Description
During this brief elucidation relating to stimulating canadian innovation how to boost canadas venture capital industry.
Stimulating Canadian Innovation:
How to Boost Canada’s Venture Capital Industry
September 2015
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 2
Get plugged in.
As Canada’s largest and most in?uential business association, we are the primary and
vital connection between business and the federal government. With our network of over
450 chambers of commerce and boards of trade, representing 200,000 businesses of all
sizes, in all sectors of the economy and in all regions, we help shape public policy and
decision-making to the bene?t of businesses, communities and families across Canada.
Be heard.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
WHAT IS CENTURE CAPITALISM
WHY IS THE RISK SO MUCH HIGHER FOR THESE COMPANIES?
BIG RISK, ENORMOUS BENEFITS FOR CANADA
HOW IS CANADA DOING?
THE SOLUTION: TO MAKE CANADA A VENTURE CAPITAL POWERHOUSE
3
4
4
6
6
8
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 3
Venture Capital is a critical part of the Canadian
economy because it provides the funding that enables
innovative, early-stage technology companies to
survive and grow.
These fast growing ?rms represent just 5% of the
companies in Canada but they have a huge impact
on our ability to innovate and on our prosperity,
accounting for 45% of new job creation.
1
Designing policies to support and stimulate
entrepreneurial ventures is a challenge; there is no
single sector they occupy, nor do they have common
business strategies. Their challenges are as diverse as
their various businesses.
But one problem is common and acute among these
unusual enterprises—almost all have dif?culty ?nding
the capital they need to realize their business plans.
Improving and growing the venture capital industry
is one strategy government can pursue that could
signi?cantly bene?t most fast-growing entrepreneurial
?rms. Such a strategy has the potential to transform
Canada—to make it more innovative—by creating new
businesses, technologies and jobs.
It is particularly timely to consider such a strategy.
The Canadian economy is challenged by headwinds
that will reduce the rate of GDP growth and job
creation in the coming years. The natural resources
and commodities that were so central to business
investment could be facing many years of price
weakness. The Canadian consumers who borrowed
and spent throughout the global crisis must contend
with record debt levels. The “nest egg” that supports
consumer con?dence is often housing, but the
Canadian housing market is overvalued by 10% to
30% according to the Bank of Canada. If Canada’s
traditional sources of growth are ebbing, then it
needs to increase productivity and innovation in
order to expand its economy into new services and
technologies.
More importantly, a study by Deloitte
2
shows
that many Canadian companies are not ready for
“disruptive innovation”—the huge leaps of technology
that will put our traditional businesses at risk.
Consider how communication has changed over the
past 20 years, from basic email, web pages and desktop
PCs to social media, smart apps, mobile web and
powerful smartphones and tablets. Technology has
profoundly transformed the way we interact with each
other, the way we do business and the nature of work.
Today, technological advancement is accelerating
and transforming our economy by creating new
products and services, increasing ef?ciency and cost
savings, and even launching new industries. Canada
must accelerate its own innovation and develop
new technologies here at home to avoid getting left
behind. What can government do? Canada has already
invested massively in R&D. In fact, public spending
on research and development, at 0.81% of GDP places
Canada ahead of countries like the U.S., the U.K. and
Japan (but still behind countries like Germany, Sweden
and Finland.) The trouble is that Canada lags on the
commercialization of products.
How do we get our great ideas developed and into
markets? By helping entrepreneurs to build new
innovative companies. A critical ingredient is having
a vibrant, thriving venture capital industry that can
provide the investment and expertise to turn ideas into
EXECUTIVE SUMMARY
1. Industry Canada, SME Research and Statistics, Key Small Business Statistics, 2012. Can be viewed at:http://www.ic.gc.ca/eic/site/061.
nsf/eng/02718.html.
2. Deloitte Canada, Age of Disruption: Are Canadian Firms Prepared?, 2015. Can be viewed at:http://www2.deloitte.com/ca/en/pages/
insights-and-issues/articles/future-of-productivity-2015.html
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 4
Venture capital is a form of equity ?nancing for
innovation-based early-stage technology ?rms. These
types of start-ups are creating brand new products, so
the growth potential is enormous, but the risk of failure
is also very high. That is why traditional forms of
funding, such as bank loans and asset-based lending,
are not appropriate.
Firstly, these companies have little, if any, of the
tangible assets that are normally used as security
in conventional ?nancing. Most of their assets are
intangible (software, R&D results, intellectual property
and people). Lenders ?nd it dif?cult to collateralize
debt with products that have not yet demonstrated any
market success.
There is a high level of uncertainty linked to R&D
activities and the development of unproven new
technologies. Many companies are seeking to create
new needs and new products in markets where it
is dif?cult to foresee what the demand might be.
