MaRS

Money from the feds

Lack of money is a chronic and critical problem facing high tech start-ups.  A recent report by Thomson Reuters, research partner for the CVCA, Canada’s Venture Capital & Private Equity Association, confirmed that the situation has continued to deteriorate during the past year. Declining investments meant that Q3 2009 showed the weakest level of venture capital activity recorded in 14 years.  In the first nine months, investments fell to $682 million, a year over year decline of 36% compared to 2008.  Among Canada’s regions Ontario was particularly hard hit, with a dramatic 87% drop in disbursements.  Analysts predict that total venture capital financing for 2009 may fall below $1 billion, a low not experienced since 1995.

Against this backdrop and continuing volatility in global markets, the federal government has continued to inject venture capital into small and medium-sized enterprises through BDC, the Business Development Bank of Canada.

At BDC Venture Capital Day, a November 16th forum at MaRS, a panel of BDC venture capital managers explained recent federal funding announcements:

• $260 million in venture capital over three years for BDC’s existing portfolio, technology start-ups and later stage companies;
• $90 million over three years to private, independent Canadian venture capital funds;
• $35 million over two years to place direct investments in early stage firms in Southern Ontario through FedDev Ontario; and
• $15 million over two years for FedDev Ontario to invest in Ontario-based venture capital funds focused on Ontario-based opportunities.

Arguably, the overall funding commitment is modest given the critical shortage in the market — and considering that it is spread over several years, regional geographies and mature as well as new companies.  But BDC’s shareholder – Canadian taxpayers – can look at this as a positive step.  BDC’s approach is prudent and diversified.  Money will go primarily toward supporting existing portfolio companies, of which BDC has about 150 in its stable.  The best of these companies must be positioned for continued growth through this challenging period.  In addition, new capital allocated to BDC’s fund-of-funds pool will allow BDC to play a larger role in catalyzing the formation of new Canadian venture capital funds.  This is critical for building a sustainable VC industry in Canada.

How much of BDC’s funding will end up in tech start-ups is anybody’s guess. The hopeful sign is that BDC’s venture capital managers in ICT, life sciences, cleantech and advanced tech – Glenn Egan, Denis Ho and Victor Scutaru – signaled a strong interest in adding promising early stage companies to their client lists during their visit to MaRS.

Make no mistake. BDC venture capital is not a government entitlement program. Companies that met with BDC at the forum encountered seasoned investors looking for profitable returns.  A panel of CEOs who had partnered with BDC told the capacity audience that it was important to have winning technology, a strong leadership team, an attractive and growing market opportunity and a compelling case for financial viability. The message to tech start-ups was clear. If you want BDC as an investor, do your homework and expect tough scrutiny.  MaRS advisors echoed the same message.

It is clear that federal funding at current levels cannot reverse the detrimental trend in early-stage financing. But the recent capital infusion into BDC’s VC arm is helpful and fully consistent with the government’s philosophy of augmenting the VC industry without being the industry.