Evidence of meeting #39 for Industry, Science and Technology in the 39th Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was money.
A recording is available from Parliament.
NDP
Peggy Nash NDP Parkdale—High Park, ON
Thank you, and hello to the witnesses.
My first question is about why we're getting so little investment in some parts of the economy. I'd like your opinion as to what the key economic challenges are here, aside from the comments you've already made. I'm wondering what the impact of the high Canadian dollar is in terms of the lack of attractiveness of investments outside of the commodities sector, and what other kinds of barriers there may be for the commercialization of Canadian technology.
General Partner, VenGrowth Asset Management Inc.
I have to take that on.
The dollar has had a devastating effect on Canadian technology firms. When you think about the impact of the dollar, manufacturing comes to mind. But when you think about a young technology company, the chances are that most of its sales are in U.S. dollars, and if they're doing their R and D here, the R and D costs and personnel costs will be their biggest expenses, so the vast majority of their expenses will be in Canadian dollars. So they have the profile to be clobbered by the dollar, and that in fact is what has happened.
NDP
Peggy Nash NDP Parkdale—High Park, ON
You don't hear much about that. We've talked a lot about the manufacturing sector. We've not heard much at all about the impact on the high-tech companies.
General Partner, VenGrowth Asset Management Inc.
It certainly has had a big impact.
Now, think about it. Most young technology companies raise money knowing that in a couple of years they're going to have to raise more. They raise multiple rounds of venture capital, starting with the angel rounds and going through to the expansion rounds, so they know they're going to run out of money and will have to go for more. And what the dollar has done is that it has taken their two years of runway and turned it into 18 months of runway, or one year of runway. From the beginning, they knew they were facing that problem—but it has been very, very significant.
I guess the other other point is that ultimately, the demand for most types of innovative technology is very cyclical. In the Ottawa area, a lot of the technology companies make telecom equipment, so it winds up that their customers are Bell South and Verizon, the big telecom companies, whose capital spending is very, very cyclical. They spent a fortune on new technology around the year 2000, and they've spent less and less ever since.
So that is just a business cycle, which everyone in tech knows we have to bear, and that's why we know it's a high-risk and hopefully high-return asset class.
President, National Angel Organization
From an angel perspective, angels are investing right across the board in every sector, save for pharma, because pharma is a 10- to 12-year investment and $100 million. And it's binary: it's going to work or it's not going to work. That's not a place where angels tend to play.
Having said that, angels are increasingly looking for a liquidity event in two and a half, three, three and a half, four years. In other words, they're looking to get their money back within that timeframe. That doesn't mean the company is sold out; it just means they build that into their terms. So when you're looking at trends and whatever, I would argue that angels have not been discouraged by the high dollar in terms of the investments they're making. Just to underscore that, it's right across the board, including service industries, in which VCs have traditionally tended not to invest.
NDP
Peggy Nash NDP Parkdale—High Park, ON
I'm interested in the commercialization of technology. It's a value-added sector that can capitalize on the big R and D investments that Canada does very well. You know, if venture capital is going into the commodities sector and not into the value-added sector, I think that's going to damage our economy for years to come.
So are there specific suggestions that you have, perhaps on the dollar or specifically on high-tech companies, that would help get us over what I hope is not a long-term disadvantage in terms of the value of our currency?
Exectutive Vice-President, Investments, Business Development Bank of Canada
If I may, what you're alluding to is the fact that the people who manage big pools of money have to decide between asset classes and they have to decide whether we are investing in technology or in natural resources or commodity factors. The natural resources sector has been pretty good to them in the last few years: less risky, they can plan their investment, and they know they will get something out. Venture capital, technology, is a lot more risky. To make those risky investments, you need better rewards. The rewards, for all kinds of reasons, have not been there in the last few years. This is why we're suggesting a few ways to try to rebalance that, at least the time it takes for the industry to recover.
You'll all remember that technology bubble that burst in early 2001, let's say. Before that there was an overshoot in the value of investments and everybody was getting rich, at least on paper. At some point the market realized that the value wasn't there and it fell through. The industry in Canada still has to recover from that. The new investments that were made after that are three, four, five years old. It takes six, seven, eight, ten years to build a company. So we're still in that recovery mode.
