Lengthy freeze at Ottawa’s cleantech funding agency will disrupt sector, companies say

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Cleantech executives and venture capitalists warn that an extended suspension of funding by the main federal investment agency for early-stage green technology could have a disastrous effect on many startups that are lining up financing for their projects.

The warnings come after Industry Minister François-Philippe Champagne announced on Tuesday that he is suspending the funding powers of Sustainable Development Technology Canada until its board takes a series of measures to address breaches in governance found in a five-month investigation. The agency has granted $1.6-billion for cleantech projects since it was established in 2001, and is seen by the industry as crucial to the country’s efforts compete globally.

The ministry in charge, Innovation, Science and Economic Development Canada, hired accounting firm Raymond Chabot Grant Thornton last spring to conduct the probe after former SDTC employees made allegations of mismanagement by its CEO and board of directors. Among its findings were lax conflict-of-interest standards, lack of due diligence in some funding decisions, programs that go beyond the agency’s mandate from government and inadequate human resources practices.

Mr. Champagne has given SDTC a deadline of Dec. 31 to implement his directives for corrective actions, but an Industry Ministry official expressed optimism that the agency will be able to resume its funding role sooner, if it makes changes swiftly. The Globe and Mail is not identifying the official because they were not authorized to speak on the government’s behalf.

But uncertainty around how long the suspension will last is already causing anxiety among cleantech companies that heavily rely upon SDTC for scaling up their products to commercialization.

“We hope that SDTC will implement the corrective measures according to Minister Champagne’s directives fairly quickly,” said Maike Althaus, executive director of Canada Cleantech Alliance, a coalition of industry associations and accelerators. “I think the speed of the process is really crucial. A delay of a few months can be a death sentence for clean-tech startups.”

The concern is amplified by stiff competition that Canadian industry is facing, especially from the United States, which is offering hundreds of billions of dollars in subsidies toward green projects.

“If we’re not viewed as being supportive of early-stage companies, they’ll move south,” said Marty Reed, a partner at Evok Innovations, a cleantech venture capital fund with a portfolio made of companies that have received SDTC grants. “I think we need to do a better job of keeping Canadian companies here and helping them accelerate. Slamming the brakes on an absolutely critical piece of this ecosystem right now really would be catastrophic.”

Ottawa extends probe into allegations of conflict of interest, financial mismanagement at Sustainable Development Technology Canada

For many cleantech companies, the temporary halt in SDTC’s funding processes could pose immediate cash-flow concerns, even though grants that have already been announced will remain in place. That’s because many developers are counting on funding applications that are far along in SDTC’s pipeline, and which the agency gave them reason to believe would soon be approved.

Under SDTC’s model, industry leaders explained, applicants need to show that they have matching private capital. However, other investors often want to know that the SDTC funding has been lined up, before committing themselves.

That results in what Tyler Hamilton, the senior director of cleantech climate programs at the incubator MaRS, called “a bit of a dance,” in which SDTC sends unofficial signals that companies can count on its backing before it has officially been announced.

Such is the case now with a company in the portfolio of Arctern Ventures, said Tom Rand, the fund’s co-founder and partner.

“We need to plan around that capital,” Mr. Rand said. “We’re weeks away from final approval, we’re lining equity up – there are a whole bunch of dominoes that all fit together to support the SDTC financing. There are a lot of repercussions.”

Among those repercussions could be immediate cash-flow problems, said Bryan Watson, senior vice-president at Venbridge Capital and managing director of CleanTech North, which offers mentorship and support to emerging companies. It’s never a good idea for companies to bank on funding that hasn’t yet been officially approved, but many do, for instance to commit to capital investments for demonstration projects that have long lead times, he said.

“My immediate gut reaction was, oh God, how many of my companies were counting on this money this quarter,” Mr. Watson said.

After Mr. Champagne’s announcement of the suspension, SDTC sent letters to companies in its funding application process, saying it will not accept new applications or process existing ones until it implements the actions laid out by the minister. It said companies can keep working on proposal submissions if they have been invited to submit one.

SDTC spokesperson Janemary Banigan said in a statement late Tuesday that the report had identified “no clear evidence of wrongdoing or misconduct,” and that there was no call for further investigation. She said its board was reviewing the report and would implement the directives “as quickly as possible to minimize disruption to Canada’s sustainable innovation ecosystem.”

The corrective directives include updating conflict-of-interest policies and human-resources policies, better aligning funding streams with the mandate from the government, and providing more documentation of project evaluations.

Editor’s note: The spelling of Evok Innovations partner Marty Reed’s name has been corrected in the online version of this story.