Canada’s Emerging Venture Capital Policy and What Scotland Can Learn

Crucial to an emerging innovation economy such as Scotland’s is a healthy supply of entrepreneurial risk capital, be it business angel, crowdfunding, or institutional venture capital financing.  Supply creates demand. Entrepreneurs seek risk capital and will move to where it is present. Such supply is perhaps the single most important yet often unarticulated reasons that entrepreneurs flock to Silicon Valley, Seattle,  or London for that matter. Often we see venture capitalists with their 100 mile rule pluck early stage companies from distant locales and plop them in their neighborhood.  These neighborhoods are well-known and include Silicon Valley, NYC, Boston, Austin, Seattle, LA, Alexandria, London, Belgium and others. Scotland competes for good deals and entrepreneurs on a global playing field, as does Canada.

There is a lot of very interesting movement in Canada (sometimes referred to as “Big Scotland”) now policy-wise at the Federal Government level. In January of 2013 the country launched its Venture Capital Action Plan (VCAP).  There are a variety of initiatives here, including the will to drive a fresh $400 million into the venture capital supply in Canada. While not huge amount — about the minimum size needed for 1 life sciences venture capital fund, or the funding of 4 information technology funds, it’s a good start.  There was a call to support incubators and accelerators through the Canadian Accelerator and Incubator Programme late in 2013.  Also, there was recently a call for fund-of-fund managers. Ontario just launched a $300 million public-private venture capital fund called the  Northleaf Venture Catalyst Fund.  It was recognized that such a fund would help curtail brain drain from the Province.

Tech companies ‘need smart people, of which Ontario has no shortage, and they need venture capital’– Ontario Premier Kathleen Wynne

OK, so here is where it gets interesting.  Recently, without warning, Canada cancelled its Investor Visa Programme. There was must criticism surrounding this as it was effectively driving immigrant capital into the real estate market and distorting values, especially in resort regions such as Vancouver. When Canada cancelled the investor visa programme, also known as the “millionaire scheme’ there were 46,000 applications in the queue.   You see, there were multiple waves of Chinese immigrants, including those from Hong Kong, Taiwan, and now, Mainland China, which moved in succession to British Columbia and other parts of Canada, bringing their capital with them. The Mainland Chinese have been especially aggressive in buying property and are paying top dollar for it as well. Recently I attended a Collier’s real estate event and the speaker, quoting his Chinese real estate clients, remarked “You ain’t seen nothing yet”.  There is a HUGE amount of capital in China that is going to move out and invest in assets all over the world. We are just seeing the tip of the iceberg at this point.

There were various reasons why Canada dumped the millionaire visa program, from political controversy to just plain strategy. Capital was coming into the nation and just sitting in real estate assets. It wasn’t being productive.

Basically, the way the “old” investor visa worked was that a loan of CAD 800,000 was made interest-free by the applicant to a Canadian province. The applicant’s minimum wealth required was CAD 1.6 million, and an investment of at least $2 million into Canada was needed.  If these were met, the applicant was sped to residency, which wasn’t very stringent.

This was ended, and quickly hit the airwaves in China. Many applicants were distraught and are seeking other shores.

However, the story doesn’t end here — nowhere near it. The Canadian government is telling the Chinese immigrants to hold tight.

Later this year, a venture capital fund investor immigration plan is to be launched. Hang on to your seats.

From what I can gather talking to various players in and around Canada, this could be the motherall of all venture capital policy plays, and a fascinating way to combine immigration policy with venture capital policy. Allow me to explain.

What we do know is that various venture capital funds in Canada have been approached in recent years by foreign investors wishing to invest in these funds. In return, these investors are asking for some sort of fast track to permanent residency in Canada. We do also know that the Canadian government called recently for fund-of-fund managers, and seeks to increase the supply of venture capital in Canada. This is a high-profile activity and one of great focus and thought. We also know that Canada has come out with a few related visa programmes in the last couple of years as well: The incubation visa, the entrepreneur visa, and so forth.  Moreover, there is a lot of attention being given to student start-ups and the funding of them, including incubators and accelerators. Venture capital, incubators, accelerators, and universities. What a combination that makes the Academic Entrepreneur very happy and pushes all of the right buttons for him.