Particularly with technology companies, new solutions
and business models emerge all the time and many of
these might not work.
There is also a high level of information asymmetry
between the entrepreneur and the investor for
technology start-ups. It is not enough to review the
?nancial statements and business plan. In brand new
companies where there are no revenues or pro?ts,
the investor needs a detailed understanding of what
is going on inside the company to judge whether
it is headed for success. Again this illustrates why
conventional lenders such as chartered banks, have
little incentive to target these clients.
Finally, it often takes a long time, up to seven years
or more, to develop, commercialize, market and start
generating revenues—the stage where companies can
launch an initial public offering (IPO) or are acquired.
Venture capital investors do not lend money.
Instead, they buy shares of a ?rm, which gives them
WHAT IS VENTURE CAPITAL?
WHY IS THE RISK SO MUCH HIGHER FOR THESE
COMPANIES?
products. Our objective should be nothing less than
to build a dynamic, attractive venture capital industry
that can provide the equity and expertise to support
the most innovative, technology companies in the
world.
The Canadian Chamber of Commerce offers a variety
of proposals to help transform the venture capital
industry in Canada:
1. Incentivize angels: make British Columbia’s
investment tax credit a national program
2. Provide a tax exemption on the capital gains from
venture capital
3. Pull in more investors with ?ow-through shares
for entrepreneurial companies that are ?nancing
the long development cycles for innovative
technologies
4. Increase government investment in venture capital
funds
5. Invest in incubators
6. Review regulations on banks, insurance companies
and pension funds
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 5
SPOTLIGHT ON ANGELS
Last year, the Canadian Chamber of Commerce hosted
roundtables with entrepreneurs all across the country
to learn more about their barriers to growth. One of the
biggest challenges they identi?ed was a lack of capital,
and in particular, a need for angel investors.
The entrepreneurs the Canadian Chamber spoke with
said they—and others—need more angel investors
who have a longer-term mindset and less of a “make it
pro?table and ?ip it” mentality.
An angel is an individual who invests his or her own
money in an entrepreneurial company. Angels provide
patient capital that is committed for many years. As
a comparison, angels invest small amounts early and
venture capitalists invest larger amounts later. A
typical angel investor is a successful entrepreneur who
is willing to speculate on new ventures by providing
cash and expertise to nurture their development. Some
of Canada’s most successful technology companies,
such as Mitel, BlackBerry and Shopify, received their
initial support from angel investors.
3
3. National Angel Capital Association. Reports on Angel Activity in Canada can be viewed at:https://nacocanada.com/knowledge/
research/.
an ownership stake and in?uence over business
decisions and strategy. Established venture capital
investors bring specialized teams with industry
expertise, management and networks to access
specialized information on technologies, markets and
competition. Venture capital managers work closely
with a company’s management team to help build the
company and, eventually, prepare an exit.
Venture capital is, by its very nature, highly illiquid
and risky. Traditional ?nancing sources are not well
equipped for such an environment.
Yet, capital is the essential tool for fast-growing
companies. If Canada can craft policies that increase
its availability for fast-growth ?rms, the potential for
bene?ts is very great.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 6
Venture capital is the lifeblood of innovation—turning
ideas into products that form the basis for new
businesses. These innovative, early-stage technology
companies create a disproportionate amount of
the high-paying, highly skilled jobs for Canadians.
Consider that they represent less than 5% of businesses
in Canada but account for 45% of net new job creation.
4
This innovation is also particularly critical to the
Canadian economy because the development and
application of advanced technologies is accelerating
and has the potential to impact each and every
business. According to a study by Deloitte, 60% of
Canadian companies think the pace of change will
increase over the next ?ve to 10 years. As it does, the
pace of technology-driven disruption will grow, and
Canada’s economic well-being will depend, more than
ever, on its competitiveness—on how well Canadian
businesses can adapt and develop new technologies.
That is why Canada needs a continuous churn of new
technology ?rms because they are so important for
developing new ideas and technologies.
5
Large established ?rms are usually much slower to
develop new opportunities and technologies outside
their set product lines. In fact, studies show that a
dollar invested in venture capital is three times more
effective in creating patents than a dollar invested in
corporate R&D. Though venture capital represented
less than 3% of corporate R&D
6
from 1983 to 1992, it
accounted for 8% of industrial patenting during the
same time.
7
The companies that are backed by venture
capital are also growth engines, growing more than
?ve times faster than the overall economy.
Finally, there are enormous intangible bene?ts of
venture capital that are impossible to quantify. Most
importantly, these ?rms generate wealth and talent
that are reinvested in the next generation of technology
start-ups. These serial entrepreneurs are always
looking for the next big opportunity and they provide
a source of experienced management talent. Alongside
business angels, venture capital funds play a critical
role in linking these pools of wealth and talent to new
start-up companies.
