Tory budget fails to address venture capital gap: ITAC

While the Conservative Party's budget recognized the importance of the knowledge economy by investing in some information and communications technologies (ICT) sectors - such as broadband and electronic health records - it missed the boat on stimulating venture capital investment in early stage companies. For years now, the venture capital market in Canada has been dry, and despite suggestions it's the result of the dot com bubble from nearly a decade ago, the problem lies in the gap that exists between early seed money and second- and third-round financing. Speaking with Tech Media Reports earlier this week, Information Technology Association of Canada (ITAC) senior VP Lynda Leonard lamented the budget for missing this key ingredient in the information and knowledge economy. "We are deeply concerned and have written to the Prime Minister on two occasions about this," she says referring to the lack deal flow for venture capital in Canada. To date much of the conversation regarding access to cash for companies during the recession has focused on the large financial institutions and credit instruments. But knowledge-based companies don't talk to their banker when they need money; they look to venture capital. But it has all but dried up, says Leonard. "There's a huge, a very pressing and potentially very damaging drought in Canada at the moment. It ranges from early stage investment like IRAP (Industrial Research Assistance Program) all the way through to second and third round venture capital," she notes. "Bank liquidity is not going to address what the Canadian knowledge-based sector, not just in ICT but in bio and in any other sector, requires for growth," she says. Deloitte Canada's director of research Duncan Stewart told TMR last year the venture capital gap was in the mid-level of financings. He said Labour Sponsored Venture Capital Funds used to fill the need for investments of between $1 million to $2 million. Ten years ago there were upwards of 15 VC firms handing out this type of money, now there are perhaps two or three, he added. Fixing the problem starts with filling the gap. "Some form of retail venture capital is very important for the growth of the Canadian technology industry," he said at the time. Leonard says there are early indications that the government is getting the message on this, pointing to the additional financing flexibility provided to the Business Development Bank of Canada (BDC) and Export Development Corp. (EDC). She adds that new money for IRAP is also an encouraging sign. (See below for more information) "The reality is though, if we don't find a solution to get venture capital flowing more readily in Canada all new deal flow runs the risk of being foreign and that doesn't auger well for the future of Canadian companies being retained in Canada," Leonard contends. "If we expect to have future generations of companies of the size and influence of RIM we have to address this." Budget highlights for IRAP, BDC and EDC Budget 2009 provides $200 million over two years, starting in 2009-10, to the National Research Council's Industrial Research Assistance Program to enable it to temporarily expand its initiatives for small- and medium-sized enterprises. This includes $170 million to double the program's contributions to companies, and $30 million to help companies hire over 1,000 new postsecondary graduates, including graduates from business schools, to implement more effective business processes and strategies, and develop new innovative products and services that companies can bring to the marketplace. The government will increase the authorized capital limits of EDC and BDC by $1.5 billion each, and increase their associated borrowing limits as necessary. The Government will also increase EDC's contingent liability limit to $45 billion to enable EDC to grow and enhance its guarantee and insurance programs, and increase the Canada Account limit from $13 billion to $20 billion. These actions follow on the additional $350 million in capital committed to both EDC and BDC in the November 2008 Economic and Fiscal Statement. One way in which BDC and EDC will make use of these additional flexibilities and resources is the new Business Credit Availability Program (BCAP). This program will improve access to financing for Canadian businesses during this period of economic uncertainty through enhanced cooperation between private sector financial institutions and the financial Crown corporations. Through this program, EDC and BDC will provide at least $5 billion in additional loans and other forms of credit support and enhancement at market rates to businesses with viable business models whose access to financing would otherwise be restricted.

Tory budget fails to address venture capital gap: ITAC

Broadcast | January 29, 2009

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