By Debbie Lawes
The Ontario Municipal Employees Retirement System (OMERS) is entering "virgin territory' with a new $10-million fund that will purchase equity stakes in early stage and start up technology companies across Canada. The funding is among four new national initiatives revealed November 25 in Ottawa by the Ontario Centres of Excellence (OCE), which is finalizing details on another 10 initiatives that together will form the backbone of its Centre for the Commercialization of Research (CCR), one of 11 federally funded Centres of Excellence for Commercialization and Research (CECRs) announced in February (R$, February 25/08).
While details are still be worked out, a VP with the pension fund says this initial investment with CCR represents a broader strategy by the $52-billion pension plan to expand beyond traditional venture capital and fund investing and towards what he describes as "life cycle investing".
"This is a direct play, moving away from fund investing to direct investing and we believe the OCE is the best example of how to do that," says Philip Haggerty. "We're still mapping out how best to apply it, and how best to follow on with it, but this does open the door to the idea that we're in this for the long term."
The OMERS investment announcement comes at a time when venture capital and other financing for early stage companies is plummeting with Q3 activity down 26% compared to the previous year – the lowest recorded in almost three years according to the Canadian Venture Capital Association.
Mark Romoff, president and CEO of the OCE, says investing in early stage companies and start ups is "virgin territory" for pension funds. "They don't tend to play in this space, so for OMERS to take a strategic decision and invest in brand new companies or early stage companies is a significant decision on their part. This initiative is driving very interesting and precedent-setting partnerships that will recalibrate the landscape."
The decision to invest in early stage tech companies could end up being more lucrative these days than traditional investments, which have plummeted with the current recession.
"You can play against the economic cycle," says Joe Irvine, director of the Ottawa Technology Transfer Network, who attended the CCR launch in Ottawa. "Companies that had private equity in 2001-02 really grew the fastest in 03-04. I think in many ways you can access angels and other private funds better now than you were able to before."
At a conference last year, OMERS Private Equity VP Martin Day said that unlike US pension plans which have a 95% passive investment strategy, the strategy of Canadian private investment plans is increasingly to make direct investments in companies. The reasons include lower management and transaction fees (6-8%), a diversified portfolio and more control over investments.
New money through CCR will also be made available for small companies and university researchers to establish a foothold in world markets through research partnerships with companies in India, China, Brazil and potentially other countries.
As part of its contribution to CCR, International Science and Technology Partnerships Canada will jointly fund projects with OCE up to a maximum of $600,000. Each project must have involvement from a Canadian company, an academic researcher and an international partner. "Every project has to be bilateral. If they don't have an international partner when they engage with ISTPCanada, we will help them find a partner," says Bharat Rudra, ISTPCanada's country manager for India.
Funding will be used for pre-commercialization R&D, "leading to the point where they can take it to commercialization on their own," adds Rudra. "Our money does not get used for marketing or sales."
ISTPCanada received $20 million over five years from the Department of Foreign Affairs and International Trade, and has set aside a tranche of funding for each country, including $6.75 million for India and $5.25 million for China.
Another partner in CCR is the University of Waterloo's Accelerator Centre, which currently shares space with the OCE. Dr Tom Corr, associate VP commercialization at U of W says under CCR, the initiative will formally link OCE, the Accelerator Centre and U of W's tech transfer operations to provide a one-stop commercialization shop for all academic institutions in the region.
"Now everyone will be in the same office location, sharing resources," says Corr. "We will have the tech transfer organization working very early stage with the researchers, and then we can deal with them right through if they need POP funding, market readiness funding or need to locate in the Accelerator Centre. Researchers will no longer have to approach each organization separately."
The OCE is also strengthening its relationship with IBM Canada's Centre of Excellence for Research in Adaptive Systems by involving academic researchers on new projects that advance commercialization of next-generation technologies, including virtualization, provisioning, cloud infrastructure, cloud security and cloud business models, among others.
"We are making a contribution and so is IBM to a research group to enable them to develop those next generation technologies, and to partner with academic researchers," says Romoff. "As good and as big as IBM is, we've got a network. They want to partner with us because we can help to identify innovations at the cutting edge because we're working with that community."
CCR will focus on the energy, environment and natural resources, health and life sciences and digital media sectors, acting as a matchmaker to link companies that need further product or technology development with university researchers that can provide the expertise. Negotiations with another 10 potentials partners are underway.
"It's about plugs and sockets," explains Romoff. "If companies have a technology challenge we try to identify the problem solver in the academic research community. We then have money that enables us to share the cost of that research with companies and also manage the research side. The key is to help companies identify what they need in order to enable them to either become globally competitive or stay globally competitive."