BIG RISKS, ENORMOUS BENEFITS FOR CANADA
Canada’s venture capital industry is growing
impressively but is still small and hitting below its
weight, particularly when compared to much larger
venture capital industries in the U.S. During the
course of 2014, the Canadian Chamber of Commerce
spoke with dozens of entrepreneurs leading
fast-growing companies who said one of the biggest
hurdles they faced was securing capital to take their
companies to the next level. Entrepreneurs observed
the capital gap is largest when moving from R&D to
commercialization.
Ominously, several mentioned the continuous pressure
they are under to relocate to the United States to be
closer to sources of capital.
The adjacent chart shows how Canadian jurisdictions
are dwarfed by the major U.S. centres, with Ontario
attracting just a twentieth of the venture capital
investment of California. Overall, Canadian venture
capital funds invested $2.3 billion in Canada in 2014,
a solid 31% gain over 2013, however, this is still well
below a peak of $4 billion in the late 1990s.
HOW IS CANADA DOING?
4. Industry Canada, SME Research and Statistics, Key Small Business Statistics, 2012. Can be viewed at:http://www.ic.gc.ca/eic/site/061.
nsf/eng/02718.html.
5. Deloitte Canada. “Age of Disruption – Are Canadian Firms Prepared?” Deloitte Future of Canada Series, Can be viewed athttp://www2.
deloitte.com/ca/en/pages/insights-and-issues/articles/future-of-productivity-2015.html
6. Canadian Venture Capital Association and Industry Canada, The Performance of Canadian Firms that Received Venture Capital Financing,
2013. Can be viewed at:http://www.cvca.ca/wp-content/uploads/2014/07/VC_Study_Final_English_September_4_2013.pdf.
7. Ibid.
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 7
Canadian Venture Capital Invested (millions of C$)
While early-stage venture capital is growing,
later-stage start-up ?nancing is actually in decline at
the important IPO stage. The past three years have
seen a sharp reduction in capital raised by
TSX-Venture-listed companies and a steep decline in
new listings. In fact, the amount of capital raised for
TSX-Venture companies has tumbled from $10.1 billion
in 2011 to $6 billion in 2012 and to $3.8 billion in 2013
before recovering to just over $5 billion last year. The
new listings show a similar decline, falling from 334 in
2011 to 240 in 2012 and to just 158 in 2013.
Numerous experts cited the low rates of return
for venture capital funds in Canada as a barrier to
attracting more funding. This is not unusual in such a
high-risk industry. For example, the pooled average
annual internal rate of return (IRR) of U.S. venture
capital funds for the 10 years ending December 2000
was a staggering 25.7%, only to be followed by a
miserable -0.8% average over the next decade. Yet, if
one chose the 10 years ended June 2012, performance
perked up to a more respectable 3.5%.
8
The point is
that the high risk and variability of returns provides
an opportunity for government to play a valuable, but
limited role.
State/Province
North American VC Rankings
California
Massachusetts
New York
Texas
Washington
Illinois
Florida
Ontario
Colorado
Utah
Pennsylvania
Quebec
Connecticut
Georgia
Virginia
British Columbia
30, 699
5, 182
4, 726
1, 664
1, 384
1, 194
961
906
882
881
858
604
572
559
526
506
54.3
9.2
8.4
2.9
2.4
2.1
1.7
1.6
1.6
1.6
1.5
1.1
1
1
0.9
0.9
2014 VC Invested
(C$ millions)
2014
North American
Market Share
(%)
8. Josh Lerner, Ann Leamon and Susana Garcia-Robles, 2013, Best Practices in Creating a Venture Capital Ecosystem, IDB Group. Can be
viewed at:http://lavca.org/wp-content/uploads/2013/12/Best-Practices-in-Creating-a-VC-Ecosystem.pdf.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 8
THE SOLUTIONS: TO MAKE CANADA A
VENTURE CAPITAL POWERHOUSE
The objective is to build the most attractive venture
capital industry that can provide the equity and
expertise to build world-leading technology
companies. The Canadian Chamber of Commerce has
a plan to transform the venture capital industry in
Canada:
1. Incentivize angels: make British Columbia’s
investment tax credit a national program
We need more angels, and British Columbia has a
spectacularly successful, tested program that the
federal government could emulate at the national
level. The province gives investors a 30% refundable
tax credit for investments of up to $200,000 in eligible
businesses, a maximum tax credit of $60,000 per
investor. The investors must hold the principal amount
for at least ?ve years or pay back part of the tax credit.
A study at UBC
9
showed that for every $1 in provincial
tax credits issued, the companies ended up paying
$2.92 in Canadian taxes (sales taxes, income taxes and
corporate taxes).
