Q-News

May 2008

If it looks like a token gesture and it quacks like a token gesture, then it's a token gesture!

Posted in Mike's Commentary

There has been plenty of excellent commentary this month regarding the June 11th announcement on the $205 million Ontario Venture Capital Fund (Wellington Financial, Startupnorth) so I’m not going to continue beating a dead horse, but when you really dig into the state of the VC sector (as detailed by the government and well known by everyone else in the investment space) and you look at the Ontario government’s feeble response you have to wonder if anyone at the premier’s office really understands the long term ramifications of a technology sector that has no money available for growth or innovation…or maybe they’re just too busy trying to figure out how much more money they can throw at GM (the last round was a $175 million 50-year interest free loan) to keep the truck plants going!  You can be sure that the ramifications for Ontario’s economy will be a substantial multiple of this commitment.

The following information has been extracted directly from the Ministry of Research and Innovation press release and website:

Funding for innovative companies has declined dramatically in Ontario since its peak in the dotcom era of the late-1990s.

  • In 2007, first time venture capital financing — the first investment a company receives — reached a 12-year low in Ontario. 
  • Early stage venture capital — funding to emerging Ontario companies looking to grow — declined from $1.5 billion in 2000 to $236 million in 2007.
  • This decline in Ontario venture capital has coincided with greatly lowered investment by institutions such as pension funds and insurance companies. In 2000, institutional investors represented 21 per cent of venture financings. This has dropped to one per cent or less in the period from 2005 to 2007.

So in response to a sector that is clearly withering on the vine the best the bureaucrats can come up with is an injection of taxpayer’s money which will contribute a grand total of $18 million to $30 million annually to be divided between selected venture funds (fund details can be found here).  A paltry amount in light of their grandiose expectations for the fund to:

  • Promote the creation of a globally-competitive venture capital industry in Ontario which supports Ontario-based innovative companies
  • Increase the supply and effective deployment of investment capital in Ontario by supporting top-performing fund managers
  • Increase the level of institutional investments in venture capital in Ontario
  • Improve the flow of capital at all stages of investment in innovative Ontario companies

I’m not a big fan of government intervention into any sector but surely they could have come up with a plan that was more innovative and relied on individual tax incentives or credits to stimulate investment along the lines of the successful British Columbia Equity Capital Program.  Additionally, Ontario’s Provincial government should be working closely with Ottawa to simplify cross border tax filing requirements and identify and address impediments to US venture capital investment in earlier stage Canadian technology companies.

 

So despite all the hoopla, what commitment did the Ontario government really make?  Not much from what I see, particularly when you compare the amount to some of the other estimated expenditures detailed in Ontario’s 2008-2009 budget:

Cabinet office                                                   $30.9 million

Small Business and Entrepreneurship                 $27.8 million

Office of the Premier                                         $  2.9 million

Lieutenant Governor                                          $  1.4 million

 

Furthermore, even with the admirable participation from Omers, RBC Capital Partners, Manulife Financial, BDC and TD Bank Financial Group, the total $205 million to be invested over a three or four year time horizon represents only about 5% of the $1.19 billion in new capital invested in 2007, which was down 27% from the $1.64 billion in new capital raised in 2006.

 

 

 

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