Industry Committee on Oct. 24th, 2016

[Karen Kastner]

We'd have to get you that number.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Obviously, you break out your—

[Karen Kastner]

It would be fewer than 100.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

So it's 400 external, 100 internal.

You break out your income statements. At least on the latest one, it is called BDC Advantage; I don't know about BDC Advisory, but it's called BDC Advantage. Over the last five years, it's gone from a loss of $11 million, to a loss of $12 million, then losses of $17 million, $24 million, $31 million.

A lot of the services that are provided are traditional consulting services. Now, in other jurisdictions, after the Enron scandal, accounting firms decided there was a conflict of interest in having someone auditing and also selling you services. It would seem to me that the same conflict of interest exists between someone offering you banking services and then at the same time trying to sell you consulting services. I'm not sure what services BDC is providing that aren't available from those 400 external consultants, who could sell themselves directly instead of having BDC as an intermediary.

I guess I'm asking whether BDC should be in this business. What would be the strong argument to say it's doing something unique for Canadian companies that is not presently available in the marketplace?

[Karen Kastner]

Well, what we found is that the very small companies don't necessarily have access to these kinds of consulting offerings. It's part of the reason, in fact, that you see the losses, or what we call the “investment” into this business. We don't fully cost-recover all the—

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

When you're selling these things, basically....

Actually, we have someone who submitted something. We have a letter from one of your consultants, who said what's happening is that he's forced to diminish his ask so that the BDC can take its cut and sell it off. He doesn't need the BDC as an intermediary and sees it as a competitor that's taking a slice of the action. He's more than willing to offer his services directly.

I'm not sure how you're adding something if that person exists already.

[Karen Kastner]

We'd have to go into the actual offering.

We have invested quite a bit, for instance, in our operational efficiency business. It's very relevant to manufacturing. We go into a company, and we'll give them advice on how to improve the operation. We're getting very, very positive feedback on it.

I don't know the exact circumstances or the particular consultant you're speaking of, but—

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

If I look at.... Say you have 100 internal consultants and you've lost $31 million. You're losing $300,000, on average, per employee. If we were delivering something that the market needs and it can't get it anywhere else, it would make sense. If you're just acting as a reseller for someone else's services, I'm struggling to see what the value is there.

[Karen Kastner]

It really isn't just a reselling of someone else's services. We have invested in the offering—

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Could we be provided with a breakdown of what specifically the BDC is doing through this program that's not available otherwise, that's not just someone else's...?

First of all, I'd like to know this. You made $16 million or $17 million in the last year in sales. What percentage of that was actually delivered by the 100 full-time employees, as opposed to the 400 external consultants? What percentage of your actual sales was not available...had to come from the BDC? Then I'd like some rethinking to understand what specifically you offer that nobody else could have offered. It was only BDC that had to be there, and you were losing money doing it.

[The Chair, Liberal, Dan Ruimy]

Is that something you could maybe put together and submit? That was a lot of things you were just asked for there.

[Karen Kastner]

Absolutely.

[The Chair, Liberal, Dan Ruimy]

We're going to move on.

Mr. Godin, you have the floor and you have seven minutes.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you, Mr. Chair. By the way, may I congratulate you on the quality of your French.

I thank the witnesses for kindly lending themselves to this exercise. I think the Business Development Bank of Canada, the BDC, is a very good vehicle for economic development, and Canada is lucky to have an organization such as yours.

We did a tour this summer that allowed us to meet some intelligent young people. Our society allowed them to develop extraordinary expertise, and these young people have products to put on the market.

I want to talk about start-ups, new enterprises. I would like to know what the BDC can do for them, since I think it has a responsibility there. As an example, let's do a simulation.

Suppose there is a student at Concordia University who has an extraordinary product that other countries are fighting over. They want to invite him over, invest in his product, develop it and turn it into a very prosperous enterprise that will sell such products to Canada. Do you know what prevents people here from going abroad? Their family ties.

As a society, we are fragile. If the people I am talking about do not have children or spouses in Canada and go abroad, we are going to lose business opportunities. And yet it was Quebec and Canadian society that made that development possible.

All through the school cycle, research and development allowed these young people to develop an interest and an expertise. Now other countries come and get them. What does the Business Development Bank of Canada do in such situations? On your website, your slogan mentions that you are the only bank dedicated solely to entrepreneurs. However, are you thinking about those who will become entrepreneurs and have prosperous businesses?

[Neal Hill, Vice-President , Market Development, BDC Capital, Business Development Bank of Canada (BDC)]

Yes, that's actually a very powerful question that we deal with all the time.

There is clearly an understanding by many who observe the entrepreneurial marketplace in Canada that we lose many of our promising young entrepreneurs to other jurisdictions. That really is the fundamental justification for our entire venture capital effort.

Sometimes we're criticized because the venture capital activities are so large that they might be unbalancing the market, but we invest an enormous amount of money in trying to reach out to those would-be entrepreneurs—students, for example, coming out of university—and make available to them many different ways for them to realize their ideas and then have them financed. We are connected with most of the major incubators and accelerators around the country, with many in universities. We provide financial support, as well as advisory support, to students who come through those organizations.

