Thank you, Mr. Chair.
I'm pleased to have an opportunity today to address this committee on such an important topic.
My colleague, Richard Rémillard from the CVCA, has provided you with an excellent overview of the state of the venture capital industry in Canada along with several recommendations on how to fix it. In my remarks I will provide you with the perspective of an active venture capital manager who is dealing with these challenges on a daily basis, as we work with our existing portfolio companies to try to help them grow and prosper in this difficult economic climate. I should also mention that for a number of years I owned and operated my own business, which was also a recipient of venture capital.
First, a few words about GrowthWorks. Outside of Quebec and the Solidarity Fund, we are the largest manager of retail venture capital in the country, with total VC assets under management of $750 million. We are national in scope, with offices in Vancouver, Saskatoon, Winnipeg, Ottawa, Toronto, Fredericton, Halifax, and St. John's. We have invested in approximately 300 portfolio companies in the various funds we manage. In recent years we have merged with or taken over the management of the following retail funds: Working Ventures, Capital Alliance, Canadian Science and Technology Growth Fund, First Ontario Fund, Workers Investment Fund, the Ensis Fund, and our most recent acquisition, the Canadian Medical Discoveries Fund.
My specific responsibility at GrowthWorks is to manage the GrowthWorks Atlantic Venture Fund, which focuses entirely on investment opportunities in Atlantic Canada. However my observations and experiences in the Atlantic fund are very consistent with my colleagues who manage the other GrowthWorks funds across Canada.
Before going any further, I should define the term “retail venture capital”, which is also known as labour sponsored venture capital. Unlike institutional funds, which raise their capital from pensions, corporations, or endowment funds, we raise all of our capital from individual retail investors, who are encouraged to do so with the help of federal and provincial tax credits. Since this program was introduced in the 1980s, over a million Canadians have invested over $12 billion in this alternative asset class.
To cut to the chase, l would have to say our number one issue nationally at present is the lack of capital to invest in both existing portfolio companies and in new companies who approach us seeking investment. A close second would have to be the lack of syndicate partners to invest with when we are actively trying to make investments. What l mean by syndicate partners are other VC firms who help us with the due diligence, who share the risk, who help lever the investment dollars we have available. The number of syndicate partners has declined dramatically in recent years for the same reason, lack of capital to invest.
These issues have very serious consequences for the fledgling firms that we already support and for new companies seeking our support. The worst thing that can happen to a VC fund is to run out of capital. It's generally accepted that when we invest in an emerging company, the initial round is just that, the first step on a long road to moving this company through the various stages of growth to success. Follow-on investments in these portfolio companies are almost always a given. If we can't continue to support them with additional capital, two outcomes are obvious: the VC fund itself will get crammed down or diluted, significantly reducing returns to fund shareholders and, more importantly, the investee company itself will eventually run out of cash at a critical juncture in its development and either cease operations or move south of the border to try to access capital there. These are not outcomes anyone in the business wants to experience.
Is there a simple solution to all this? Well, Richard identified a number of initiatives that would certainly address these current challenges, and for simplicity I will focus on one that I think the federal government should consider as it relates to retail VC funds.
When this program of offering tax credits to investors was begun in the early 1980s, the federal tax credit was set at 20% combined with a 20% provincial tax credit. The annual contribution limit was set at about $5,000, the same level as the RSP limit at that time. The program became very popular in the 1990s and significant amounts of capital were raised. So both levels of government scaled back their tax credits to the current level of 15%. The annual contribution amount was not increased and remains at $5,000, even though the RSP limit now is north of $20,000.
Times have certainly changed. As Richard said, there are very few folks left in the business, even fewer who are actively trying to raise new capital, and for those who continue to do so, like GrowthWorks, the amount the industry now raises annually pales in comparison to the 1990s, excluding Quebec. In those days I think we raised about a billion dollars annually and today it's around the $100 million mark.
Can we reverse the fundraising trend for retail venture capital, thereby ensuring significant levels of additional capital becoming available for these new emerging companies who are focused on clean tech, information technology, life sciences, and advanced manufacturing as opposed to sunset industries? We think the answer is yes. And the simplest way of doing this is by modernizing the existing program, by reverting back to a 20% federal tax credit to match a number of provinces who have just done this in recent provincial budgets, and by bringing the annual contribution limit in line with the current RSP contribution limit of $20,000.
If these two measures were put in place for the 2010 RSP season, we are convinced the industry would increase its capital raising immediately and these moneys would flow to emerging companies shortly thereafter, as the infrastructure is already in place to make this happen.
I'm happy to expand on any of these points during the Q and A portion of the session.