The federal government should establish a 15%
refundable tax credit on eligible start-ups that would
be matched by the provinces. A country-wide 30% tax
credit would incentivize angel investors to do more
and to hopefully grow the angel community.
2. Sweeten the deal: provide a tax exemption on
the capital gains from venture capital
The capital gains in tax-free savings accounts (TFSAs)
are exempt from taxation, a helpful boost to retirement
savings. By providing a similar treatment for venture
capital, the government would make Canada a very
attractive destination for investors. Because so many
venture capital investments fail to make any pro?ts, it
is critical that the successful ones have the large returns
that can justify investing in venture capital funds.
3. Pull in more investors with ?ow-through
shares for technology companies
For 25 years, ?ow-through shares, a uniquely
Canadian tax innovation, have generated
billions of dollars for mining exploration and
enabled the development of some of Canada’s
largest mines. Just in the past ?ve years,
Canadian mining ?rms have raised $2.5 billion
using ?ow-through shares.
The way it works: the tax deductions for
exploration and development expenditures
are of no use to companies that will not have
taxable income for years. Flow-through
shares enable them to renounce qualifying
expenditures and transfer them to their
9. Thomas Hellmann and Paul Schure, 2010, An Evaluation of the Venture Capital Program in British Columbia, Report prepared for the B.C.
Ministry of Small Business, Technology and Economic Development. Can be viewed at:http://strategy.sauder.ubc.ca/hellmann/pdfs/
Hellmann%20Schure%202010%20Venture%20Capital%20Report.pdf.
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 9
investors. Someone who purchases shares in a
mineral exploration company gets the potential
return along with a nice tax deduction.
This would work for innovative technology
companies that will not have any income for
the years it takes to develop a new product.
In fact, a study by PricewaterhouseCoopers
LLP in 2010 analyzed the potential economic
impacts of allowing the biotechnology sector
to use ?ow-through share ?nancing. The study
predicted an increase of R&D spending by
$411 million, a total gross output impact of
$967 million, and the creation of 7,945 full-time
equivalent jobs. That same study also points
to an increase in government taxes collected,
totaling over $80 million.
The government should make ?ow-through
shares available to all types of technology
companies, not just mining companies.
4. Increase government investment in
venture capital
The federal government’s Venture Capital Action
Plan (VCAP) was announced in 2013 to provide $400
million in funding over a decade to attract $1 billion
in private capital to various venture capital funds of
funds. The program has been very successful because
government investment must be matched by private
sector funding—that is the fund managers must go
out and raise money from the private investors. The
government should double the size of the VCAP to
$800 million and consider placing a 3% cap on the
return on government investment in order to boost
the returns received by private sector venture capital
investors. This improves the return of private sector
investments while leveraging up the funding
for entrepreneurs.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 10
For more information, please contact:
Hendrik Brakel | Senior Director, Economic, Financial & Tax Policy | 613.238.4000 (284) | [email protected]
5. Invest in incubators
Business incubators are organizations that
support start-ups and new companies by
providing resources and services, such as
mentorship, funding, networking, training and
of?ce space, to accelerate their development.
Incubators often vary widely in services
provided and in costs to be accepted, but
most entrepreneurs ?nd them very valuable.
However, the application process is often very
dif?cult, with hundreds of companies applying
for a small number of spaces. They are also far
more easily available in the biggest cities.
Governments must invest in incubators as a
key part of bringing together start-ups, mature
companies and post-secondary institutions.
These can help foster “business clusters”:
organizations and spaces where start-ups,
mature businesses, post-secondary institutions
and governments can collaborate to accelerate
learning and innovation. Examples include
Montreal’s Notman House, the Waterloo
Region’s Communitech, Toronto’s OneEleven
and Vancouver’s Launch Academy.
10
For this reason, the government should spend
money to support incubators in partnership
with universities in order to grow their size so
they can serve more companies and build new
ones in communities across Canada. There is
an amazing array of Canadian incubators and
accelerators
11
that could be expanded.
6. Review regulations on banks, insurance
companies and pension funds
The government should consider changes to guidelines
and regulations to encourage ?nancial institutions and
pension funds to invest a small portion of assets in
venture capital funds.
10. Deloitte Canada. “Age of Disruption – Are Canadian Firms Prepared?” Deloitte Future of Canada Series, Can be viewed athttp://www2.
deloitte.com/ca/en/pages/insights-and-issues/articles/future-of-productivity-2015.html
11. Rob Lewis, “The Comprehensive List of Canadian Incubators and Accelerators,” TechVibes, April 13, 2011. Can be viewed at:http://www.
techvibes.com/blog/the-comprehensive-list-of-canadian-incubators-and-accelerators-2011-04-13.
This report was made possible by the
generous support of our sponsors
doc_976702167.pdf
During this brief elucidation relating to stimulating canadian innovation how to boost canadas venture capital industry.
