From my perspective the most important aspect of the 2012 federal budget was the focus on “supporting entrepreneurs, innovators and world-class research.” Someone in Ottawa must have been reading my columns.
The key budget provisions were:
•$400 million to help increase private sector investments in early-stage risk capital;
•$100 million to the Business Development Bank of Canada to support its venture activities; and
•$110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program (IRAP).
KPMG recently released its British Columbia Technology Report Card 2012. On the plus side, KPMG reported that B.C.’s tech sector now employs 80,000 people – more than the forestry, mining and oil and gas sectors combined. Tech revenue grew to $18.9 billion in 2009 from $12.1 billion in 2001, an average of 5.7% annually, more than double B.C.’s overall GDP growth.
Fantastic, right? Not quite.
KPMG also reported that:
•B.C.’s tech sector GDP is significantly lower than the Canadian and U.S. averages;
•tech employment, as a percentage of total B.C. employment, is behind that of the other provinces with significant technology industries; and
•B.C. ranks 29th out of 42 jurisdictions examined in terms of R&D expenditures as a percentage of GDP.
We need to pull our socks up in B.C. if we want to build tomorrow’s technology future in B.C. It’s not happening yet.
This is why the renewed financial support from Ottawa for the tech sector is such an exciting opportunity.
Here is my roadmap for how Ottawa can best fire up the venture capital industry to support the tech sector and leverage as much of the federal investment as possible.
As background, Ottawa must recognize that Canada’s venture industry is made up of five significant components: angel investors, private retail investors, public venture market investors, institutional investors and government. In this way, Canada is unique. All five venture capital segments are needed if Canada hopes to match the world leaders in innovation investment.
First, Ottawa should double the investment by inviting interested provinces to opt in and double up on spending. B.C. has an advantage here because it already makes a strong commitment to venture investment in B.C. through its provincial tax credit programs. Theoretically, this would increase the $400 million to $800 million.
One-quarter of the budget should provide angel investors with a 30% tax credit for becoming the earliest outside investors in startup companies. B.C. is already doing this successfully, but it needs to be doubled up with federal help. If the market continues to be as hostile as it is currently toward venture investment, consideration should also be given to increasing the angel tax credit to 40% or 50% temporarily, on perhaps the first $5,000 of angel investment, just to get new angels into the market.
One quarter of the budget should go to attracting new retail investors into retail venture funds whereby retail investors receive a 30% investment tax credit. One quarter of the budget should go to financing Scientific Research and Experimental Development (SR&ED) tax credits for venture stage companies seeking capital from Canada’s public venture market. Currently, these early stage technology companies are discriminated against because as soon as they go public, they lose the valuable 35% SR&ED tax credit. Given that venture capital for private tech ventures is so scarce these days, a level SR&ED playing field that ignores whether a startup is private or public would be a boost for the tech industry, maximizing venture investment from private and public channels.
One-quarter of the budget should go into “fund-of-funds” initiatives like B.C.’s Renaissance Capital program, which invests in local and foreign private institutional funds that are willing to make suitable venture investments in Canada. This segment would be a bit dicey, however, because historically, institutional venture capital in Canada has been volatile and unreliable over the long term – it comes and goes with the cycles. Even with investment from Ottawa, institutional venture capital could end up going anywhere in the world and not be invested in Canada.
Not surprisingly, some of the leaders of the individual segments listed above are lobbying Ottawa to focus the total federal spending on their sector over the other venture market participants. I say to Ottawa, don’t listen to any of these one-dimensional lobbies. Instead, support the mobilization of the entire venture spectrum. B.C. – and Canada – need to have its innovation financing engine firing on all of its cylinders. •
