Canada: Boosting Canada's Knowledge Economy: Will New Government Funding Be Enough?

Last Updated: April 16 2013
Article by Ted Maduri

Canada’s venture capital industry has suffered from insufficient funding over the past number of years. This lack of funding poses a significant problem if we want to keep entrepreneurs who will strengthen the Canadian innovation economy in the country.

Canada receives a “D” on investment capital spending

In a new report released by the Conference Board of Canada on April 4, 2013, Canada was ranked second-to-last among its peers in venture capital investment and business R&D spending. The Conference Board of Canada’s President and Chief Executive Officer Daniel Muzyka said in a news release regarding the report that “[w]hile governments, other organizations and individuals have done many things right, the gaps in innovation investment and activities create serious consequences for our economy and society. More importantly, we have now reached a point where we are seriously impacting the wealth and opportunities for following generations.”

It’s not all bad news - Canada received above-average ratings on scientific research quality and the creation of new businesses. But, as Mr. Muzyka stated in the release, “these signs of promise are not being turned into commercially viable products and services.” Canada performed poorly on most of the 21 indicators of innovation, receiving 13 “D” ratings and zero “A”s. Specifically, Canada received a “D” grade on venture capital, with the amount of venture capital investment in Canada amounting to less than half of those countries which received an “A” (i.e., the United States, Sweden and Switzerland). Canada also received a “D” on innovation indicators such as business enterprise R&D spending, patents by population and information and communications technology investment.

New venture capital fund for entrepreneurs

The timing of the federal and provincial government announcements regarding the establishment of a new venture capital fund couldn’t be more appropriate. The federal government, as part of its 2012 and 2013 Economic Action Plan, will contribute $400 million with an aim to increase private sector investments in early-stage risk capital and to support private sector-led large-scale venture capital funds. In January 2013, Prime Minister Stephen Harper announced the Venture Capital Action Plan, a comprehensive strategy to deploy the $400 million to bolster investment in Canadian start-up companies over the next seven to 10 years. In addition, the federal government, as part of its Economic Action Plan 2013, plans to contribute $60 million over five years in an effort to help expand existing incubator and accelerator organizations in Canada.

On March 19, 2013, Ontario Premier Kathleen Wynne announced a $50 million provincial contribution to a new venture capital fund to “support innovation, help build a stronger economy and create more jobs across the province”, according to the provincial government’s website. The new fund for entrepreneurs will be in addition to the existing Ontario Venture Capital Fund (the “OVCF”), established in 2008.

The provincial government is aiming to have the new venture capital fund investing within 18 months and to have fund investors announced within the next six to 12 months, with the fund manager being named shortly after. The new fund may be faced with some criticism, as the Canadian venture capital industry continues to struggle more than four years after the establishment of the OVCF. The governments’ hope is that the success of the new fund will emulate the success of the OVCF, which saw the initial investment of $90 million lead to more than $750 million in private capital.

Applying for funding

Details regarding the new fund, specifically eligibility for funding and the application process, should be released over the next 18 months. The new fund may be structured like the existing OVCF. According to the OVCF’s website, the OVCF focuses on fund investments and makes direct operating company investments as a co-investor alongside fund partners. A “Fund Finder” can be found on the OVCF’s website, whereby those seeking funding can select their industry focus (IT, life science/healthcare or cleantech) and be provided with a list of venture capital fund firms and firm contact details. Those seeking funding from the existing OVCF are to contact the venture capital firms directly. OVCF funding is available for companies at all stages of development, from seed investing to expansion stage investing. Likely, there will be many similarities between the OVCF and the newly-established Ontario fund.

The recently announced venture capital fund may prove to be crucial in stimulating private investment and increasing innovation in Canada.

The federal and provincial government announcements can be found here and here.

The Conference Board of Canada report can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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