Stimulating Canadian Innovation:
How to Boost Canada’s Venture Capital Industry
September 2015
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 2
Get plugged in.
As Canada’s largest and most in?uential business association, we are the primary and
vital connection between business and the federal government. With our network of over
450 chambers of commerce and boards of trade, representing 200,000 businesses of all
sizes, in all sectors of the economy and in all regions, we help shape public policy and
decision-making to the bene?t of businesses, communities and families across Canada.
Be heard.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
WHAT IS CENTURE CAPITALISM
WHY IS THE RISK SO MUCH HIGHER FOR THESE COMPANIES?
BIG RISK, ENORMOUS BENEFITS FOR CANADA
HOW IS CANADA DOING?
THE SOLUTION: TO MAKE CANADA A VENTURE CAPITAL POWERHOUSE
3
4
4
6
6
8
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 3
Venture Capital is a critical part of the Canadian
economy because it provides the funding that enables
innovative, early-stage technology companies to
survive and grow.
These fast growing ?rms represent just 5% of the
companies in Canada but they have a huge impact
on our ability to innovate and on our prosperity,
accounting for 45% of new job creation.
1
Designing policies to support and stimulate
entrepreneurial ventures is a challenge; there is no
single sector they occupy, nor do they have common
business strategies. Their challenges are as diverse as
their various businesses.
But one problem is common and acute among these
unusual enterprises—almost all have dif?culty ?nding
the capital they need to realize their business plans.
Improving and growing the venture capital industry
is one strategy government can pursue that could
signi?cantly bene?t most fast-growing entrepreneurial
?rms. Such a strategy has the potential to transform
Canada—to make it more innovative—by creating new
businesses, technologies and jobs.
It is particularly timely to consider such a strategy.
The Canadian economy is challenged by headwinds
that will reduce the rate of GDP growth and job
creation in the coming years. The natural resources
and commodities that were so central to business
investment could be facing many years of price
weakness. The Canadian consumers who borrowed
and spent throughout the global crisis must contend
with record debt levels. The “nest egg” that supports
consumer con?dence is often housing, but the
Canadian housing market is overvalued by 10% to
30% according to the Bank of Canada. If Canada’s
traditional sources of growth are ebbing, then it
needs to increase productivity and innovation in
order to expand its economy into new services and
technologies.
More importantly, a study by Deloitte
2
shows
that many Canadian companies are not ready for
“disruptive innovation”—the huge leaps of technology
that will put our traditional businesses at risk.
Consider how communication has changed over the
past 20 years, from basic email, web pages and desktop
PCs to social media, smart apps, mobile web and
powerful smartphones and tablets. Technology has
profoundly transformed the way we interact with each
other, the way we do business and the nature of work.
Today, technological advancement is accelerating
and transforming our economy by creating new
products and services, increasing ef?ciency and cost
savings, and even launching new industries. Canada
must accelerate its own innovation and develop
new technologies here at home to avoid getting left
behind. What can government do? Canada has already
invested massively in R&D. In fact, public spending
on research and development, at 0.81% of GDP places
Canada ahead of countries like the U.S., the U.K. and
Japan (but still behind countries like Germany, Sweden
and Finland.) The trouble is that Canada lags on the
commercialization of products.
How do we get our great ideas developed and into
markets? By helping entrepreneurs to build new
innovative companies. A critical ingredient is having
a vibrant, thriving venture capital industry that can
provide the investment and expertise to turn ideas into
EXECUTIVE SUMMARY
1. Industry Canada, SME Research and Statistics, Key Small Business Statistics, 2012. Can be viewed at:http://www.ic.gc.ca/eic/site/061.
nsf/eng/02718.html.
2. Deloitte Canada, Age of Disruption: Are Canadian Firms Prepared?, 2015. Can be viewed at:http://www2.deloitte.com/ca/en/pages/
insights-and-issues/articles/future-of-productivity-2015.html
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 4
Venture capital is a form of equity ?nancing for
innovation-based early-stage technology ?rms. These
types of start-ups are creating brand new products, so
the growth potential is enormous, but the risk of failure
is also very high. That is why traditional forms of
funding, such as bank loans and asset-based lending,
are not appropriate.
Firstly, these companies have little, if any, of the
tangible assets that are normally used as security
in conventional ?nancing. Most of their assets are
intangible (software, R&D results, intellectual property
and people). Lenders ?nd it dif?cult to collateralize
debt with products that have not yet demonstrated any
market success.
There is a high level of uncertainty linked to R&D
activities and the development of unproven new
technologies. Many companies are seeking to create
new needs and new products in markets where it
is dif?cult to foresee what the demand might be.
Particularly with technology companies, new solutions
and business models emerge all the time and many of
these might not work.
