Innovation Canada: A Call to Action

Filling the GapsWith the foregoing in mind, the Panel isrecommending programs to facilitate investmentin the two parts of the risk capital market wherethe most crucial gaps exist: angel investment andlate-stage venture capital and growth equity.Recommendation 5Help high-growth innovative firmsaccess the risk capital they needthrough the establishment of newfunds where gaps exist.The Vision of the PanelInnovative, growing firms require risk capital, yettoo many innovative Canadian firms that havethe potential for high growth are unable toaccess the funding needed to realize theirpotential. The Government of Canada can playan important role by facilitating access by suchfirms to an increased supply of risk capital.Getting ThereTo realize this vision, the Panel recommends thefollowing.5.1 Start-up stage — Direct the BusinessDevelopment Bank of Canada (BDC) toallocate a larger proportion of its portfolioto start-up stage financing, preferably inthe form of a “sidecar” fund with angelinvestor groups.5.2 Late stage — Provide the BDC with newcapital to support the development oflarger-scale, later-stage venture capitalfunds and growth equity funds in supportof the private venture capital and equityindustry. These funds would specialize indeal sizes of $10 million and above that aremanaged by the private sector and subjectto appropriate governance practices.The foregoing recommendations, depicted inFigure 7.3, reflect the Panel’s views on wherethe weaknesses in the financing chain arefound. However, as pointed out by Josh Lerner,a respected US analyst of the venture capitalmarket, government intervention has to becarefully structured in order to be effective(Lerner 2009). 11 The recommendations aretherefore developed with the followingconsiderations in mind.Government intervention should bestructured to address market failures andto create a net benefit for society. Thepurpose of intervening in the venture capitalmarket is to improve rates of return onfinancial capital through a reallocation amongsectors. The purpose is not to subsidize theproduction of R&D — that is the role of R&Dsupport programs. As a result, if marketforces are appropriately harnessed to allocatefunding, successful intervention will notrequire a large subsidy. In mostcircumstances, the government will be able tomake a positive return on its investment.Setting up appropriate governance structuresfor the funds is an important determinant oftheir effectiveness and will help ensure thatthe intervention generates a net economicbenefit. Governance structures have to becarefully developed to ensure that privateincentives are appropriately aligned with thepublic interest and that the scope for selfservingbehaviour is constrained.11 The title of Lerner’s recent book on venture capital is highly revealing — Boulevard of Broken Dreams — and the subtitleeven more so — Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do about It.7-17