Emerging Technologies Fund aims to revive moribund venture capital investment

Ontario is hoping to attract venture capital (VC) and angel financing to three designated high-tech sectors with a $250-million, five-year fund in which the province will match private sector capital on dollar for dollar basis. The Emerging Technologies Fund (ETF) will see the province take on the same terms as its VC or angel partners — a co-investment concept based on a similar Scottish fund launched in 2003.

The ETF marks the second time in a year that the government has provided a cash infusion into the sectors deemed the most promising for future economic growth — clean technologies, life sciences and digital media and information and communication s technology.

Last June, the province launched the $205-million Ontario Venture Capital Fund (OVCF) which included $90 million in public funds (R$, November 28/07 & June 20/08). The first investment was made last week nearly a year after the government named TD Capital Private Equity Investors as the fund's manager (see page 7).

If all funds are invested from both funds, nearly $750 million in new investment will flow into the tech sector, helping to offset the current scarcity of risk capital and counteracting some of the worst effects of the recession.

"The funds address pressing issues in venture capital and attract interest globally in our ideas," says Wilkinson, adding that the aim is to make initial investments within three months. "The ETF is a quick response to a pressing need. We want to commercialize inventions in the province and find success here to benefit our economy. The key is market-based solutions to a problem we have now with VC."

Over the past year, VC in Ontario and Canada has effectively collapsed, stranding early-stage firms in what has been characterized as a tragedy in the making. The hope is that co-investment between the public and private sectors will encourage greater risk taking by Canadian funds at the earlier stages of company formation, ensuring that the intellectual property remains in the country.

"MRI will get arm's length advice from qualified investors," says Wilkinson. "There will be limits (on the size of investments) but that has to be determined. I expect the maximum deal size will recognize the nature of early stage deals."

The ETF has come under some criticism for limiting investment to three specific sectors rather than allowing the money to flow to wherever the best deals can be found. Wilkinson rejects the criticism of governments picking winners, pointing to the origin of the targeted sectors to the Ontario Research and Innovation Council, a private sector-dominated advisory group headed by Dr Adam Chowaniec, board chair of Ottawa-based Tundra Semiconductor Corp. ORIC's work, in turn, informed the creation of the province's innovation agenda — Seizing Global Opportunities: Ontario's Innovation Agenda — launched last year with $3 billion in investment committed to S&T (R$, April 30/08). An overriding focus on commerce was a linchpin in ORIC's advice to the province along with a recommendation that government take a catalytic role in strategic direction and focus (in consultation with business and academia) with public funding support.

"ORIC said we need to focus and the three sectors of focus are broad and offer globally significant competitive advantage … Our 10-year corporate tax exemption applies to the same three sectors," says Wilkinson. "If we take this bold step with a co-investment fund, VC says they can do these sorts of deals. We see it as a market-based solution."

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