There is also a high level of information asymmetry
between the entrepreneur and the investor for
technology start-ups. It is not enough to review the
?nancial statements and business plan. In brand new
companies where there are no revenues or pro?ts,
the investor needs a detailed understanding of what
is going on inside the company to judge whether
it is headed for success. Again this illustrates why
conventional lenders such as chartered banks, have
little incentive to target these clients.
Finally, it often takes a long time, up to seven years
or more, to develop, commercialize, market and start
generating revenues—the stage where companies can
launch an initial public offering (IPO) or are acquired.
Venture capital investors do not lend money.
Instead, they buy shares of a ?rm, which gives them
WHAT IS VENTURE CAPITAL?
WHY IS THE RISK SO MUCH HIGHER FOR THESE
COMPANIES?
products. Our objective should be nothing less than
to build a dynamic, attractive venture capital industry
that can provide the equity and expertise to support
the most innovative, technology companies in the
world.
The Canadian Chamber of Commerce offers a variety
of proposals to help transform the venture capital
industry in Canada:
1. Incentivize angels: make British Columbia’s
investment tax credit a national program
2. Provide a tax exemption on the capital gains from
venture capital
3. Pull in more investors with ?ow-through shares
for entrepreneurial companies that are ?nancing
the long development cycles for innovative
technologies
4. Increase government investment in venture capital
funds
5. Invest in incubators
6. Review regulations on banks, insurance companies
and pension funds
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 5
SPOTLIGHT ON ANGELS
Last year, the Canadian Chamber of Commerce hosted
roundtables with entrepreneurs all across the country
to learn more about their barriers to growth. One of the
biggest challenges they identi?ed was a lack of capital,
and in particular, a need for angel investors.
The entrepreneurs the Canadian Chamber spoke with
said they—and others—need more angel investors
who have a longer-term mindset and less of a “make it
pro?table and ?ip it” mentality.
An angel is an individual who invests his or her own
money in an entrepreneurial company. Angels provide
patient capital that is committed for many years. As
a comparison, angels invest small amounts early and
venture capitalists invest larger amounts later. A
typical angel investor is a successful entrepreneur who
is willing to speculate on new ventures by providing
cash and expertise to nurture their development. Some
of Canada’s most successful technology companies,
such as Mitel, BlackBerry and Shopify, received their
initial support from angel investors.
3
3. National Angel Capital Association. Reports on Angel Activity in Canada can be viewed at:https://nacocanada.com/knowledge/
research/.
an ownership stake and in?uence over business
decisions and strategy. Established venture capital
investors bring specialized teams with industry
expertise, management and networks to access
specialized information on technologies, markets and
competition. Venture capital managers work closely
with a company’s management team to help build the
company and, eventually, prepare an exit.
Venture capital is, by its very nature, highly illiquid
and risky. Traditional ?nancing sources are not well
equipped for such an environment.
Yet, capital is the essential tool for fast-growing
companies. If Canada can craft policies that increase
its availability for fast-growth ?rms, the potential for
bene?ts is very great.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 6
Venture capital is the lifeblood of innovation—turning
ideas into products that form the basis for new
businesses. These innovative, early-stage technology
companies create a disproportionate amount of
the high-paying, highly skilled jobs for Canadians.
Consider that they represent less than 5% of businesses
in Canada but account for 45% of net new job creation.
4
This innovation is also particularly critical to the
Canadian economy because the development and
application of advanced technologies is accelerating
and has the potential to impact each and every
business. According to a study by Deloitte, 60% of
Canadian companies think the pace of change will
increase over the next ?ve to 10 years. As it does, the
pace of technology-driven disruption will grow, and
Canada’s economic well-being will depend, more than
ever, on its competitiveness—on how well Canadian
businesses can adapt and develop new technologies.
That is why Canada needs a continuous churn of new
technology ?rms because they are so important for
developing new ideas and technologies.
5
Large established ?rms are usually much slower to
develop new opportunities and technologies outside
their set product lines. In fact, studies show that a
dollar invested in venture capital is three times more
effective in creating patents than a dollar invested in
corporate R&D. Though venture capital represented
less than 3% of corporate R&D
6
from 1983 to 1992, it
accounted for 8% of industrial patenting during the
same time.
7
The companies that are backed by venture
capital are also growth engines, growing more than
?ve times faster than the overall economy.
Finally, there are enormous intangible bene?ts of
venture capital that are impossible to quantify. Most
importantly, these ?rms generate wealth and talent
that are reinvested in the next generation of technology
start-ups. These serial entrepreneurs are always
looking for the next big opportunity and they provide
a source of experienced management talent. Alongside
business angels, venture capital funds play a critical
role in linking these pools of wealth and talent to new
start-up companies.
