Budget fails to address venture capital gap:

By Perry Hoffman

The Conservative Party's Budget has recognized the importance of boosting the knowledge economy by investing considerable funds into select information and communications technologies (ICT) sectors — such as broadband and electronic health records. But it missed the boat on stimulating venture capital (VC) investment in early stage companies.

For the past several years, Canada's VC market in Canada has been dry. And despite suggestions that it's due to the result of the dot com bubble from nearly a decade ago, the problem lies in the gaps between early seed money and second- and third-round financing.

"We are deeply concerned and have written to the prime minister on two occasions about this," says Lynda Leonard, senior VP Information Technology Association of Canada (ITAC), referring to the lack VC deal flow in Canada.

damaging drought

Leonard laments the Budget's silence on this key ingredient in the information and knowledge economy. To date much of the conversation regarding corporate access to cash during the recession has focused on large financial institutions and credit instruments. But knowledge-based companies typically don't talk to their banker when they need money; they look to VC. But it has all but dried up, says Leonard.

"There's a huge, a very pressing and potentially very damaging drought in Canada at the moment," she says. "Bank liquidity is not going to address what the Canadian knowledge-based sector ... requires for growth," she says.

Leonard says that there are early indications that the government is getting the message on the financing challenges tech companies are facing, pointing to the additional financing flexibility provided to the Business Development Bank of Canada (BDC) and Export Development Corp. (EDC). She adds that the new money for IRAP is also an encouraging sign. (see page 3)

"The reality is, if we don't find a solution to get venture capital flowing more readily in Canada, all new deal flow runs the risk of being foreign and that doesn't auger well for Canadian companies being retained in Canada," says Leonard. "If we expect to have future generations of companies of the size and influence of RIM (Research In Motion) we have to address this."

The Budget will increase the authorized capital limits of EDC and BDC by $1.5 billion each and increase their associated borrowing limits as necessary. EDC's contingent liability limit will be increased to $45 billion to enable EDC to grow and enhance its guarantee and insurance programs, and increase the Canada Account limit from $13 billion to $20 billion. These actions follow on the additional $350 million in capital committed to both EDC and BDC in the November 2008 Economic and Fiscal Statement.

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