Venture Capital

Archived Topic Box from the 2003 Third Annual Benchmark Report

Although venture capital investments make up only a small fraction of overall capital markets, its importance goes well beyond dollar value. Through providing funds to small and start-up companies at the critical early stages of development, venture capital investments are an essential element in encouraging innovation and promoting new technologies. In addition to 'seed' capital, venture capital investors provide a wealth of other resources to a growing company. Mentorship benefits such as strategic and management advice from experienced board members, refining of business plans, and assistance with developing networks and alliances can all make the difference between a young company that succeeds and a company that stagnates or fails.

Venture capital investment levels are frequently cited as one of the primary indicators of a region's innovation capacity, and thus of its ability to make productivity improvements. BC performs well on certain of these innovation measures with more university spin-off companies than either Ontario or Quebec and recent improvements in relative performance on R&D expenditures. However, despite the fact that a great deal of scientific innovation is being produced within the province, BC's access to venture capital is low compared to that of competing jurisdictions. Of the roughly $22.5 billion of venture capital assets under management in Canada in 2002 only $1.1 billion (4.9%) was in BC. Similarly, of the $3.2 billion in venture capital raised nationally in 2002 only $194 million (6.1%) was BC based.

Although there are various reasons for the disparity in venture capital access across the country, BC's caps on labour sponsored funds may be one contributing factor. Labour sponsored funds, which offer investors tax credits on contributions, can be an important source of investment capital for small companies. Currently, BC caps contributions to such funds at $80 million annually, a sum that is divided between only two government-approved funds; BC is only one of two provinces with such a cap. Limits on venture capital sources decrease the possibility of entrepreneurs gaining access both to 'seed' capital and investors with relevant skills and contacts in the local community, potentially encouraging new technologies and entrepreneurs to leave BC in search of assistance. New companies often tailor business plans and hiring practices to the local capital environment, meaning growth strategies of small BC companies will not be as aggressive as they might have been given a larger pool of available capital. And, the tendency for employees to leave existing companies to form or join new and innovative companies – the phenomena of "churning" which is common practice in many technology centres – can also be inhibited by a lack of venture capital.

Efforts to improve BC's investment performance should encourage in-bound capital by targeting top tier venture firms to access both their money and expertise and also encourage the pension industry to target investment in Venture Capital. Overall, the focus should be to build a solid, market-driven venture capital industry in BC. Despite access issues, BC is home to a wide array of innovative new companies. With a technology sector that is far more multi-dimensional than those of other highly specialized Canadian technology centers (Montreal, Ottawa and Southern Ontario) BC's companies are as varied as alternative fuels, computer gaming, life sciences, medical devices, digital animation, and communications. With centers of excellence in many of these areas the opportunities for future growth are considerable if necessary steps are taken at both the Federal and Provincial levels to improve tax regimes, capital gains rules, and the treatment of stock options and flow-through shares. Once appropriate reforms are made, BC companies will be in a much better position to take advantage of the province's multitude of resources, and to make progress toward the Premier's Technology Council goal of becoming a top ten world technology centre by 2006.

Sources: NRC-IRAP 2002, based on 2000 data - BC 239 spin-offs, ON 229, QC 110; BCTIA, Access to Capital Survey, December 2002; McDonald and Associates, 2002 - based on quarterly survey of 150 Canadian VC companies.