Creating a thriving venture capital community requires more than a municipality declaring some long forgotten industrial park a center of innovation and giving it a snappy nickname. Through a combination of incentive programs and a generally welcoming stance toward the VC industry, the government of Quebec is giving a big boost to their business, local VCs and entrepreneurs say.
The program most praised by local VC community is the research and development tax credit. Along with the Canadian federal government, the provincial government of Quebec offers tax credits – in effect tax rebates – for money spent on research and development for companies based in Quebec. When taken together these credits can account for up to 40% of a company’s R&D spending in a given year.
Moreover, companies that have previously qualified for the tax credits from the provincial government can also borrow capital against their expected future tax credits from some local banks. Investissement Quebec, the provincial government agency, guarantees the loans responsible for trying to create investments and jobs in Quebec’s private sector.
“The tax credits are helpful in many ways. For a VC investing in a young company, it minimizes your financial risk, while leveraging your money,” says Richard Prytula, founder and managing partner of Montreal-based, early-stage technology investor Technocap.
Most of the companies in the portfolio of another early-stage technology investor, Innovatech Grand Montreal, take advantage of the tax credit program, says Hubert Manseau, president and chief executive officer of Innovatech. “For a biotech company the first several years are all research, so maybe, 80% R&D spending, and then they get up to 40% of that amount back, so it’s a huge savings and any start-up would benefit from that,” Manseau notes.
“The R&D credits had a major impact on our development,” says Duffy Dufrense, president and CEO of ConjuChem Inc., a public biotech company that counted Innovatech among its venture backers. “The credits allowed us to extend our money further and do more with less, since the issue most companies face in the early days is financial constraints – and back then we got in excess of (CAD)$1 million,” he adds.
Indeed the credits prove to be such a boon to a nascent company’s development that Manseau says he does approximately three deals a year where he convinces an established company to move to Quebec, or a foreign company to house a subsidiary in Quebec. He points to current portfolio company MethylGene Inc., a spinout of an American company, as an enterprise that moved to Quebec, in part, because of the incentive programs in place.
At the time it decided to locate in Montreal, MethylGene had scouted the globe for the right place to set up shop. “We went to different parts of the world that were trying to develop their biotech industries. Not only were there VCs in Montreal willing to spend money on us, but we saw with incentives like the tax credits that Montreal is a good place to do research,” he says. “In terms of our ability to do cost effective research, Montreal has come through tremendously.”
Another attractive incentive for VCs and their portfolio companies is the five-year provincial tax holiday the province will grant individuals with key technical or business skills who move to Quebec from outside of Canada to work for a Quebec-based company. “We have several people, three or four, who are the beneficiaries of that program – which is a big deal because the provincial income tax is nearly as high as the federal income tax, so that is a lot to save,” notes ConjuChem’s Dufrense. “In every case we have applied for a tax holiday in this situation, it has been approved.”
Between the tax credits and the personal income tax holidays for key hires, Manseau believes Quebec is becoming a much more attractive place for foreign investors, in particular American VCs, to look for deals. He has co-invested with VCs from the U.S., Europe and even Asia. While the tax credits and other incentive programs by themselves are not an overwhelming reason for an American VC to do a deal for a Quebec-based company, they certainly are a factor that is given some consideration, says Neal Hill, a managing director with Boston-based Venture Investment Management Company LLC. VIMAC has co-invested once with Innovatech, while Innovatech is also a limited partner in a VIMAC fund.
Contact Alistair Christopher at: