Joyce Groote

Where Will the Science Go?

By Joyce Groote

Research generated from federal R&D investment has and will continue to provide promising new technologies and products. These in turn provide the foundation for the creation of new start-up companies. But who will invest in these young innovative companies? The Canadian government should be applauded for meeting its recent commitments to accelerate investments in R&D and research infrastructure. The creation of Genome Canada and continued support of the Canada Foundation for Innovation, the Network of Centres of Excellence and the grant-ing councils have provided invaluable financial assistance for Canadian researchers.

However, investment capital is also the lifeblood for companies that have recently moved from the lab. Once ‘love money’ has been depleted, companies turn to angel investors and seed funds, enabling the company to build value before approaching venture capital investors. Currently, there are large numbers of small start-ups competing for a limited pool of Angel and seed money. Given the current investment climate, it would be overly optimistic to believe that this pool will meet the demand. And the expected surge of new innovative companies resulting from increased R&D investment can only widen this financing gap.

A second important element in the creation of viable technology clusters is the availability of local service companies. These include small-scale manufacturing facilities, contract research organizations, and skills and expertise offered through the consultant community. Although governments have made limited investments over the past years, few programs remain for this supporting infrastructure and they lack sufficient funding to meet demand.

Some financing for both companies and the service infrastructure is available through federal programs such as the National Research Council’s Industrial Research Assistance Program and Industry Canada’s Technology Partnerships Canada. But this support is not sufficient to provide the level of financing critical for young companies. The venture capital community is no longer investing in companies at the seed level as they have found that liquidity event timeframes are too distant.

When focusing more closely on the life sciences sector, provincial incentives vary across the country. The Quebec government has provided the strongest leadership in this area. It has built a vibrant biotechnology industry by establishing excellent incentive programs for start-up companies. Other provinces such as Saskatchewan, Alberta and most recently, Ontario, have also established programs to invest in their young innovative companies.

Unfortunately the BC government, which is striving to meet tight cash constraints and gain budgetary control, does not have incentive programs to invest in small start-up firms. Elimination of programs such as the Technology BC program have only exacerbated this growing problem. With the existing levels of private investment financing and the growing numbers of start-up companies, accelerating the R&D agenda will turn the existing financing gap into a chasm. For companies that require sufficient and timely financing, this can result in closing their doors and shelving or losing R&D. It can also mean becoming increasingly dependent upon international markets, often involving offshore relocation. Few firms will successfully attract the necessary financing to continue building value.

For BC and several other provinces in a similar situation, it is therefore necessary to establish new support mechanisms and ways of doing business. These include:

• increasing effective communications from federal government about existing programs (such as the NRC/IRAP, Canadian Institutes of Health Research programs, etc.), reducing the requirement for matching provincial funding, as well as extending the mandate to invest in young start-up companies;
• increasing the level of funding and mandate of existing programs (e.g. BIRC Corp, an investment firm focused on the biopharmaceutical contract research industry in BC)
• the BC provincial government investing in the industry through increased incentives (financial and other);
• more cohesion among the financial community to create a stronger financing continuum; and finally,
• discouraging the premature formation of spin-out companies.

Without these measures, precious public funds will be spent on Canadian S&T that neither sees the light of day nor accrues economic benefit to Canada. In the end, the equation is simple: increased R&D investment must equally offset increased investment in new start-up firms.

In their race to establish vibrant technology clusters, numerous government-sponsored studies have identified the necessary conditions gleaned from successful experiences. These studies have one key finding in common: great science needs to be combined with investment in the industry. A report of the Center on Urban and Metropolitan Policy of the Brookings Institution noted that the US’s “nine biotechnology regions are leaders because they have two necessary elements for industry growth: strong research capacity and the ability to convert research capacity into successful commercial activity”.

The private sector also has to be more innovative in exploring options more fully. Although the traditional investor-company partnership will continue to be an important source of financing, a new focus on alliances and partnerships needs to be considered by the private sector. The first of these is company-company alliances and partnerships. This could include larger companies that expand their pipelines by partnering with smaller companies to provide not only financial support and product development expertise but also mentoring to new executives. As well, company–company alliances need to refocus on consolidation by ‘bundling’ technologies to attract the necessary private investment.

Lastly, investor–investor alliances need to develop and expand using mechanisms such as investor networks (e.g. VanTech and the recently established Life Science Angel Networks in BC). They could create an easier transition for companies to raise the necessary capital from the early stage angel investors to seed and venture capital investors. The ideal model would ensure that complementary financial and expert resources benefit not only investors but also the companies themselves.

In short, an abundance of research is not sufficient to create successful industrial clusters. Canada must also be able to successfully commercialize the results of the research investment. Government and the private sector share the responsibility to make this happen.

Joyce Groote is past president of BIO-TECanada, transition CEO & president for AbNovo, a new biotech start-up and founder of the BC Life Sciences Angel Network.