British Columbia venture capital formation picking up as government sweetens tax credit and revamps key legislation
October 27, 2003
Improvements in investment conditions in British Columbia have resulted in a flurry of new funds with an emphasis on early-stage and seed financing. The catalyst is being provided changes to the Small Business Venture Capital Act (SBVCA) introduced by the Gordon Campbell government and an opening up of the venture capital market to more players. The result is an S&T investment community that’s more energized than it’s been in years.
The cap on the 30% provincial tax credit for investing in a venture capital corporation (VCC) is the most prominent change. In response to criticism from the S&T community and recommendations from its own BC Premier’s Technology Council, the government has increased its contribution to the tax credit to $60 million, allowing for $200 million to be invested in VCCs annually. It has also extended the deadline past calendar year-end to the end of February to allow VCCs to more effectively compete for registered retirement investments.
The changes will allow investors to capitalize on the massive investments made by the federal government across a wide spectrum of university-based research.
“Everyone is pretty excited about it. All these fund and existing funds are going to be good for the industry,” says Dr Michael Volker, director of Simon Fraser Univ’s industry liaison office (ILO) and president of the new Western Universities Technology Innovation Fund (WUTIF) (www.wutif. ca).“There’s lots of cash piling up in RRSP accounts and this will free it up and get it into these funds.”
Volker likens the revamped SBVCA to Ontario’s Small Business Development Corp, a fund that operated in the 1970s and 1980s before expiring about 10 years ago. He was able to use the fund when he got began working with technology start-ups while at the Univ of Waterloo in the early 1980s, selling his first company and one of the university’s first start-ups.
The new regulations mean that investors with high marginal income tax rates investing in VCCs risk just 26 cents on the dollar, the best rate in the country with the possible exception of Quebec. And unlike other provinces where the battle continues over who controls the commercialization of university research, the university ILOs support the emergence of the new funds.
“There’s no university resistance, quite the opposite. All university ILOs are behind this. In terms of getting start-ups launched, early stage capital is the big challenge,” says Volker. “Universities don’t have to resources because they’re not encouraged enough. We hope the new funds will stimulate researchers and technology entrepreneurs.”
The WUTIF is a uniquely positioned VCC that is targetting early- and seed-stage funds and hopes to co-invest in promising prospects in conjunction with angel investors. In addition, investors can purchase share purchase warrants in the Fund at $10 each and donate them to universities or charities, or place them in a registered retirement savings plan. That way, academic institutions will benefit by gaining access to start-up capital as well as receiving a future source of endowment income. WUTIF has been given an allocation of $5 million by the province this year and if successful, should receive $10 million next year, with the objective of eventually assembling a $30-million fund. It plans to assemble a broad portfolio of start-ups with a maximum of 25% in any one technology sector.
“Our niche is the start-up companies, anything with a research underpinning to it or a university connection. It could also be pre-company formation,” says Volker. “Likely investors will be companies, angel investors and high net worth individuals.”
Another new VCC created as a result of changes to the SBVCA is the BC Advantage Fund (www.bcadvantagefunds.com). The BCAF is employing a mentor model and is also targetting early-stage companies. Fund officials would not provide details on their plans as they are currently in the midst of currently negotiating co-venture agreements to expand its reach beyond the BC lower mainland.