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In response to the critical lack of venture capital in Ontario, the province’s Ministry of Research and Innovation unveiled Wednesday a new $250-million fund to invest in emerging technology companies over the next five years.
On the surface, it was welcome news. Early-stage and high-growth companies need consistent access to risk capital in order to exploit brief windows of opportunity. And with venture investments spiralling down in the province, any injection of new money is worth supporting.
But entrepreneurs, venture capitalists and other industry observers raised good questions about how effective the fund will really be. As always, the devil is in the details.
Starting in July, the new fund, which is part of the government’s much ballyhooed $3-billion innovation agenda, will co-invest matching amounts of capital alongside pre-qualified venture capitalist, angel groups or private investment syndicates. The money will target the clean technology, life sciences, digital media and information communication technology sectors. “Whatever the terms the private sector strikes with their investment, we will have exactly the same terms,” said Minister of Research and Innovation John Wilkinson in an interview. “If they take equity, or warrants, or debt, that is exactly what our budget will be used for. When they’re in, we’re in; when they’re out, we’re out.”
The ministry chose this investment model to try and thaw out a frozen risk capital market. “It’s the quickest way, in our opinion, to get the money allocated,” he said, noting that for governments, making investment capital available no later than July is like “operating at warp speed.” An RFP for a third-party firm to pre-qualify investor groups will go out within weeks.
Wilkinson described the co-investment strategy as a way to hasten the due diligence process by putting faith in the private sector. “We’re willing to do the due diligence on the people making the investment decisions,” he said. “The market is the best determiner of which companies should receive venture capital investment. By doing that, it allows the private sector to focus on making the best investment, and it allows us to make a co-investment alongside them.”
But will it get money to entrepreneurs quickly? Time is of the essence. According to the Information Technology Association of Canada (ITAC), many early-stage companies, and even mid-sized firms that need follow-on financing to fuel growth, will start to hit a wall within six to 12 months. (ITAC proposes that the federal government inject between $1 billion and $2 billion directly into the Business Development Bank of Canada’s venture capital arm as an efficient way to support the sector.)
A number of initial concerns about Ontario’s plan were raised. Adam Chowaniec, a former chair of the Ontario Research and Innovation Council and past chairman of ITAC, as well as current chairman of Tundra Semiconductor, applauded the injection of capital, but wondered if $250 million would go very far. “We’re back to nickel-and-diming here,” Chowaniec said in an interview. “I think there will be a rush to access this funding as quickly as possible. If they do get $100 million of requests on the first day, are they prepared to move on that or are they going to still stick with trying to spread this out over five years?”
The CEOs of two companies I wrote about (“Cold Realities”) in last month’s special innovation issue attended the announcement in Toronto with several other entrepreneurs. Wendy Robertson, CEO of Toronto-based Kneebone Software—which is in the midst of raising angel financing—supports the government’s move.
On the other hand, Geminare’s Joshua Geist called it “a good step forward,” but sounded notes of caution. “What is missing in the equation, however, is there isn’t any money in Ontario. What it means is we’re still looking at venture capital in the U.S.” American VCs, however, are reluctant to invest outside a local geographic area because they like to be close to their portfolio companies, and generally need an existing Canadian venture capital firm to be on board. It’s hard to know how U.S. VCs will react to the Ontario government’s offer.
At least one Canadian VC contacted doesn’t like the sound of it though. David Levi, CEO of GrowthWorks Capital Ltd.—which runs one of only two Canadian VC funds actively making new investments in Ontario—wondered how a venture capitalist would be compensated for their expertise. “What the government seems to be asking is for the VCs to put out all the work, making a decision on where to invest and how,” he said, “and they want to get a free ride, to manage their investment on their behalf.”
As for Geist, who continues to try and raise funds, the announcement may have complicated things. He frequently gets calls from people desperately seeking jobs, and while he has 15 seats he could fill, he needs financing to do it. But the fund’s July start-date would delay any financing until then—if the government’s plan to sign up investment groups happens at warp speed.
“We will get companies pre-qualified just as quickly as possible,” said Wilkinson. “We’re also told that if we can free up the capital markets, there are investments that are ready to go but for the fact that right now the VC sector is frozen, and we need to unfreeze it.”
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