Industry Canada study probes significance and potential of foreign venture capital

Foreign venture capital (VC) is playing an increasingly critical role in the financing of Canadian companies, particularly in follow-on rounds where larger amounts of capital are required. A major new study shows that foreign VC has jumped from just 3% of the total in 1998 to more than 26% in 2002, as US firms discovered a wealth of opportunities north of the border. That share jumps to 35% for deals of $5 million or more.

Commissioned by Industry Canada and conduced by PricewaterhouseCoopers LLP (PWC), the study — entitled Foreign VC Investment in Canada: A Profile of Foreign Investors and Domestic Investees — shows that nine of the 10 largest US VC firms are actively investing in Canada, followed by nearly 40% of so-called mid tier firms (VCs that invest in 21 to 39 deals). In general, US VCs place top priority on the quality of the business opportunity and value the strength of the clusters in which Canadian firms operates.

PWC based the study on 35 interviews with executives from Canadian firms that received foreign VC, Canadian firms that received only domestic VC and US VC firms, those that invested in Canada and several that did not. The data contained in the report are current as of Spring/03, reflecting the lengthy process of releasing the study. It also took an admittedly high-level approach to the subject producing profiles of the types of issues surrounding foreign VC investment, and offers suggestions for further study. Among the issues cited for future investigation are:

* assessing foreign VC’s net benefit to Canada, measured in terms of job creation, gross and export revenues and personal, corporate and sale tax revenue;

* longer-term impacts on entrepreneurial and innovative capacity of the Canadian economy, such as the extent to which foreign VC investment causes head offices to be moved to the US;

* the stimulative effect of foreign VC on domestic VC activity;

* measures to consider to increase foreign VC investment in Canada, including amendments to policies and regulations for taxation and investment, clear documentation on structuring options and associated tax benefits, and educational or accreditation data criteria for VC specialists.

The data show that nearly 90% foreign VC in 2002 was directed toward the information technology sector, compared to two thirds for all VC.

A copy of the study can be obtained at http://strategis.ic.gc.ca/epic/internet/insbrp-rppe.nsf/en/rd00530e.html under the Venture Capital heading.

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