The Academic Entrepreneur’s educated guess is that the Canadian government is going to launch a “venture capital investor visa”.  In fact, the government has already said that a venture capital investment visa is going to replace the old investor visa, and we know that it is working on a couple of pilot programmes surrounding this new immigration policy and venture capital supply. What we aren’t sure of is just how this will look. Thus the Academic Entrepreneur has pulled out his crystal ball and will tell you what he sees. Under such a new programme, immigrant investors might have the choice between investing in government sanctioned fund-of-funds, or straight into qualified venture capital funds. There will be no other choice for foreigners wishing to fast track to permanent Canadian residency; they will be forced to invest in venture capital fund-of-funds or venture capital funds, or else join the back of the queue in some other immigration programme (these seem to be on the trend of constriction right now as well).   We do also know that there is a lot of pressure and hurry on behalf of  successful Chinese entrepreneurs (millions upon millions of them) and other investors to move their money out mainland China and into safer havens. This class is also fretting over increase pollution, and owns the desire to educate its children in Western institutions.

This  upcoming policy will be a HUGE force for rapidly increasing the supply of venture capital for the Canadian market, and for funding academic entrepreneurs, students, and other tech entrepreneurs, and even low-tech ventures.  Impact venture capital funds as well will emerge, as will new programmes in R & D, incubation and acceleration of new ventures, and the advent of masses of student and faculty startups from the university base.

An optimist, the Academic Entrepreneur believes that Canada is cooking up quite a plan of epic proportions to be unveiled later this year.  Let’s just do some basic, conservative math. Suppose the numbers stay the same, and immigrant, fast-tracked investors are asked to invest at last CAD 800,000 into venture capital fund-of-funds or straight into venture capital funds that are 10 -15 years in length. Multiply this by the 46,000 applications backlogged and you have a venture capital supply increase of 36 BILLION dollars in just a couple of years:

CAD 800,000   * 46,0000 =  CAD 36,800,000,000 in increased venture capital supplyJust from the ” minimum fee requirement” alone, never mind the investment component.

To put this in perspective, the entire amount of limited partner capital raised by all US-based firms in 2012 was about USD 20 billion according to PWC Moneytree.  2011 was about USD 19 million. Canada has a population of approximately 36 million people, and the US is approximately 330 million. This means that roughy 10X as much venture capital supply would be raised on an annual basis in Canada alone.

And this is JUST the beginning.

Many of these investors will put additional investment into venture capital. And the number of applications and acceptances can be increased for demand currently outstrips supply by a wide margin.  Run the numbers on 100,000 applications a year at the minimum investment of 2 million each into venture capital funds:

CAD 2,000,000 * 100,000 = CAD 200,000,000,000 per year in increased venture capital supply

That is an increase of 200 billion in venture capital supply in Canada per year.  Do that for 5 years and a country increases its supply of venture capital by CAD 1 trillion; for 10 years, 2 trillion.

To put this in perspective, the entire size of the US Venture Capital industry is approximately USD 200 billion. Thus Canada could be raising the same amount as the entire US Venture Capital Industry on an annual basis through its innovative new venture capital investor immigration programme.  Simply spectacular.

10X  the USA could be the Venture Capital Industry in Canada over a 10 year period

There is the potential here to increase the venture capital supply in Canada by CAD 2 trillion or more over the next 10 years. Thus it would become 10X as large as the entire venture capital industry in the United States of America; and 100X as big as that in the USA on a per-capital basis. This will have major implications for innovation and shift the center of innovation to the Northern neighbor of the United States, and position Canada for global leadership as the country of choice for the world’s technology entrepreneurs.

Readers of The Academic Entrepreneur may be surprised to learn that actually Canada already leads the USA in terms of venture capital deals, according to the Global Innovation Index.  (Israel is first, Canada second, and the USA is third).  Canada would easily catapult to the top of the charts after such a funding.

MASSIVE.

Now to Scotland:

So the questions.

Is this something that Scotland (which some English refer to as “Wee Canada“) can replicate model-wise through immigration policy?

A: Yes.

Can Scotland handle an increased population of 100,000 per year?

A: Yes and even more as supposedly 640,000 are going to move south of the border upon independence.  Heck, Scotland may need a million of these foreign investors. There are at least 100 million Chinese entrepreneurs, mind you.  Scotland could easily double its population to 10 million over the next 10  years by taking in a million new revenues per year.

Q: Is this a model that could be improved upon even further to drive more venture capital investment through innovation policy?

A: Yes

Q> Would an increased venture capital supply of this magnitude — 2 trillion over 10 years — drive a completely era of innovation and creativity in Scotland and create great wealth while alleviating poverty?

A: Yes

Q: Assuming a resident population of 10 million in Scotland in 10 years, would its venture capital supply be approximately 300X that of the USA on a per-capita basis?

A: Yes

Q: Would this be a totally positive international relations move in a partnership with China of sorts?

A: Yes

Q: Would this reflect the policy of an open, inclusive, innovative and creative society?

A: Yes

Q: Is such a policy and programme possible under rule of Westminster?  NO

Is this a good argument for independence?

Go to it, Scotland.

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