As anticipated, the Canadian Government has launched its Immigrant Investor Venture Capital Program (IIVC). This was originally announced in December of 2014. The program opened at the end of January. Unfortunately, the Academic Entrepreneur has not been blogging at the usual pace. Apologies are in order.
Essentially, here is how The IIVC works: High Net Worth Individuals (HNWIs) who wish to immigrate to Canada and be fast-tracked to Permanent Residency (PR) apply to the program through Canadian Immigration. They must have at least CAD 10 million in personal net worth. If accepted, they agree to invest at least CAD 2 million into what is essentially a venture capital fund-of-funds through the Business Development Bank of Canada (BDC). Its expected to raise $100 million in total. These funds are at-risk in total, and there is no guarantee that the investors will get even a dime of their money back. The funds are held for 15 years. The pool this year will be invested in 5-6 venture capital funds for innovation – as it follows the Venture Capital Action Plan of Canada from a few years ago, we can assume the “venture capital” will be provided to high growth technology ventures. In the original pool, the Canadian government will accept up to 500 applications, and 60 investors will be randomly chosen. Investors also agree to due diligence, a provision the Canadian government has put in-place in order to thwart the potential of “dirty money”. There are also educational restrictions, and an English or French language requirement. Applications are being taken through mid-April of 2015. See more on the program below from the Canadian Government website.
Analysis
The pilot program is a good test of the market. There have been criticisms by some that its nothing but window dressing by a Harper government that doesn’t really embrace foreign investment, immigration or innovation for that matter. Other criticisms surround the fairness of the act.
However, while the numbers are small to begin with, it could grow into something larger in the future if the political will is there to do it. 60 investors will yield only an additional CAD 120 million in limited partner venture capital funding, which will barely make a dent in the Canadian economy. CAD 120 million is just slightly larger than what is needed for an initial early stage venture capital fund.
As the program sits currently, the constraints are quite high. Recent research by the Academic Entrepreneur into the (Mainland) Chinese investor market in Canada, for instance, revealed that the English or French language requirement is quite a burden to many. As the Huran’s recent Chinese Millionaire Wealth Report 2014 shows, the average millionaire is in his or her late 30’s; and about 20% are from Beijing. Many of these business people and investors did not learn how to speak English when they were growing up for various political and cultural reasons. Learning a new language in one’s 30’s is especially challenging (take it from one who tried). Another major barrier is the capital requirement. The field things quite significantly once you reach the CAD 10 million in personal net worth, especially, as the Canadian government describes it “a legally obtained net worth of at least $10 million derived from lawful, profit-making business activities“. The wealth can not have been inherited, it had to be made, and had to be made legally. Furthermore, the CAD 2 million investment is a constraint for many, for that is quite a portion of a CAD 10 million portfolio to be investing in risky venture capital fund-of-funds. Even savvy investors outside of Silicon Valley with high risk propensity would only invest around 10% of their assets in venture capital fund-of-funds; 20% is quite heavy. In reading through Huran’s 2013 Chinese Millionaire Wealth Report we can see that there are only 64,500 millionaires from China with a net worth over RMB 100 million (CAD $20 million) whom it would make financial sense to risk CAD 2 million for such a long-term investment in venture capital fund-of-fund vehicles.
It is understandable why the Canadian government has placed such constraints on the program in the early stages. However, the good news is that this capital is positive in that it will drive innovation and new venture creation, and help diversity the Canadian economy away from natural resources and real estate. This money won’t drive up the price of real estate in Vancouver, for example.
The Academic Entrepreneur believes that this program can be greatly expanded next year. In order to do so, the following recommendations are given to policy makers in Canada:
1 – Drop the English and French language requirement
2 – Drop the Education requirement
3 – Lower the minimum net worth from CAD 10 million to CAD 5 million
4 – Lower the minimum investment amount from CAD 2 million to CAD 1 million or even CAD 500K.
5 – Drop the “made” requirement and allow for inherited wealth
6 – Keep the “legally obtained” portion as well as the strict due diligence requirements in order to avoid criminally obtained funds and money laundering.
7 – Keep the 15 year investment window and the non-guarantee of any return of monies
8 – Greatly increase the number of application invites and number of immigrants invited to invest and the number of PRs granted under the IIVC. 100,000 would be a good annual figure to start with as a cap.
9-Create regional fund-of-funds that would enable investors to choose regions of innovation to invest into
If these 9 recommendations are taken up and the program changed next year after the pilot runs this year, the supply of innovation / technology venture capital in Canada could be greatly increased. This would drive economic growth and diversify the economy.
There is currently more and more backlash in Vancouver especially against the policy of allowing foreign investors to drive up the price of real estate. There is also criticism against “hot money’ or “dirty money” if you will that is coming into the region. Many are benefitting from the current system and have a huge stake in keeping it going, moreover. This venture capital program, if rolled out correctly, could help channel that capital into more fruitful endeavors of innovation. Combined with it might be the curtailment of foreign investment into real estate in certain regions, especially Vancouver. Thus we have recommendation 9 coming into play. This would allow, for instance, immigrant investors to put money into fund-of-funds specifically in the regions in which they live or have hopes for growth. Such might be Vancouver, and the resulting innovation could be seen through a portfolio of innovative high growth technology companies that would grow right before one’s eyes.
As discussed in earlier posts here on The Academic Entrepreneur, Canada has the potential for building a venture capital supply that would surpass that of the United States in 5 or 6 years through leveraging immigration. Not only is their demand from China, but from other parts of the world including the Middle East and The United States itself.
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From http://news.gc.ca/web/article-en.do?nid=915049 on 16 December 2014
The new Immigrant Investor Venture Capital Pilot Program
Canada is attracting experienced immigrant investors who will contribute to our economic growth and long-term prosperity.
Benefits of the Program
- The Immigrant Investor Venture Capital (IIVC) pilot program is a new approach to immigrant investor programming in Canada, which is expected to have strong benefits for the Canadian economy.
- The program will target high-net worth business immigrants with skills and abilities that will help them integrate into the Canadian economy and society.
- Each investor will be required to make a $2 million non-guaranteed investment for approximately 15 years into the IIVC fund. These funds will be invested in innovative Canadian-based start-ups with high growth potential.
- The pilot program will provide up to 60 investors and their families with a pathway to permanent residence.
Overview of eligibility factors
Selection criteria under the pilot program are designed to attract investors with skills and abilities that will help their integration into the Canadian economy and society. These include:
- proven language proficiency in one of Canada’s official languages;
- education credentials: a Canadian post-secondary degree, diploma or certificate, or proof of a completed foreign education credential and an equivalency assessment from a designated organization; and
- a legally obtained net worth of at least $10 million derived from lawful, profit-making business activities, which will be verified by a designated due diligence service provider. Only applicants selected for processing will be required to obtain a due diligence report from a designated service provider.
Applications to the program will be accepted starting in late January 2015.
Overview of the application process
Citizenship and Immigration Canada will accept up to a maximum of 500 applications within a specified period.
Applications will be selected randomly for processing until up to 60 approved applications are finalized. Applications that are not retained will be returned.
It is expected that selected applicants will receive a decision on their applications within approximately six months of submitting all required documentation. Successful applicants will become permanent residents.
This approach will help prevent a backlog of applications, provide fair access to the application process to a greater number of applicants, ensure that a variety of applications are received and ensure efficient processing.
Further details on the application process will be available at the launch of the pilot program in January 2015.
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