June 22, 2012

Consultation on How to Better Encourage Private Sector Investment and Management of Seed and Large-Scale Venture Capital Funds

Note: A consultation is not a poll. Please do not send multiple or duplicate submissions.

Consultations Documents:

Closing date: July 27, 2012

Who may respond:

The Government looks forward to receiving the comments of interested parties.

Submissions can be emailed to ConsultationsVentureCapital-CapitaldeRisque@fin.gc.ca.

Also, written submissions can be forwarded to:

Consultations on Support for Venture Capital
Economic Development and Corporate Finance
Department of Finance Canada
L’Esplanade Laurier
12th Floor, East Tower
140 O’Connor Street
Ottawa, Canada K1A 0G5
Facsimile: 613-943-5597

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act (ATI Act) and may be disclosed in accordance with its provisions. If a request pertaining to your submission is received under the ATI Act, you will be consulted under Section 27 of the ATI Act.


Consultations on Budget 2012 Venture Capital Funding: Discussion Paper

Introduction

Venture capital plays an important role in funding and supporting the growth of high-risk innovative small and medium-sized enterprises, which have difficulty accessing debt financing from traditional sources because they have few tangible assets and little or no financial track record.

The Canadian venture capital market faces a broad range of challenges, including historically low returns, a decline in fundraising, and an inability to consistently attract large, well-funded institutional investors such as pension funds.

The Government of Canada recognizes the crucial role played by private sector risk capital in driving business growth and innovation, and has taken important steps to strengthen its availability.

Over the last several years, the Government has supported the venture capital industry mainly through financial Crown corporations, including the Business Development Bank of Canada, Export Development Canada and Farm Credit Canada, and through the Labour-Sponsored Venture Capital Corporations tax credit program. Concerns have been raised as to whether some of these approaches have been an effective means of promoting a sustainable venture capital sector.

In Economic Action Plan 2012, the Government announced that it will make available $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector. By providing these resources, the Government is seeking to enhance the funding and expertise available for growth-oriented innovative firms while focusing resources on those that are most likely to become global leaders. The Government is now seeking views on how best to implement the delivery of the new resources.

Objectives

The objectives for the new funding commitment are to:

Key Issues

The Government is seeking input on key issues to better inform its approach and meet the objectives for the Economic Action Plan 2012 funding. Issues include:

Contributing to the development of a sustainable venture capital eco-system spurred from private sector investments

The Government’s objective is to act as a catalyst in the creation of a sustainable venture capital industry financed by the private sector. Key issues include the financing needs of high-growth firms in Canada, the features that influence private sector investment decisions, and the role that governments can play in developing an environment that supports a healthy venture capital sector with sophisticated fund managers and strong returns.

Increasing private sector participation and investments

In order to encourage private sector participation and investment in the venture capital industry, other jurisdictions have utilized different models. For example, in a “fund of funds” model, the public sector establishes a large fund that in turn allocates its capital in multiple venture capital funds based on market principles. Other jurisdictions have relied on a direct investment model, where governments invest in specific venture capital funds based on criteria such as investment orientation, experience of the fund manager, and willingness of other partners to invest.

Attracting Canadian and international institutional investors

Historically, relative to the U.S. market, the Canadian venture capital industry has been highly dependent on resources from governments and individuals benefiting from tax credits when they invest in retail funds. Investments by institutional investors, both Canadian and foreign, remain low as the industry faces difficulties attracting private sector investors.

Encouraging the creation of venture capital funds managed by the private sector

A number of stakeholders have indicated that a key gap relates to the small relative size of Canadian venture capital funds, which are often challenged to provide adequate follow-on financing as a firm moves from seed-stage to commercialization. Consideration is required of the optimal size of fund(s) that should be established using the $400 million.

Ensuring that high-potential Canadian innovative firms have access to financing

A key government objective is to ensure that high-growth Canadian firms benefit from access to capital. In that regard, it is important to consider ways to avoid placing unduly burdensome restrictions that will deter private sector investors. Some jurisdictions have chosen to invest in funds with a broad investment mandate. Alternatively, public support could target specific funds that focus on particular sectors. Another consideration is whether government support should target particular stages of company development, for example, seed and early-stage companies.

Developing a deeper pool of experienced fund managers in Canada, including attracting foreign expertise and capital

According to industry observers, the Canadian venture capital industry would benefit from more Canadian venture capital fund managers with solid management and operational experience. One of the objectives of the Economic Action Plan 2012 funding is to attract successful venture capital managers, including from outside Canada, to benefit from their deep industry and operational knowledge as well as global networks of partners.

Role of corporate strategic investors

Large global corporations can play a key role in providing young firms with risk capital and strategic business advice, access to global supply chains and networks, as well as potentially acting as first-buyers for these companies’ novel products.

Discussion Questions