Canadian Government plans to scatter seed money for startups – Venture capital program aimed at getting promising research to market

The federal government intends to step into the venture capital business, nurturing cash-starved startups that have prospects of building commercial successes on Canadian research.

Joe Fontana, parliamentary secretary to Prime Minister Paul Martin, said the government is developing plans to create a new pool of money to provide financial leverage that would help young companies attract private investment.

By SIMON TUCK

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The broader goal is to improve Canada’s ability to turn promising research into corporate sales.

Ottawa has invested heavily in research in recent years, but officials now believe that many of those projects are "clogged up" on the path to commercialization because of a lack of seed capital.

The Liberal government has been billing the commercialization of research a missing link in the development of successful Canadian companies, improving productivity and boosting economic growth.

"We need to create new companies and grow existing companies," said Mr. Fontana, whose position was designed to focus on science and small business.

He added that there’s a groundswell of support within government for creating the new fund. He said the measure could make it into the March 23 federal budget, although perhaps only as a future commitment. Details have not been worked out, but he suggested a pool of about $500-million over the next five years would be fitting.

"There’s no doubt that there is a consensus, there needs to be a special fund," Mr. Fontana said in an interview. "Everyone agrees there needs to be risk capital brought into the market."

Private sector venture capitalists, however, aren’t so sure.

Ted Anderson, a partner with Vancouver-based Ventures West Management Inc., one of the country’s largest venture capital firms, said he believes there’s already enough money for researchers that have the necessary ingredients — including the market, the business model and the managerial acumen — to lead to a successful company.

"There’s never enough money if you’re listening to people trying to get it," he said. "Sometimes they just don’t deserve money."

Mr. Anderson questioned why Ottawa wouldn’t just provide new incentives for labour-sponsored funds, which invest in startups, or bolster the Business Development Bank of Canada, which provides seed money.

He acknowledged, however, that Ottawa’s participation in venture capital will help increase the total pool of money available to startups, which would encourage researchers to take entrepreneurial chances.

Mr. Fontana said the government’s model could be that private investors chip in about $2 for every $1 of public money, so long as there is assurance that the money would be used to help startups get over the first few hurdles.

He emphasized that the government has no intention of competing against private sector venture capitalists, or attempting to pick corporate winners and losers.

Industry Minister Lucienne Robillard said in a recent interview that the commercialization of research, particularly finding a way to make more money available to startups, is one of her priorities. She wouldn’t elaborate.

Mr. Martin has also made it clear that improved commercialization of research is one of the keys to what the Prime Minister is billing as "the 21st-century economy."

Mary Macdonald, president of Toronto-based research firm Macdonald & Associates Ltd., which tracks Canada’s venture capital industry, saluted the government’s intention to create the new fund, but said the domestic venture capital industry needs help at all stages — not just the early post-research stage. "As long as people recognize that it’s one piece in the grid, it’s a good thing."

Canada has long been viewed as strong in research but not as good at taking it to market and creating large, successful companies.

Despite being hit hard by the technology sector meltdown more than three years ago, Canada’s venture capitalist industry has grown significantly over the past decade, Ms. Macdonald said.

The industry peaked in 2000, at the height of the telecommunications boom, with $5.8-billion invested in Canadian startups. In 2003, that figure had tumbled to $1.5-billion, similar to what it was about seven years ago.

Government officials say most of that money goes to advanced companies, many of which are within sight of a possible initial public offering. That makes it tough on researchers trying to take the early steps toward commercialization.

Ottawa has dramatically boosted its support for research in recent years and made another big contribution Monday when it announced that the Canada Foundation for Innovation would provide $450.7-million for infrastructure projects for universities and other research institutions. The CFI, a non-profit corporation established by the government and heavily funded by Mr. Martin when he was finance minister, also announced $135.2-million for operating costs for those same facilities.

The government, however, has been less focused on helping small companies get to that next stage of development. At later stages, Ottawa has corporate incentive plans, such as technology partnerships Canada (TPC) and the industrial research assistance program (IRAP).

Ottawa is also mulling new incentives to attract angel investors, individuals who invest in startups. "If we want to increase our wealth, we’ve got to grow our companies," Mr. Fontana said.

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