Chairman, Board of Directors, National Angel Organization
Yes, on the same comment. I've recently invested in a warehouse automation company in Mississauga. The dollar really clobbered them, especially on contracts they had out two or three years ago. They ended up losing money because they sold in U.S. dollars and the value of the revenue went down substantially.
You know, they're still at it, and they're working hard. They understand the dollar's here for a long time and they're going to succeed. But the key, and the reason I'm interested as an angel investor, is we have to transform them from a Canadian company to a global company. They're selling to Avon Products, to the limited brands, to Lands' End and automating their warehouses, and they can go around the world. So I see angel investors stepping in today, because if we don't, nobody else will. The banks won't.
I see it as very opportunistic.
Peggy Nash NDP Parkdale—High Park, ON
Thank you.
On the labour venture funds.... I'm from Ontario. I can't remember the specifics, but I remember there were problems with the labour venture funds. If I remember, people were getting tax credits without really significant output at the other end. I think that might have been it, or there might have been management problems.
If you're saying this is still something that you see as a viable investment tool, what would be the mechanisms to prevent that problem in the future?
General Partner, VenGrowth Asset Management Inc.
The point you're referring to is really an issue that cropped up in the mid-1990s, when a number of the labour-sponsored funds in Ontario raised way more money, frankly, than they were expecting to raise and that they could reasonably deploy, so the funds had too much cash and it took a while to work that off.
Frankly, the industry would kill for that problem today. It's long gone. If the market turns around such that labour-sponsored funds can raise that kind of money again, probably the committee does need to hold hearings on why there isn't enough venture capital in Canada. It's a broader point that refers to your previous question.
A lot of government programs are cyclical in this area, when they should be counter-cyclical. It's much easier for people like us to come to the government and ask for support for our industry when our returns are super high. But the truth is we probably don't need the support at that point in the cycle. Now is the time in the cycle when the government should be stepping up, yet it's a tougher ask because we have to ask you for support in some form or another at a time when the returns are poor.
It's a challenge for government to get programs across the finish line against the wind, but that is actually the time when you should be doing it. And that's, broadly speaking, where labour-sponsored funds are at today, and all types of venture capital.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Heller.
Thank you, Ms. Nash.
We'll go to Mr. Cullen, please.
Liberal
Roy Cullen Liberal Etobicoke North, ON
Thank you, Mr. Chairman.
Thank you to the witnesses.
I'm going to throw out a few questions. Then, if you could hold your powder dry, whoever wants to can jump in.
It's been a while since I looked at this issue, so I feel a bit dated, especially when you talk about a national angel organization, because my impression then was that in the continuum of finance, angel capital was friends and relatives, and that moved then to venture capital, which was slightly different. That has evolved, obviously, when you have a bunch of friends and relatives gathering into a national organization, so maybe you could help me to better understand the difference between angel capital and venture capital.
By the way, one of the issues I had with the labour-sponsored venture funds was that they wouldn't look at anything less than $500,000, so they started to group it together, and it seemed to lose some of its value over time.
We're looking at tax advantages. Surely making the scientific research tax credit refundable would help early-stage companies in loss carryforward positions in their early stages. Making that research credit refundable is something that's been around, and people have proposed it.
Also, I was glad the government extended the accelerated capital cost allowance, but surely they could have extended it for a period beyond one or two years if you look at the planning horizon of corporations.
When we looked at this some time ago, one of the problems.... Actually, this group I was with was looking at commercializing federal government research, because there is a fair bit of federal government research going on. We looked at commercializing it. One of the things we bumped into was intellectual property rights.
You know the problem of researchers: a lot of them aren't very good at tech transfer or tech diffusion, so intellectual property rights could maybe be an incentive. We looked at models. Mr. Simoneau, you mentioned the University of Waterloo. I was familiar with that one. Also, Guelph had a company called GUARD Inc. , which was the bridging corporation between the scientists and the capital markets. It seems to have worked very well; in fact I wondered, and we wondered, if we should actually do that at the federal level--have a bridging company between the scientists and the capital markets to help put the prototypes together and advance the file and get the capital to do that.
I'm wondering if you think we should be doing anything on intellectual property rights and if we should be doing anything with that particular model--building on the University of Waterloo model or the Guelph model--to provide that mechanism in between.
Conservative
The Chair Conservative James Rajotte
Let's start with Mr. Mothersill. You indicated you wanted to start, so I think you want to start with the angel and VC question.
