AVAC explores new funding options as it moves into equity co-financing with angels

Cap on ROI limiting growth potential

One of Canada's most distinctive and successful innovation engines may be getting a makeover. AVAC Ltd is currently being assessed by the Alberta government to determine whether changes should be made that would allow the investor in provincial agriculture and agrifood value-added products and services to become self-sustaining.

The decision to review AVAC comes as the not-for-profit corporation extends its financial support to other areas such as clean tech, information and communications technologies and industrial technologies (including oil and gas) and ramps up a new $10-million angel co-investment fund awarded to it last year by Alberta Enterprise Corp.

In its most recent annual report, AVAC board chairman Dr Rob Rennie noted that the corporation was at a "pivotal stage" as the original provincial government funding nears its end, prompting it to work with the province and an outside consultant "to identify options and move toward recommendations and next steps".

"It's appropriate that after 16 years the AVAC model is examined and tweaked/changed/liberated. There are a number of restrictions on our sustainability," says Dr Michael Raymont, who was recently appointed AVAC's permanent president and CEO after serving nine months in an interim capacity (see page 7). "The review will result in options for a Cabinet decision expected by the end of the year."

Since its inception, AVAC — with offices in Calgary and Edmonton — has received $130 million in government assistance. The Alberta government has provided the majority of support but the federal government has also contributed $9.9 million through a matching agreement with the province. AVAC has traditionally been funded through the agriculture ministry but more recently funding has been allocated through the ministry of Enterprise and Advanced Education. The shift has coincided with an expansion of the sectors it supports, moving from a complete focus on agriculture and agrifood to one in which those sectors now account for approximately 50%.

Since 2006, AVAC has been investing in areas where agriculture and information intersect, including robotic and vision systems, pattern recognition and satellite surveillance.

The new, diversified approach to investing has allowed AVAC to generate impressive returns as gauged by a number of indicators:

• Investment in more than 100 start-ups, with 61 reaching the revenue stage;

• Investees have generated more than $1 billion in sales and $50 million in annual payroll;

• Direct payback to Alberta government of approximately $10 million annually; and,

• Investment of $32 million in four fund of funds, leading to $65 million in new investment in Alberta companies.

exploring new funding arrangement

Despite AVAC's success in stimulating target sectors, provincial funding has become more sporadic in recent years as the era of hefty budget surpluses take their toll. In addition, AVAC's fund of funds has been constrained in the level of returns it is permitted to retain which are capped at twice the initial investment.

These include the AgriValue Fund, IVAC?Capacity Builder Fund and the Early Stage Venture Funds which have been active for approximately five years. All have exceeded the policy targets of a 4-6% annualized return.

"They're a strange soft debt instrument. We can only receive royalties on increased sales and can't take equity so we can't capitalize on home runs," says Raymont. "To become self-sustaining requires a loosening of the reins. One of our investments was extremely successful but we only received $600,000 whereas it would have been $25 million if we could take uncapped equity."

Accelerate Fund forges new direction

An indication of AVAC's new strategy is its Accelerate Fund (AF), which was launched late last year through its subsidiary AVAC Management Co, an angel co-investment fund which offers a pure equity investment. AF received a $10-million award from Alberta Enterprise Corp, which itself is going through a transition — the results of which will be announced in the near future.

The AF also provides links to A100, a group of more than 60 entrepreneurs who have been engaged with many successful technology plays in the province. That, in turn, links AVAC to the C100, a group of Silicon Valley-based Canadian ex-pats who formed in 2010 to assist companies, entrepreneurs and investors back home (R$, June 4/10). All A100 charter members have been founders or C-level executives in an Alberta technology firm and "experienced the full life cycle of a startup from concept to exit".

"The AF is one of several funds supported by Alberta Enterprise Corp but it's unique to us. We're already active in early-stage companies but the AF is for start-ups," says Raymont. ""It fills an early-stage gap in the province and is a structured fund co-investing with angels which are often tough to organize to share experiences and opportunities. The key differences between the AF and our funds of funds is that we can take an equity position — almost exclusively — and the returns are not capped."

Although a report generated through the provincial review is at the draft stage, Raymont says an element of a possible self-sustaining model for AVAC would include gaining access to the direct payback benefits currently being returned to the provincial treasury.

AVAC has undertaken summary calculations of potential revenues under a self-sustaining model including returns from investments made through its funds of funds. New metrics have also been applied to its activities including jobs and new product sales and contributions to employment. But it appears that uncapping the returns AVAC is allowed to receive is a central pillar of the new model.

"If AVAC could have taken uncapped equity (in the past), it would be very strong today, receiving more than the $130 million invested into it," says Raymont. "Funding has been ad hoc over the years but that's not a reflection of performance. It's been the challenge to Alberta as there are no more huge budget surpluses. It's been very good about providing what it can but it's been more limited recently."

FMI: www.avacltd.com.

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