BIG RISKS, ENORMOUS BENEFITS FOR CANADA
Canada’s venture capital industry is growing
impressively but is still small and hitting below its
weight, particularly when compared to much larger
venture capital industries in the U.S. During the
course of 2014, the Canadian Chamber of Commerce
spoke with dozens of entrepreneurs leading
fast-growing companies who said one of the biggest
hurdles they faced was securing capital to take their
companies to the next level. Entrepreneurs observed
the capital gap is largest when moving from R&D to
commercialization.
Ominously, several mentioned the continuous pressure
they are under to relocate to the United States to be
closer to sources of capital.
The adjacent chart shows how Canadian jurisdictions
are dwarfed by the major U.S. centres, with Ontario
attracting just a twentieth of the venture capital
investment of California. Overall, Canadian venture
capital funds invested $2.3 billion in Canada in 2014,
a solid 31% gain over 2013, however, this is still well
below a peak of $4 billion in the late 1990s.
HOW IS CANADA DOING?
4. Industry Canada, SME Research and Statistics, Key Small Business Statistics, 2012. Can be viewed at:http://www.ic.gc.ca/eic/site/061.
nsf/eng/02718.html.
5. Deloitte Canada. “Age of Disruption – Are Canadian Firms Prepared?” Deloitte Future of Canada Series, Can be viewed athttp://www2.
deloitte.com/ca/en/pages/insights-and-issues/articles/future-of-productivity-2015.html
6. Canadian Venture Capital Association and Industry Canada, The Performance of Canadian Firms that Received Venture Capital Financing,
2013. Can be viewed at:http://www.cvca.ca/wp-content/uploads/2014/07/VC_Study_Final_English_September_4_2013.pdf.
7. Ibid.
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 7
Canadian Venture Capital Invested (millions of C$)
While early-stage venture capital is growing,
later-stage start-up ?nancing is actually in decline at
the important IPO stage. The past three years have
seen a sharp reduction in capital raised by
TSX-Venture-listed companies and a steep decline in
new listings. In fact, the amount of capital raised for
TSX-Venture companies has tumbled from $10.1 billion
in 2011 to $6 billion in 2012 and to $3.8 billion in 2013
before recovering to just over $5 billion last year. The
new listings show a similar decline, falling from 334 in
2011 to 240 in 2012 and to just 158 in 2013.
Numerous experts cited the low rates of return
for venture capital funds in Canada as a barrier to
attracting more funding. This is not unusual in such a
high-risk industry. For example, the pooled average
annual internal rate of return (IRR) of U.S. venture
capital funds for the 10 years ending December 2000
was a staggering 25.7%, only to be followed by a
miserable -0.8% average over the next decade. Yet, if
one chose the 10 years ended June 2012, performance
perked up to a more respectable 3.5%.
8
The point is
that the high risk and variability of returns provides
an opportunity for government to play a valuable, but
limited role.
State/Province
North American VC Rankings
California
Massachusetts
New York
Texas
Washington
Illinois
Florida
Ontario
Colorado
Utah
Pennsylvania
Quebec
Connecticut
Georgia
Virginia
British Columbia
30, 699
5, 182
4, 726
1, 664
1, 384
1, 194
961
906
882
881
858
604
572
559
526
506
54.3
9.2
8.4
2.9
2.4
2.1
1.7
1.6
1.6
1.6
1.5
1.1
1
1
0.9
0.9
2014 VC Invested
(C$ millions)
2014
North American
Market Share
(%)
8. Josh Lerner, Ann Leamon and Susana Garcia-Robles, 2013, Best Practices in Creating a Venture Capital Ecosystem, IDB Group. Can be
viewed at:http://lavca.org/wp-content/uploads/2013/12/Best-Practices-in-Creating-a-VC-Ecosystem.pdf.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 8
THE SOLUTIONS: TO MAKE CANADA A
VENTURE CAPITAL POWERHOUSE
The objective is to build the most attractive venture
capital industry that can provide the equity and
expertise to build world-leading technology
companies. The Canadian Chamber of Commerce has
a plan to transform the venture capital industry in
Canada:
1. Incentivize angels: make British Columbia’s
investment tax credit a national program
We need more angels, and British Columbia has a
spectacularly successful, tested program that the
federal government could emulate at the national
level. The province gives investors a 30% refundable
tax credit for investments of up to $200,000 in eligible
businesses, a maximum tax credit of $60,000 per
investor. The investors must hold the principal amount
for at least ?ve years or pay back part of the tax credit.
A study at UBC
9
showed that for every $1 in provincial
tax credits issued, the companies ended up paying
$2.92 in Canadian taxes (sales taxes, income taxes and
corporate taxes).
The federal government should establish a 15%
refundable tax credit on eligible start-ups that would
be matched by the provinces. A country-wide 30% tax
credit would incentivize angel investors to do more
and to hopefully grow the angel community.