President, National Angel Organization
In the very early stage, there are three forms of funding. The first is usually from the entrepreneur, who puts in cash, maximizes his credit cards, mortgages his house, and sells his kids for medical experiments. That's the first money in. That's skin in the game.
Second are, of course, the three Fs: friends, family, and fools. These people are usually relatives or acquaintances, and they put in a little bit of cash, usually less than $100,000.
Once you get past that, you get into angel investing. Angels are, according to the various securities commissions within the provinces, sophisticated high-net-worth individuals who can assume the kinds of risks that they take. All members of an NAO, for instance, and all members of angel groups have formally signed off on the fact that they are indeed accredited, sophisticated investors. That's when the angels begin to play.
There are those three early stages. Then it may pass on, depending on the size of the investment, to venture capital. One very quick trend that's happening is that angels, because they're investing together, are now getting into VC rounds, so it's not uncommon to see $3 million, $4 million, or $11 million rounds just in angels alone.
Liberal
Roy Cullen Liberal Etobicoke North, ON
Thank you. That helps a lot.
What about the other questions on refundable research, accelerated CCAs, the bridging mechanism with Waterloo, and...?
Conservative
General Partner, VenGrowth Asset Management Inc.
I can speak to a couple of those. Maybe I'll leave the Waterloo question to Mr. Simoneau.
SR and EDs are a hugely important government program for knowledge-based industries, and any enhancement is certainly welcome. It's not quite as good as venture capital, because it's refundable--you have to have the money before you can get it back--but certainly if you've raised some money and you want to have that take you down a longer runway, the SR and EDs are extremely important.
CCA, capital cost allowance, is somewhat less so, because, frankly, most of these companies don't pay tax and have tons of losses already. They don't need more.
I did want to speak for a moment on your point about labour-sponsored funds not doing smaller deals of less than $500,000. It really speaks to the point that there is a continuum of finance in which the angels are most efficient at providing capital at a certain size and stage of a company, and then the VCs come in. There's no clear break where that occurs, but probably around $500,000 is in the ballpark of getting pricey for the three Fs and getting more appropriate for an institution, a professional money management firm. That's why that is the way it is, and it's just a natural market force, I think.
Conservative
The Chair Conservative James Rajotte
Very briefly, we'll hear Mr. Simoneau on intellectual property.
Exectutive Vice-President, Investments, Business Development Bank of Canada
In the university transfer, what is important is that they should be very business-minded in their approach and have a quick process, and right now, that's not what we see, and therefore it drags on for too long. The decision level is not in the hands of the people the entrepreneur is talking to. This makes it very difficult.
Waterloo is a different concept. That's why we say it's probably the one we should start looking at. I'm not very aware of the Guelph one: having a more unified approach.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Cullen.
We'll go to Mr. Carrie, please.
Conservative
Colin Carrie Conservative Oshawa, ON
I'll be splitting my time with Mr. Van Kesteren.
Mr. Johnston, when you were here last time, for the members who were here I think your quote summed up what this study is all about. You said that you actually have to start just working on the people, changing their approach to life, so that their goal is not to finish university and get a job, their goal is to finish university and create a thousand jobs.
Could you provide specific recommendations that Canada's federal government could implement to move forward? What's the best thing we could do to back up your statement? I thought it was a great statement.
President and Chief Executive Officer, Precarn Incorporated
Thank you.
I think I would start with a general statement that just says again that it relates to a balance in the system, but it also relates to the gap.
I'll use very specific anecdotal evidence. Back in 1990 we were funding a program in universities called IRIS. There's a graduate student by the name of Shahram Tafazoli who invented some technologies for managing heavy equipment: monitoring it, etc.—all sorts of different aspects. When he graduated, he started a small company called Motion Metrics, and through our Precarn side, through Precarn funding, we were able to provide small amounts of funding into that company. Following that, he actually worked with Syncrude on a larger project.
So we filled the gap, as it were, and now literally his company is selling his technology around the world. It's still a very small company, but that's an example of what I mean, because now he employs nine or ten other high-value-added people in his company. It's a matter of getting the technology matched against a user need and then filling the gap a little bit so that the company can become successful.
But that's only part of it. We've talked about tax credits, the dollar, capital cost allowance. All of these things have to be balanced to create the right environment. My argument is related to filling in the gap as well.