With investors showing signs of life, venture capitalists call for government to stimulate economy by re-examining programs under its investment branch

Curt Cherewayko

As they emerge from their recession-induced hibernation, venture capitalists want the B.C. government to improve its own investment mechanisms so that the province is a highly visible target for investment when the markets fully rebound.

“We’re seeing good opportunities out there right now,” said Frank Holler, CEO and partner of BC Advantage Funds, which invests in early stage life science, technology and clean-technology companies in B.C.

“We’re seeing companies that have had 30% to 40% growth in revenue in the last year, and yet their [value] price is down by 30% to 40%.”

Spurred partly by that disconnect between performance and value, BC Advantage has invested roughly $4 million into three B.C. companies since last August.

Holler recalled BC Advantage’s experiences following the dot-com bust in 2001. Its life-sciences fund portfolio was largely built in the two years following the bust, and includes some of the company’s most successful investments, such as Aspreva Pharmaceuticals Corp. (now known as Vifor Pharma Ltd.).

“Some of the best portfolios are built in the aftermath of a market correction,” said Holler.

Nonetheless, Holler and other venture capitalists believe that the government’s venture capital corporations (VCCs) program and its other investment programs need some tweaking.

Under the VCCs program, investors in B.C.-based VCCs such as BC Advantage, Pender Growth Fund and WUTIF Captial Inc. receive a 30% refundable tax credit from the government on investments of up to $200,000 per year.

VCCs can allocate $10 million annually in tax credits to investors.

In 2008, the limit wasn’t an issue for the many venture capital corporations that failed to meet their allocation.

But with signs that the market is rebounding, Holler said that venture capitalists could be injecting more capital into the B.C. economy if the $10 million cap was raised or removed.

“We could have raised more money in the strong markets and then have more money to deploy now, when the markets are weaker, when there are all these great opportunities to invest in.”

Quebec is among the jurisdictions that have no cap, while Ontario, at the other end of the spectrum, recently dismantled one of its larger tax credit funds.

Harry Jaako, president of BC Discovery Funds Inc., echoed Holler’s sentiments: “The way the markets should work is that when investor appetite is out there, you should be able to raise as much as the market is interested in investing with you.”

Both BC Discovery and BC Advantage have met their tax credit allocation nearly every year since 2003, with 2008 being the exception.

While BC Advantage is on the lookout for deals, BC Discovery will likely use the 15% that remains in its $60 million fund to top up the working capital of some of the 15 companies in its existing portfolio.

The B.C. government restructured the VCC program last June, creating an additional $16 million pool that VCCs can access once they’ve met their $10 million allocation.

The VCCs can access the additional capital on a “first-come, first-served” basis, which places more emphasis on company performance as an investment criterion – a criterion favoured by VCCs – than on the government’s idea of which sectors should be supported.

A spokesperson from the Ministry of Small Business, Technology and Economic Development said that the tax credit offered by the province is designed solely to fund early stage companies.

“Going beyond $10 million over a reasonable period would be expansion capital and beyond the intent of the program,” said the spokesperson.

She noted that companies that are receiving capital from a registered VCC can raise another $10 million after the second anniversary of initially reaching the $10 million limit.

“This provision ensures that companies in sectors such as life sciences and clean technology that require significant amounts of capital may continue their development.”

Clean-technology companies that are looking for other sources of capital besides venture capital can now apply for a grant from the Innovative Clean Energy (ICE) Fund, which the province extended last month, adding $25 million in grant money to the investment pool in B.C.

The new capital will likely spark new clean-tech projects – buoying the sector and indirectly buoying venture capitalists such as Chrysalix Energy that support it.

Chrysalix invests internationally so it doesn’t qualify as a VCC in B.C., but it still holds a stake in a number of clean-tech companies in B.C., including Day4 Energy Inc. (TSX: DFE) and General Fusion Inc.

Richard MacKellar, Chysalix’s managing director, said that the company has “sufficient” capital, and is continuing to scout new investments.

He noted that the recent US$380.4 million venture-backed initial public offering of battery manufacturer A123 Systems Inc. (Nasdaq:AONE) and stirrings in the Silicon Valley venture capital community are providing a rosier outlook for the future.

With that in mind, MacKellar and other venture capitalists are anxious to see government action on the B.C. Renaissance Capital Fund.

B.C.’s “fund of funds” is searching for new partners after three of its six managers failed to raise the $80 million in capital required to leverage its $90 million investment pool.

After more than 18 months, only two companies have received capital from the fund: Ostara Nutrient Recovery Technologies Inc. and Angstrom Power Inc., the latter of which is partly funded by Chrysalix.

“We should applaud the government for wanting to do this,” said MacKellar, of the government fund. “The concept is good, but the way it delivers hasn’t led to either the result or to the number of investments we would have expected at this stage.”

He personally thinks the fund should be restructured in a way that is similar to the province’s VCC program, so that it’s a performance-based fund with a first-past-the-post approach that encourages competition. •

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This article from Business in Vancouver October 27-November 2, 2009; issue 1044

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