With regard to our venture capital activities, we attempt to balance both our direct and indirect activities so that there is a ready supply of capital at each stage that an entrepreneur might go through to realize his or her idea.

It's a very difficult, broad-based problem. It's one that we try to address in many different ways and I think we are addressing in many different ways, but we can, and will always, want to do more.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

You are in fact taking a step into that universe, but there are other models in different countries. I am putting the question to you very openly, but I am not sure that the BDC will be able to solve this problem all by itself. However, it is its duty to be a partner.

There are different business models in other countries. We all know that start-ups can generate losses and that the risks are very high. However, you just need a few successful businesses to offset those losses. Will that happen at the beginning or the end of the cycle, however? What ratio has the BDC set for losses? What risks do you take, and what losses can you absorb? How far are you willing to go to support start-ups that have extraordinary products and will in some cases be successful in marketing those products, and in other cases not?

[Neal Hill]

On the venture capital side, I would say our loss ratio is quite comparable to that of private sector investors doing the same stage of investment. A portfolio of seed-stage investments is going to have a much higher loss rate. Sometimes as many as eight out of 10 of the portfolios will be absolute losses. At a later stage, in what is called a series A, a start-up round or a growth round, then the loss ratio will decline to perhaps only 40% of the companies, but still the losses are very high.

We have recently done an accounting of all of the venture capital investing that BDC has done for the last 30 years, and we are just now able to say that for every dollar we've put into venture capital in Canada—obviously that is the only place we invest—it is now worth a dollar. We have sustained substantial losses over those many years to help bolster the industry to invest in multiple sectors of industry and multiple stages of companies. We're encouraged that the system seems to be working better now, but we do believe it's our job to find the spaces where others aren't investing and try to deploy capital and resources there.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Mr. Chair, I know that time is short, but I have a very brief question.

What organization would be in the best position to take the lead and review the model to help our start-up businesses and see to it that they are made welcome in Canada, as is the case in other countries like the United States and Israel?

[Neal Hill]

I think that we, as a Canadian entrepreneurial ecosystem, are actually beginning to get there. We are deploying more capital than we have before. We're deploying it through more different vehicles, both private and public sector. The bulk of the growth is happening in the private sector. I am encouraged by that, because I think the knowledge and the expertise tends to be more heavily concentrated in the private sector.

I believe we are contributing our share to the improvement in the ecosystem. I believe that we often are a lead in those projects, these incubators and accelerators. We are often the only funder from outside of the organization, and we think that is our role. Our job is to be there and help the organization exist and, as companies graduate from those incubators and accelerators, we will often make available additional financing immediately to help them move their ideas along.

[The Chair, Liberal, Dan Ruimy]

Thank you very much. I'm going to have to cut you off there.

[Neal Hill]

Yes.

[The Chair, Liberal, Dan Ruimy]

Okay?

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you.

[The Chair, Liberal, Dan Ruimy]

Mr. Masse, you have seven minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

The BDC occupies a really interesting component of our rural economy and for Canada. It really comes about from the Second World War, basically moving people from wartime to peacetime activities.

It's interesting in the sense that you're criticized for making too much of a profit and you're criticized for not making enough of a profit. Many people like to go around saying, “Oh, government needs to act more like business.” If you were in business, you wouldn't provide many of the loans that you do provide. It's an interesting aspect. You take risks, but you only exist because the private sector won't do this, so it becomes a giant muddle in terms of what we expect out of the BDC.

I think that's where we really have to come to grips in terms of a modern understanding of where the BDC falls. You pay a dividend to the government. You don't see a benefit of that dividend. You don't see that dividend being similar to Canada Post, for example, where for generations upon generations, it returns annual returns to the government of any political stripe, and then it doesn't count for anything later on, even despite anomalies.

Right now you're a $23 billion organization with 2,000 employees. The mandate, though, of the BDC is very difficult to square right now related to young entrepreneurs getting access to capital, and that is really their mandate. It is to entrepreneurs, smaller SMEs. To be quite frank, I don't think it's done a great job of doing that over the years. I think it's strayed from that. I'd rather have more risks to support more entrepreneurs and start-up businesses than other ventures.

On your website, you have an incentive model for performance, based upon the success of lending in different departments. That seems to be a conflict with the overall mandate, and for taking risk. If you do those and you don't have that return, you get less of a salary. Could you explain a bit about that, and how that can work in the culture of what you're supposed to do?

Overall, I actually do have great empathy. It's an incredible tool that could be available for the economy and for Canada, but the mixed messages that are being received are quite contradictory to what you're able to do, in the sense that if you return less, it's “Why didn't you return half a billion this year?”, when it was only $400 million.

At the same time, we have many people who are complaining because they don't get access to capital for riskier ventures that may turn out to be losers at the end of the day, but that capital is actually still in our economy, in our society.

Can you explain how this works internally, when you actually post for people who have expectations that risk is not financially rewarded when return is?