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Capital and Financing

Introduction

This reference document is intended to provide supplementary information relating to "capital and financing," one of the four key inputs to business innovation discussed in Section 2 of the panel's consultation paper. The other three inputs to business innovation are: (1) ideas and knowledge; (2) talented, educated, and entrepreneurial people; and (3) networks, collaborations, and linkages. Federal support for business R&D takes the form of specific initiatives that help businesses develop or access each input. As such, understanding the larger Canadian context for each input is essential to examining the role and effectiveness of the initiatives at the core of this review.

Supplementary Information

The following builds on topics covered in the portion of the panel's discussion paper pertaining to capital and financing:

  • The two graphs below depict venture capital (VC) investment trends in Canada and the US.

    Venture Capital Invested to GDP (1998-2007)
    Venture Capital Invested to GDP (1998-2007) Source: Main Science and Technology Indicators by the OECD, VCReporter by Thomson Financial, and MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.
    Venture Capital Invested to High Tech Sector GDP (1998-2004)
    Venture Capital Invested to High Tech Sector GDP (1998-2004) Source: Main Science and Technology Indicators by the OECD, VCReporter by Thomson Financial, and MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association. Sectors under the North American Industry Classification System (NAICS) included for "high tech" are as follows: 51, 54, 56, 334, 335, and 325. No detailed comparable nominal GDP data at the industry level are available after 2004.
  • There are structural differences between the VC markets in Canada and the US.

    Source:Daniel Sandler (2004), Venture Capital and Tax Incentives: A Comparative Study of Canada and the United States, Canadian Tax Foundation. The reference year is 2002. LSVCF = Labour sponsored venture capital fund.
  • The rates of return on VC investments in Canada are lower than in the US.

    Source: Council of Canadian Academies (2009), Innovation and Business Strategy: Why Canada Falls Short.
  • The following graph depicts capital available in Canada but not invested in VC enterprises (as a percentage of VC investment).

    Source: VCReporter by Thomson Financial. Capital available is the total dollar value of capital under management less those resources that have already been invested by a private equity fund (also known as liquidity). In the case of labour-sponsored venture capital corporations (LSVCC), reserves required by statutes are not included in liquidity calculations.
  • In terms of labour-sponsored venture capital corporations, the following graph depicts the ratio of funds raised to funds invested.

    Source: VCReporter by Thomson Financial.
  • Since 2007, venture capital (VC) investments have fallen in both Canada and the US.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • Canadian VC funds support proportionately more companies than those in the US.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • Average VC investments per company are larger in the US.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • Foreign VC has become an important source of VC in Canada. The below graph depicts the share of foreign VC in Canadian VC investments.

    Source: VCReporter by Thomson Financial.
  • Foreign VC investors bring larger deal sizes to Canada.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • In Canada, information and communications technologies (ICT) is the dominant sector for VC investments.

    Source: VCReporter by Thomson Financial.
  • Foreign VC investments are more concentrated in the ICT sector than domestic VC investments. The below graph depicts the share of ICT in foreign and domestic VC investments in Canada.

    Source: VCReporter by Thomson Financial.
  • In 2009, 53% of VC investments in Canada were captured by the IT sector.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • In 2009, 20% of VC investments in Canada were captured by the life sciences sector.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • In 2009, 9% of VC investments in Canada were captured by the clean technologies sector.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • Canadian VC funds have been investing less abroad in recent years. The below graph depicts dollars invested outside the country by Canadian investors.

    Source: Canada's Venture Capital and Private Equity Association, Canada's Venture Capital Industry in 2009 (based on data from Thomson Reuters).
  • A recent study on the duration of VC investments in Canada and the US found that "there is a smaller percentage of VC-backed IPOs [initial public offerings] in Canada relative to the United States and a greater percentage of both private exits and write-offs in Canada relative to the United States." The same study found that "over the 1991–2004 period, the average time to IPO from first VC investment was 2.45 years in Canada and 2.95 years in the United States." The below graphs depict some of the study's findings.

    Canadian VC Investment Duration
    Canadian VC Investment Duration Source: Douglas Cumming and Sofia Johan, "Venture Capital Investment Duration," Journal of Small Business Management 2010 48(2), pp. 228–257. The data analyzed "comprise a sample of 557 Canadian and 1,607 US VC-backed firms over the period 1991–2004."
    United States VC Investment Duration
    United States VC Investment Duration Source: Douglas Cumming and Sofia Johan, "Venture Capital Investment Duration," Journal of Small Business Management 2010 48(2), pp. 228–257. The data analyzed "comprise a sample of 557 Canadian and 1,607 US VC-backed firms over the period 1991–2004."
  • Canada's business sector has persistently lagged the US business sector in ICT machinery, ICT equipment and software investments per worker.

    Source: Institute for Competitiveness & Prosperity (2010), Report on Canada 2010.