Thank you, Mr. Chair and members of the committee, for inviting me here this morning.
I'm with VenGrowth, Ontario's largest venture capital firm. Since our inception in 1982, VenGrowth has invested over $1.1 billion in more than 180 small and medium-size Canadian businesses, mainly in the high tech and life sciences sectors.
I'd like to speak to you this morning about the state of Canada's venture capital market, but first I think it's important to point out why venture capital is so critical. The answer, simply, is jobs. Venture capital builds knowledge-based businesses that create high-paying jobs in cutting-edge sectors such as software, semiconductors, therapeutics, and clean energy. The biggest challenge that companies in these sectors face is access to capital.
Knowledge-based businesses create jobs by turning ideas into businesses. This involves three stages.
First, a researcher conceives and tests the idea. Often this occurs in a public institution such as a hospital or a university that, obviously, is largely publicly funded. This is what we call the primary research stage.
Second, an entrepreneur starts a company around the idea. He or she continues research and development, develops a business plan, and starts talking to customers. We call this the early growth stage. Companies at this stage rely on funding from angel investors and from early-stage venture capital firms. This is what our colleagues from NAO call the valley of death. As I'll discuss further, this type of venture capital is rapidly declining in Canada, particularly in Ontario.
Finally, a company reaches the expansion stage. Business ramps up, sales and marketing and productive capacity expand, and a product is completed. These types of companies are funded by expansion-stage venture capital, and sometimes by going public. Canada's domestic supply of expansion-stage venture capital is, like early-stage venture capital, also in decline, but foreign investors have taken up some of the slack.
To continually create knowledge-based businesses, we need the pipeline to be full at all three stages all the time. It requires ongoing funding for basic research, for early-stage start-up companies, and for expanding firms. Unfortunately, Canada is experiencing a significant decline in financing for the second stage, the early growth stage. As I mentioned, this is when basic research is first taken out of the lab and put into a company. It's also generally when a company first raises outside capital.
In the past four years, the number of companies receiving first-time venture capital investment has declined by 25% in Quebec and by 50% in Ontario. Over the same period, the U.S. grew by 100%. Ontario saw fewer new companies funded in 2007 than at any time in the past 10 years.
Why is early stage venture capital in such decline, especially in Ontario? The answer is that all four sources of money for the industry have contracted concurrently.
The first source of capital of the four is institutions, such as banks and pension funds. Except in Quebec, these institutions have in recent years cut back their allocations for venture capital in favour of other sectors.
The second source of capital is retail investors, largely through the labour-sponsored venture capital, or LSVC program. Fund-raising in this program has fallen dramatically in recent years, particularly in Ontario, where the provincial government is phasing out its support for the program.
The third source of capital is government. The federal government remains a critical supplier of venture capital funding, largely through BDC and to a lesser extent EDC, but federal spending on the LSVC program has declined in recent years to less than half the level of eight years ago.
The fourth and final source of venture capital is foreign investors, mainly from the U.S. This source of capital is actually growing in Canada, but it's focused largely on later-stage expansion companies. Foreign investors generally will not fund early-stage Canadian companies. In 2007, there were only four disclosed early-stage venture investments in Canada that did not have Canadian investors.
The lack of early-stage venture capital in Canada has reached serious, perhaps crisis proportions. Entrepreneurs are already leaving Canada for the U.S. to get their companies funded. I invite you to look at the last page of my written material, which contains quotes from a number of leaders of Canada's venture capital industry attesting to the enormity of the problem.
The federal government simply must devote more resources to facilitating early-stage venture capital or the inevitable result will be fewer high-paying jobs in knowledge-based industries.
Thank you for your time. I would welcome any questions.