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Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
Raffi Amit
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Raffi Amit

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  • Capital under management - total dollars currently invested in ventures. In addition to labour, private and corporate funds there are government and hybrid funds but these are a relatively small fraction and were omitted for simplicity of presentation.
  • US data are for 1999. Canadian data are for 1998. Remaining points Canada US Acquisition 5% 4.1% Later 18% Turnaround 6% Other 1% 1%
  • The pie chart is set up to be as close to the one for Canadian VC investments as possible, although it is not identical. Internet-specific firms are those that would not exist without the Internet and do not fit in any other sector. Deliver content, e-commerce, hardware or services to the Internet economy. The US investment represents approximately $72B in Canadian funds in 1999. Compare to the estimate of $2B for VC investment in Canada. The Internet sector increased 471% from 1998 to 1999. Without the Internet sector the increase in VC funding for the remaining sectors would have been just over 80%. The percentage of firms that went through IPOs that were VC backed jumped significantly in 1999 from 1998. 1995 35.2% 1996 32.3% 1997 21.9% 1998 20.9%
  • If the level of US investment had increased by 35% (98 to 99) similar to the Canadian increase, it would have reached about $36 - $37B Canadian dollars (using a conversion rate of 1.4 Can.$ to US$) still significantly greater than the level of Canadian investment on a per capita basis. The investment 85% of funds in high tech is skewed by the contribution of Internet investments, but the level of US venture investment in high tech has been in the range of 75% - 80% for the last few years and consistently higher than the Canadian investment in high tech, usually between 65% and 70%.
  • I could find no direct evidence of a deficit of investment in early stage firms. There is considerable anecdotal evidence through newspaper reports and comments of people in the industry. The recent shift of significant amounts of venture funding to incubator facilities and funds focused on early stage investment is also highly suggestive of an unfilled need. US early stage investment = ($10.7B X 1.4) = $14.98B Can. versus Canadian early stage = ($2.2B X 35%) = $0.77B Can. Ratio = (14.98/0.77) = 19.45. Thus, approximately 95% more early stage capital per capita in the US than in Canada. Growth of the Canadian market will continue to lag the American market. Capital raised for venture investing: Canada - Approximately $2B Can. raised in 1998. US - Approximately $42B US ($58B - $60B) raised in 1999. Source Venture Economics.
  • The estimate of 95% more per capita is based on relative populations of 10:1 for the US and Canada. US early stage investment = ($10.7B X 1.4) = $14.98B Can. versus Canadian early stage = ($2.2B X 35%) = $0.77B Can. Ratio = (14.98/0.77) = 19.45. Percentage of funds focused on early stages based on a news release from Venture Economics. I think this based on the number of funds declaring a focus rather than the relative dollar amount.
  • Summary of taxation issues - 1) Capital gains in Canada up to 38.5%; US up to 20%. 2) Canadians who sell one asset (stock) to invest in another are assessed capital gains on the sale. Americans have a 60 day grace period in which to reinvest without being assessed capital gains on the sale. Further, in the US any subsequent losses can be deducted from the earlier capital gains, while in Canada they can not. 3) Foreign investors in pooled funds are treated as Canadian taxpayers. 4) In the US investors who build a company and take it public can have capital gains taxes reduced up to 50%. The first two points account for the estimate that it requires approximately $1.66 invested to get $1 to the firm. If the funds invested are taken from one asset and then reinvested, the Canadian investor must pay capital gains on any profit realized at that point, where the American investor would not.
  • Transcript

