Innovation Canada: A Call to Action

Innovation Canada: A Call to ActionInnovation Input:Capital and FinancingInnovative start-up firms need access to riskcapital to build a bridge between their newideas and commercial viability. Risk capital cancome from internal earnings or from externalsources. With respect to the latter, it can takethe following forms.Seed and start-up capital to finance thevery early stages of firms’ development —activities such as proof-of-concept, productdevelopment and initial marketing — usuallycomes first from founders, family and friends,then from “angel” investors. The latter aretypically individuals who have succeededas entrepreneurs in technology-basedenterprises and who are consequently ableto provide not only financial investment butalso mentoring of early-stage entrepreneursin the angel’s area of experience.Venture capital provides financing for firmsthat survive the seed and angel-financedstage of development. Venture capital isgenerally provided through professionallymanaged funds combining the resources of agroup of investors, which may also includepublic sector players.Public markets, mergers and acquisitionsenter the picture beyond the early stages ofcommercialization in response to the need forfunds to support expansion, but before thecompany is able to access more conventionalforms of finance such as bank or cooperativefinancial services loans.Without an active presence in Canada ofadequate sources of capital, some of thecommercial benefits of innovations originatingin this country could be exploited by firms inother countries with greater risk investmentcapacity and/or propensity. 2 This and relatedissues are addressed in Chapter 7.The limited data available on angel investmentin Canada suggest that “they are much lessextensive, in relative terms, than comparablesources in the United States” (CCA 2009, p. 8).This has repercussions extending beyond theavailability of financing, since early-stageinvestors are an invaluable source of mentorshipand expertise. Rates of return of Canadianventure capital funds have been well belowthose in the US for both private and tax-assisted(“labour-sponsored”) venture capital funds. Therelatively low returns result from a number offactors, including subscale venture capital fundsand a comparatively young venture capitalindustry in Canada that “has not yet developedsufficient breadth and depth of experience toselect and mentor the best potential investmentcandidates” (CCA 2009, p. 8).Capital investment in machinery and equipmentalso supports innovation within firms, as theseassets embody the latest ideas, technologiesand innovations developed by others. It isparticularly noteworthy that the Canadianbusiness sector has persistently lagged behindits US counterpart in ICT investment per worker(Figure 2.7). Given that the production andapplication of ICT played the central role instimulating very strong productivity growth inthe US over the past decade or more, thelagging ICT investment record of the privatesector in Canada is a source of great concern. 32 For example, a 2009 study published by Canada’s Venture Capital & Private Equity Association states that“US-based funding generally supports later-stage companies and sometimes results in a shift of the company activitiesto the US. Building a strong and innovative technology-based economy in Canada requires a strong Canadian-basedventure capital industry” (Duruflé 2009, p. 41).3 As part of the government’s “Digital Economy Strategy,” Budget 2011 provided $80 million of funding for a pilot initiative,through the Industrial Research Assistance Program (IRAP) and colleges, to boost the adoption of appropriate ICT by smalland medium-sized enterprises (Department of Finance 2011).2-18