As an industry Quebec excels in the fields of engineering, transportation, telecommunications, aeronautics and aerospace technology, medical research, computer science and biotechnology. They are not too bad in ice hockey either. The Canadian province exports 40% of its production, mainly to the U.S.
But to date, American VCs haven’t exactly been clamoring to do business with their northern cousins. That may change if Quebec’s venture community continues to grow the way it has recently. In 1993, the region managed a mere $3 billion in capital; today, it has more than $12 billion under management.
The Government of Quebec, which oversees Quebec and Montreal, is working to expand that growth and get American VCs and companies to take notice of the region. On the plus side, Quebec is a compelling residence for entrepreneurs because the cost of living is among the least expensive in North America, and it’s easily accessible by plane.
What’s more, the Government of Quebec established financial benefits to lure companies to the area. For example, if a company does its research and development in Canada, it gets about 40% of its money back though a tax refund. The government also gives out a plethora of grants and loans.
After receiving its first round of funding from Bio Capital, Fonds de Solidarite FTQ and Innovatech all located in Quebec – Origenix Technologies relocated from the U.S. to the Quebec area.
“There is a lot of money in certain pockets up here. In 1997, when we were spun off, U.S. VCs didn’t want to look at us because they were busy looking at other types of companies,” says Douglas Jensen, president and chief executive of Origenix, a spinout of Hybridon Inc. that is in the process of raising CAD$20 million.
Jensen also plans to take advantage of the tax-incentive program. However, until recently there was a restriction on having the benefit. Hybridon had already turned out a company that relocated to Canada prior to Origenix. The Canadian government’s restriction wouldn’t allow two companies from the same parent to both collect the tax incentive.
However, “Quebec waived that rule because they were fully aware that there are many companies here in the same situation we are, but the federal government has held our up money. We are still waiting for it,” Jensen says.
With or without the tax incentive, Jensen notes that it is less expensive to do R&D and easier to hire high quality employees. “Rents are lower, and there are good local universities that attract talent from all over the world,” he says. “We were happy to move. We had good technology, and ideas; Quebec helped us get off the ground.”
Despite Jensen’s high praise of Quebec, he admits there is still need for America. After completing its first two rounds, which raked in a total of CAD$16 million, the company is now looking for some help from U.S. investors. “We have investors up here, but for survival it is important to expand our investor base. Just getting money from one area can be limiting,” Jensen adds.
Quebec Accepts Come More Than Others
While the Quebec government is eager to bring any business into the area, it clearly shells out more dollars to certain sectors. In 2001, 21% of deals done were in the biotech arena. Per capita, the region is the fourth hottest biotech player. While San Francisco, Seattle and Boston employ the most of the tech world, Montreal employs the fourth highest number of techies. The region beat out New York and Dallas.
Additionally, early stage companies accounted for 50% of the money spent in the region.
Pierre Coulombe, president of Infecto Diagnostic, a diagnostic product that detects infectious diseases, suggests Quebec is the right place for an early stage company. Having founded his company in Quebec, Coulombe said, “It’s a nice place to nurture companies. There are a lot of resources here that make the building process easier. There is also a lot of expertise up here,” he says, adding that the Quebec government promotes a positive working environment.
Daniel Laporte vice president of technological investments at Fond de Solidarite adds, “Start-ups don’t even have to reach profitability to collect their tax benefit.”
Coulombe’s company, which at one time took advantage of the incentive plans offered in the area, has raised CAD$21 million and is now looking for another CAD$15 million. Its testing procedures are expected to be out on the market this year.
However, after being in Quebec for so long, Coulombe is also aware of the restraints. While it may be easier to get money early on, it does get harder. Additionally, a round of financing in Quebec does not measure up to a round in America.
Venture capital investments in Canada on average are 50% lower than they are in the U.S., which can be a disadvantage, said Coulombe. “The smaller amounts force us to come back to the market sooner, which makes us take more time to come to market. If you don’t receive enough money you may have to face a bear market and you just can’t control that,” Coulombe says, adding that like Jensen, he would be more than happy to embrace an American VC.
“We would certainly take money from the U.S. We would never move there, but we could expand to the area. The U.S. controls 50% of the world market. That’s huge, who wouldn’t want to be a part of that,” Coulombe says.
LPs Have Overlooked It, Too
Nonetheless, it is not just U.S. businesses and VCs that have largely ignored the region. American LPs don’t seem to be opening up their wallets for their northern neighbor, either. Technocap, a Quebec-based venture capital firm founded in 1993 that currently has $250 million under management, has a list of limited partners, all of which are Canadian institutional players. Its LPs include Sofinov of the Caisse de depot, Bombardier Trust, Solidarity Workers Fund, Desjardins Pension Fund, National Bank of Canada and TechnoAnge Inc.
Perhaps even more telling than Technocap’s cast of LPs is Fond de Solidarite’s list of non-traditional institutional LPs. Fond de Solidarite and more than half of Canada’s venture capital dollars under management are labor-sponsored funds. What’s more, the investments, which also offer individual investors generous tax credits, allow workers to put a percentage of their paycheck into Fond de Solidarite’s fund.
Under the law, the government permits employees to put up to CAD$5,000 into such funds each year. Based on the firm’s previous track record, Laporte says workers are guaranteed returns after investing with Fond de Solidarite for a 10-year period. The workers’ fund invests over 60% of its capital locally in Canada.
Clearly the programs work. Government officials said they already have a long list of companies that applied for the newest incentive that was added this year, which gives loans to companies that receive funding from outside of Quebec. “Every year there are a number of new measures put in place by the government and they must work because companies are talking about them and applying for them; it’s a big help,” says Laurent Waessa, commercial attache to the Quebec government.
No Dotcom Hangover Up Here
Canadian VCs can be thankful they didn’t follow their American counterparts in at least one sector: dotcoms. They did not partake in the dotcom fad to any great extent, and therefore, do not have the hangover that many American VCs have. “We avoided the dotcom world mainly because the pricing was too high and we didn’t want to pay,” says Laporte, whose firm has $4.5 billion under management and invests mostly in telecommunications and biotech companies in Quebec.
In 2000, U.S. venture capitalists invested more than U.S.$500 billion into companies. However, last year’s downturn in the economic climate forced U.S. VCs to slash their investment activity to just under U.S.$200 billion. By contrast, Canadian VCs showed no such fall off, investing around U.S.$300 billion in 2000 and again in 2001, according to Mary Macdonald & Associates, a Canadian-based consulting firm.
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