    • 1. Public Policy Issues in the Canadian Venture Capital Market Professor Raffi Amit University of British Columbia and The Wharton School Phone: (215) 898-7731 FAX: (215) 573-7189 E-mail: amit@wharton.upenn.edu
    • 2. Canadian Venture Markets - Size and Growth
    • 3. Growth of Canadian Venture Investments
    • 4. Venture Capital Investment Activity by Development Stage of Firm US data were kindly supplied by: Venture Economics, www.ventureeconomics.com Canadian data from: Canadian Venture Capital Association
    • 5. Venture Capital Investments - Distribution by Industry Sector
    • 6. Comparison of Venture Investment in the US and Canada Total value of venture capital investments (1999) % increase in amount invested over 1998 % of funds invested in high tech sectors Average size of venture investments in 1999 % increase from 1998 Canada $2B - $2.2B (Canadian funds) (est.) 20% to 35%. 68% in 1998. 1999 expected to be similar $2.34M. (est.) 52% US $48.34B (US) 150% 85% $11.5M. (US) 64%
    • 7. Summary of Venture Investing Data <ul><li>Venture capital plays an important role in helping firms grow to more mature stages. </li></ul><ul><li>There apears to be a significant gap in early stage funding, particularly seed stages </li></ul><ul><li>Venture capital investment is highly focused in high tech industries. </li></ul><ul><ul><li>Canada has a more even spread of investment than the US. </li></ul></ul><ul><li>Growth of Canadian venture market lags the growth in the US market. </li></ul>
    • 8. Unique Challenges of Venture Capital Investing - Adverse Selection <ul><li>“ Hidden Information” </li></ul><ul><ul><li>Sellers have private information about the quality of the goods for sale. </li></ul></ul><ul><ul><li>Because the buyers can not distinguish high value from low value goods, they offer prices that undervalue better quality goods. Sellers of high quality goods withdraw from the market leaving only low quality goods </li></ul></ul><ul><ul><li>Entrepreneur may have a better insight into the likelihood of a product working (or not). </li></ul></ul>
    • 9. Unique Challenges of Venture Capital Investing - Moral Hazard <ul><li>“ Hidden Action” </li></ul><ul><ul><li>Investors are unable to monitor the actions of the sellers accurately. </li></ul></ul><ul><ul><li>This allows the sellers to act in a way that benefits themselves at the expense of the buyers. </li></ul></ul><ul><ul><li>Venture capitalist is unable to determine accurately how hard the entrepreneur is working on a project or even what project is currently being pursued. </li></ul></ul>
    • 10. Public Policy Issues in Venture Capital <ul><li>Early stage financing gap </li></ul><ul><ul><li>Many good early stage companies still struggle to find funding </li></ul></ul><ul><ul><ul><li>despite 35% of venture capital going to early stage companies. </li></ul></ul></ul><ul><ul><ul><li>Average size of investment is smaller in Canada than in the US </li></ul></ul></ul><ul><ul><li>The gap is likely to grow. </li></ul></ul>
    • 11. Public Policy Issues in Venture Capital - Labour Sponsored Venture Funds <ul><li>“ Crowding Out” - large capital pool could deny access to good investments for private funds </li></ul><ul><ul><li>Investors will gravitate to later stages of development where information asymmetry is reduced. </li></ul></ul><ul><ul><li>Private capital may earn lower returns because </li></ul></ul><ul><ul><ul><li>the cost of good investments increases </li></ul></ul></ul><ul><ul><ul><li>fewer good investments are available </li></ul></ul></ul><ul><li>Evidence is mixed. Mandate of LSVCFs directs funds to underserved areas of investment </li></ul><ul><ul><li>Failure to fulfill mandate of investing in early stage firms or other underserved areas of investment </li></ul></ul><ul><ul><li>Regulation of mandates is being enforced more tightly </li></ul></ul>
    • 12. Emerging Issues in Venture Investing <ul><li>Taxation of funds used in venture investing </li></ul><ul><ul><li>raises cost of venture capital in Canada relative to US. </li></ul></ul><ul><li>Growth rate of venture capital investment still lags US significantly </li></ul><ul><ul><li>Loss of R&D supported in Canada to larger, more mature American market. </li></ul></ul><ul><ul><li>Failure to support industries during early stages </li></ul></ul><ul><ul><ul><li>Support for US Internet ventures significantly higher in 1999. </li></ul></ul></ul><ul><li>Venture capital market still maturing </li></ul><ul><ul><li>Canada still lacks sufficient private equity professionals </li></ul></ul><ul><ul><li>Canadian market lags in the development of private VC funds for smaller investors </li></ul></ul>

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