Good afternoon, everybody, and thank you.
I am Mark McQueen, the founder of Wellington Growth Partners. Prior to this I spent five years at the CIBC after it acquired my venture debt fund. I raised five funds over 18 years and ran their innovation banking practice for half a decade. Well before that I spent five years on Parliament Hill—your future's up here some day as a witness.
Canada kept pace with the U.S. economy from 1961 to 2000, and then the wheels came off. As a tech company financier when the 2000-era, dot-com bubble famously burst, I recall how quickly Canadian investors pulled back from financing our innovation economy and life science start-ups.
American investors took the Nasdaq market swoon in stride, and 2004 saw the IPOs of Google, Salesforce and DreamWorks Animation, among others. More than 50 biotechs hit the U.S. public markets that year, while most Canadian investors hid when our economy came knocking, favouring real estate, mining, and oil and gas.
This has been our reality for the last 20 years, with serious repercussions for our standard of living. I'm glad to hear you're considering those topics today.
According to StatsCan, the U.S. saw labour productivity grow at twice the Canadian rate between 2000 and 2021. Analysts found that a major component of the disconnect between U.S. and Canada stems from the fact that while productivity growth at Canadian information and cultural services firms was two-thirds higher than other Canadian businesses, similar American-based firms outgrew the rest of the U.S. economy by a factor of four. Growth capital was the key.
Over the 10-year period ending in 2023, U.S.-based entrepreneurs raised an average of $156 billion U.S. a year from VC funds and institutional investors. A great year in Canada would see $7 billion Canadian of similar investments. America has about eight times our population but invests 22 times the capital in its start-ups, ignoring exchange rates, and that's every year.
Whether or not you see the CANDU reactor or the Avro Arrow as a success or a failure, both initiatives speak to a time when Canadians were proudly prepared to take new technologies to the world, rather than tinker on the IP of another nation. Giving Ericsson's $470 million of taxpayers' money to advance foreign-owned R and D on 6G networks is not a national innovation strategy.
Over the course of my time leading Wellington Financial, we identified thousands of jobs that were supported by what amounted to about $1 billion of capital in our private funds.
One B.C.-based software company, for example, grew employment from 30 staff to 450 following our three different capital rounds. Government can play a role via SR and ED, for example. Those are small dollars compared to what foreign automakers seem to negotiate out of the federal government.
For our innovation entrepreneurs, they’ll be the first to tell you that a lack of sufficient growth capital is the only thing that undermines their ability to create new high-paying jobs and commercialize the IP that's created on our campuses.
I have four recommendations to help address the shortfall, and two relate to tax policy.
Canada has been a centre for mining and oil and gas financing for decades, and our flow-through share policy obviously has been a great support of that. The innovation economy cannot access that same program. Do you wonder why we're not a leader in attracting that same capital?
Consider this. If I have a full-time job and I want to start a retail honey business in my backyard, I can spend tens of thousands of dollars over the next three years on start-up expenses and write that money off against my income. If I invest $3,000 in Chad's AI company, I need a capital gain down the road to write off, if I were to have a loss on those dollars.
We are consciously prioritizing side gigs over commercializing IP. An angel tax credit is long overdue.
Third, let's privatize the Business Development Bank of Canada and take it public on the TSX. Simply put, if you want more agile players, more growth capital in our economy, the BDC just so happens to be the only obvious vehicle available to spur the right kind of private sector-owned competition with our personal and commercial banking sector.
The taxpayers of Canada have $15 billion tied up in shared equity in the BDC today generating a core net income last year of $492 million, which means we borrow $15 billion every year to keep it in business, paying about$477 million in interest on that for $50 million of dividends last year.
No investor will pay 3% in margin interest to earn a gross return of 3.2%.
If BDC was focused merely on filling the gaps, as required by the 1995 act, outstanding loan balances wouldn’t have grown fivefold to $42 billion over the past 15 years. To put that size of this bloated balance sheet in context, National Bank's average business and government loan book is just $70 billion, and the Canadian Western Bank's was $29 billion prior to that acquisition.
Of BDC's $50 billion of assets, just $3 billion are in the venture capital space. That's 6%. If we're trying to support our economy in the innovation sector, this is not how you would do it.