, doesn’t need the program’s help – "there are also all sorts of new and emerging companies with new media applications, applications for distance learning, resource mapping and planning," he says. In 2003, a survey by New Media BC, the province’s new media industry body, estimated that the number of new media businesses in the province had grown from 200 in 1998 to 700, and accounted for more than 14,000 jobs (CNM, July 11/03). Venture capital was the most common funding source reported, with 44% of firms saying they’d received some form of VC funding. Thanks to the money provided by the program, firms might have the resources to eventually attract funding from the "traditional" VC community, which is mostly comprised of larger multi-million dollar pooled funds; however, Tessier adds, the average start-up has less than a one-in-20 chance of garnering that kind of attention. "Even if they aren’t able to, this seed capital lets them explore other opportunities: they may be advanced enough in this stage that they can approach traditional lenders once they start earning revenues," he says. The program’s success has also earned Tessier some accolades and invitations: he will speak in October at an Ottawa event sponsored by the National Angel Organization, a group representing Canada’s angel investor community. "They would like to see our BC program applied at a national scale, and the Conference Board of Canada has made the same recommendation," he says.

BC new media tax credit still alive, still growing

Broadcast | September 30, 2005

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