Feds on right path with Innovation ecosystem consultations

Hi. I’m from Ottawa and I’m here to help.

As jokes go, it is a tired one, and usually followed by a sarcastic guffaw among friends at the start of any meeting involving the private sector or unions and politicians and/or public servants. You can easily replace “Ottawa” with “Washington”, and turn your mind back to any number of speeches by the late Ronald Reagan.

For the early stage entrepreneurial ecosystem, and certainly the venture community subset, the line is actually a legit description of what the Department of Finance is attempting to with the current industry consultations in the wake of Minister Jim Flaherty’s $400 million budget allocation to the space. Folks think it’s bucks for VC-land. To be more precise, the Minister’s published desire is to help “high growth companies access risk capital”. And to do that, Canada’s venture capital community needs some urgent help.

For those of us from the CVCA who knocked around the corridors of power in 2007-09, trying to draw attention to the 60% drop in the deployment of venture capital across Canada over a three year period, the fact that the problem is in the Minister’s crosshairs is a welcome event. And that’s not to say he didn’t do his part up until now; in three consecutive budgets, hundreds of millions of new dollars were directed at the VC division of the Business Development Bank of Canada, money that seemed to wither on the vine. Some have identified a lack of tolerance for VC-type risk within the profit-minded BDC senior executive team (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept 27-10). Others blame the patient (VCs), while lionizing entrepreneurs even when they fail, as can happen from time to time. Not that any of this matters at this point.

According to BDC’s own financial statements, it largely withdrew from new VC capital deployments just as the Innovation funding industry was going into a tailspin. In 2005, for example, BDC authorized $143 million into the venture space; that figure fell to $95 million in 2011…of which only $60 million was for direct investments in companies. As a percentage of the total amount of VC capital deployed nationally, BDC’s commitments dropped from almost 9% of the national landscape in 2006 to around 6% in 2011. Not the “countercyclical” storyline BDC told the Senate Standing Committee on Banking, Trade and Commerce in December 2010 (see prior post “BDC snows the Senate part 5” Mar 18-11).
It appears that the status quo is no longer acceptable to the Federal Cabinet, and the private sector has been making it clear how appreciative it is that Minister Flaherty and his Finance team have taken such a personal interest in the sector.

My take from the Consultation process is that the government recognizes the challenge before it. The advice ranges depending upon the audience, but in essence, the message has been:

– The government must move quickly;
– It must deploy its resources across the seed, early and mid-stages of Innovation;
– Most institutional investors have vacated the VC landscape, which is a real change from 2002 when BCIMC, OMERS, OTPP, CPPIB and CDP were all directly leading the fundraising syndicates of such firms as Mosaic, Edgestone, Lumira, Celtic, J.L. Albright Ventures and Ventures West;
– To succeed, it must find mechanisms to both recapitalize funds while not ignoring the need for added capital, now, at the individual company level.

If there wasn’t enough evidence that Minister Flaherty and the PM are taking the topic seriously, Sam Duboc has been appointed “Special Advisor” to the Minister on the topic and is participating in much of the consultation process. As a private equity chief himself, Sam has spent many an hour analyzing companies and raising capital – both for his firm and his portfolio companies. And, back when Edgestone Capital Partners was successfully running the CPPIB Canadian VC Fund-of-fund mandate, he was personally involved in reviewing the plans of many of the funds that are in business today; it is also worth noting that the CPPIB VC fund-of-fund Edgestone ran (circa 2002-04 vintage) is in positive return territory (see prior post “CPPIB Q2 2011 General Partner performance numbers” Dec 20-11).

I don’t envy the job of saving the industry where there’s so much conflicting good advice, and even some downright poor stuff they’ve got to wade through too (ie, the Jenkins Report). But at least the government has sounded the alarm bells, and everyone’s now on deck.

MRM