If venture capital dries up, CVCA chief executive Kim Furlong says Canada risks losing companies, skilled workers and intellectual property to well-financed foreign entities.Canadian Venture Capital and Private Equity Association
Canada’s venture-capital industry is warning the federal government of dire consequences for the innovation sector unless Ottawa commits fresh funds to back technology startups.
Without a new program, industry representatives are warning that Canada’s innovation sector “will be severely weakened” as the pandemic stunts the economy, according to a form letter they sent this fall to Small Business Minister Mary Ng, Innovation Minister Navdeep Bains and Deputy Prime Minister Chrystia Freeland.
The Canadian Venture Capital and Private Equity Association (CVCA) has also pressed its case with officials in Ms. Ng’s and Mr. Bains’s departments, as well as the Industry Strategy Council – a group of business leaders advising government on ways to rekindle the economy postpandemic.
“I want to avoid having a [lengthy] gap in the market where … people are knocking on doors and they can’t fundraise or close [on investments]," CVCA chief executive Kim Furlong said.
If venture capital dries up, Ms. Furlong said Canada risks losing companies, skilled workers and intellectual property to well-financed foreign entities. This would stifle the development of technologies such as artificial intelligence and quantum computing and curtail job growth, she said.
The CVCA is pushing for a sequel to two programs launched in the past decade and widely credited for bolstering Canada’s tech sector. After the 2008-09 financial crisis, the industry lobbied Ottawa for help, which led the Conservative government in 2013 to launch the Venture Capital Action Plan. VCAP distributed $340-million to four “funds-of-funds” to invest in venture-capital firms, which in turn backed startups, and provided another $50-million to four venture-capital firms.
That federal funding, topped up by $113-million from Ontario and Quebec and $904-million raised from private investors, infused $1.4-billion into the sector. By the end of 2018, the program had supported 310 companies, which generated combined revenues of $2.7-billion and employed more than 17,000 people, according to government data.
The timing was good as Canada’s technology sector rebounded and a new group of venture-capital firms posted better returns than their predecessors. But the industry argued it needed more aid to help fund managers evolve to the point where they needed less public money to thrive.
So in 2017, the Liberal government committed $450-million for its Venture Capital Catalyst Initiative (VCCI) program, with recipient funds raising another $1-billion from the private sector. The tech industry continued to flourish; domestic companies in 2020 raised more than $6-billion in venture capital, the second highest on record adjusted for inflation. Several startups grew into multibillion-dollar companies, including Shopify Inc., Lightspeed POS and Nuvei Corp. By 2019, returns by Canadian venture capitals had improved to the point where they equalled their U.S. counterparts, according to the Business Development Bank of Canada (BDC), which manages Ottawa’s venture-capital programs.
But industry players say the onset of COVID-19 prompted venture capitalists to burn through available funds to help bolster investee companies hit by the pandemic. That means VCCI money, which was expected to sustain funds through 2022, could run out by mid-2021.
There are also fears that foreign investors and Canadian corporations that had warmed to venture investing may retreat if the downturn drags on, said Thomas Park, vice-president, operations and strategy at BDC Capital.
“It’s not like Silicon Valley where … institutional investors are comfortable" investing in venture capital, he said. “In Canada, it’s a 10-year-old story in an asset class that needs 40 years to get that kind of track record.”
So far, investment has remained strong during the pandemic. The second quarter saw $1.7-billion invested over 145 deals – a Q2 record – as venture-capital funds wrote large cheques to keep their strongest-portfolio companies afloat. But history suggests caution: venture-capital investment in Canada dropped 64 per cent in the two years after the dot-com bust in 2000 and 30 per cent after the 2008-09 financial crisis, according to BDC data.
The CVCA is asking Ottawa for a “cut and paste” copy of the biggest part of the VCCI program. That would see around $350-million provided to the four fund-of-funds managers mandated under VCCI and VCAP to back venture-capital funds as they saw fit. VCCI also targeted $100-million for clean technology funds and those managed by diverse management teams.
The domestic venture-capital industry does have a cushion. Several funds raised money before the pandemic and VCCI is still deploying capital. BDC also launched a $300-million bridge-financing program in April to help venture-backed companies hit by COVID-19.
So far, it has advanced $116-million to 56 companies, matching funds from other investors with convertible debt. That should give companies up to two years of funding, BDC Capital executive vice-president Jérôme Nycz said, but it’s only a stopgap measure.
“We’ll have to see larger [funding] rounds come together in the next 12 months or else companies will start being short on cash, and they won’t be able to hire talent or keep the talent that they have," he said.
A senior government source told The Globe and Mail that the CVCA began pressing for emergency funding last spring, but the government was focused on other pandemic-response programs. This is likely to stay the case this fall; any movement on the file likely won’t be until 2021, the source said. The Globe is not identifying the source because they were not authorized to speak publicly on the issue.
In normal circumstances, the source said a sequel to VCAP and VCCI would likely target specific strategic sectors that struggle to raise private funding. But if data show the venture-capital industry is really struggling, the source said the government could be open to following the CVCA’s recommendations, but that it was too early to be certain.
Youmy Han, a spokesperson for Ms. Ng, didn’t address the CVCA’s proposal, but said the government “will continue to support the venture-capital ecosystem and work with stakeholders – including the CVCA – to ensure a strong venture-capital market to support Canadian … innovative businesses.”
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