2. Sweeten the deal: provide a tax exemption on
the capital gains from venture capital
The capital gains in tax-free savings accounts (TFSAs)
are exempt from taxation, a helpful boost to retirement
savings. By providing a similar treatment for venture
capital, the government would make Canada a very
attractive destination for investors. Because so many
venture capital investments fail to make any pro?ts, it
is critical that the successful ones have the large returns
that can justify investing in venture capital funds.
3. Pull in more investors with ?ow-through
shares for technology companies
For 25 years, ?ow-through shares, a uniquely
Canadian tax innovation, have generated
billions of dollars for mining exploration and
enabled the development of some of Canada’s
largest mines. Just in the past ?ve years,
Canadian mining ?rms have raised $2.5 billion
using ?ow-through shares.
The way it works: the tax deductions for
exploration and development expenditures
are of no use to companies that will not have
taxable income for years. Flow-through
shares enable them to renounce qualifying
expenditures and transfer them to their
9. Thomas Hellmann and Paul Schure, 2010, An Evaluation of the Venture Capital Program in British Columbia, Report prepared for the B.C.
Ministry of Small Business, Technology and Economic Development. Can be viewed at:http://strategy.sauder.ubc.ca/hellmann/pdfs/
Hellmann%20Schure%202010%20Venture%20Capital%20Report.pdf.
Stimulating Canadian Innovation | The Canadian Chamber of Commerce 9
investors. Someone who purchases shares in a
mineral exploration company gets the potential
return along with a nice tax deduction.
This would work for innovative technology
companies that will not have any income for
the years it takes to develop a new product.
In fact, a study by PricewaterhouseCoopers
LLP in 2010 analyzed the potential economic
impacts of allowing the biotechnology sector
to use ?ow-through share ?nancing. The study
predicted an increase of R&D spending by
$411 million, a total gross output impact of
$967 million, and the creation of 7,945 full-time
equivalent jobs. That same study also points
to an increase in government taxes collected,
totaling over $80 million.
The government should make ?ow-through
shares available to all types of technology
companies, not just mining companies.
4. Increase government investment in
venture capital
The federal government’s Venture Capital Action
Plan (VCAP) was announced in 2013 to provide $400
million in funding over a decade to attract $1 billion
in private capital to various venture capital funds of
funds. The program has been very successful because
government investment must be matched by private
sector funding—that is the fund managers must go
out and raise money from the private investors. The
government should double the size of the VCAP to
$800 million and consider placing a 3% cap on the
return on government investment in order to boost
the returns received by private sector venture capital
investors. This improves the return of private sector
investments while leveraging up the funding
for entrepreneurs.
Stimulating Canadian Innovation| The Canadian Chamber of Commerce 10
For more information, please contact:
Hendrik Brakel | Senior Director, Economic, Financial & Tax Policy | 613.238.4000 (284) | [email protected]
5. Invest in incubators
Business incubators are organizations that
support start-ups and new companies by
providing resources and services, such as
mentorship, funding, networking, training and
of?ce space, to accelerate their development.
Incubators often vary widely in services
provided and in costs to be accepted, but
most entrepreneurs ?nd them very valuable.
However, the application process is often very
dif?cult, with hundreds of companies applying
for a small number of spaces. They are also far
more easily available in the biggest cities.
Governments must invest in incubators as a
key part of bringing together start-ups, mature
companies and post-secondary institutions.
These can help foster “business clusters”:
organizations and spaces where start-ups,
mature businesses, post-secondary institutions
and governments can collaborate to accelerate
learning and innovation. Examples include
Montreal’s Notman House, the Waterloo
Region’s Communitech, Toronto’s OneEleven
and Vancouver’s Launch Academy.
10
For this reason, the government should spend
money to support incubators in partnership
with universities in order to grow their size so
they can serve more companies and build new
ones in communities across Canada. There is
an amazing array of Canadian incubators and
accelerators
11
that could be expanded.
6. Review regulations on banks, insurance
companies and pension funds
The government should consider changes to guidelines
and regulations to encourage ?nancial institutions and
pension funds to invest a small portion of assets in
venture capital funds.
10. Deloitte Canada. “Age of Disruption – Are Canadian Firms Prepared?” Deloitte Future of Canada Series, Can be viewed athttp://www2.
deloitte.com/ca/en/pages/insights-and-issues/articles/future-of-productivity-2015.html
11. Rob Lewis, “The Comprehensive List of Canadian Incubators and Accelerators,” TechVibes, April 13, 2011. Can be viewed at:http://www.
techvibes.com/blog/the-comprehensive-list-of-canadian-incubators-and-accelerators-2011-04-13.
This report was made possible by the
generous support of our sponsors
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