Brady Fletcher
Managing Director - TSX Venture Exchange

How to Grow Canada’s Capital Markets and Future Success Stories

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Takeaways

  1. Combining social consciousness with profit generation will help power the future economy by guiding companies and entrepreneurs to develop businesses and technologies that are solving real-world problems while delivering on social priorities.
  2. Venture capital, both public and private, is a key component that shapes and enables our future economy by finding the entrepreneurs and business plans that have the potential to grow and scale.
  3. Capital has never been more mobile and Canada must focus on establishing the most competitive and fit-for-purpose regulatory environment possible to attract companies and investment.

Action

Canada must encourage and support our public markets to drive investment into them. This can be done by expanding the flow-through tax credit program, encouraging private investment into public companies through capital gains reductions, and reducing regulatory burdens to attract more companies to our markets.


What kind of work or companies do you foresee having the most impact and potential for investment in the context of Canada’s future economy?

In the future economy, we have to be able to connect underserved communities with the services they need. The fact that we do not have clean drinking water in all of our First Nations communities in Canada is tragic. We need to find ways to service their different needs, train them in new skills, and create new jobs for them.

Recognizing these needs, we now have entire industries emerging that are using technology to service these communities, such as Drone Delivery Canada, a company listed on TSX Venture Exchange that raised $25 million from public venture capital. Now, they are actively tackling the problem of supplying goods to disconnected communities. 

Within the private sector and the investment community, there are numerous examples of companies that are solving these real challenges for Canada – whether it’s water treatment or using drones to service disconnected communities. These initiatives will be fostered and supported by private sector investors. We need to focus on developing innovative and nimble businesses that are solving real world problems. And what is really exciting today is that people are recognizing that returns and value creation can come from a spectrum of purposes, from totally socially motivated purposes to profit-oriented, to somewhere in between.

Resource technology is a core issue that companies are starting to focus on.Hitachi is an example of a business that is focused on deploying technologies into mining. There are companies like MineSense that are based in Vancouver that have developed X-ray sorting mechanisms to do ore sorting right at the shovel and then feed that data back into the mining facility. We are also hearing about mining companies adopting electric vehicles for down-hole activity, which reduces emissions and increases worker safety. Those Canadian industries and companies have been leaders in adopting new, efficient technologies and finding new ways to do what is otherwise a very capital-intensive business.


What role do Canada’s public venture capital market play in shaping our future economy and enabling the growth of companies defining it? 

We need to support entrepreneurs that can identify society’s problems and then build a solution for them. We need to provide them with the capital to try their solutions a couple of times, recognizing that you only learn through failure. We need to have the capital here to be able to scale those businesses into becoming global leaders in their own respective ways. 

Venture capital plays a key role in being able to find those entrepreneurs and those business plans that are defensible and have a legitimate shot at becoming a real business.It is capital that is able to perform its due diligence and has the risk appetite to support entrepreneurs early on in their life cycle.

It allows for the creation and growth of entirely new sectors. For example, we recently saw Canada’s cannabis industry build considerable momentum in attracting investment off the back of legalization. Now that we are towards the end of 2019, financing activity has been a little bit challenged, but only because people are looking to see the value rationalization in some of the cannabis companies and other higher profile companies, which is actually really healthy for the markets. Now, we are going to see some consolidation and a new foundation set for this industry in which Canada has an opportunity to be a world leader – and this was enabled by our capital markets and the depth of capital that’s available through them to fund the scale of those new businesses.


Is there anything about the current trends in Canada’s venture capital ecosystem that concerns you?

There are three things that cause me concern with the current ecosystem. First, the trend towards investors in private and public companies alike being increasingly focused on larger and later-stage companies. In the public markets retail capital that would have typically invested in smaller, growth stage companies is being directed elsewhere, while private venture capital funds continue to focus on the later stage deals, creating a gap in Seed and Series A funding. 

The second concern is that the growing pool of private equity continues to push Canadian and international companies to stay private longer. This means that the wealth creation from those phases of most dramatic growth is being limited to select few investors in the VCs who are part of that phase, and precluding the broader public from that wealth creation. The Atlantic had a great article in November 2018 that talked about how this trend contributes to the growing wealth divide. 

The third concern, more specifically around Canada’s venture capital ecosystem, is that companies in Canada don’t have the same access to capital as US competitors. When you look at what goes on in the US, the average size of an early stage deal is US$14.3 million. The average size of a late stage deal in the US is US$42.2 million. In Canada, we are at C$ 9 million. The US is on track to do $100 billion worth of venture capital deals this year. Canadian companies just do not have the same access to capital that American companies do.


How can we attract more capital to invest in Canada and Canadian companies?

Our public markets, and specifically TSX Venture, have historically filled that gap between Canada and international jurisdictions. We need to be thinking about how we encourage and support the public markets to drive investment into them. For example, how can we expand the flow-through tax credit program that helps support the Canadian mining industry so heavily? How could we use that flow-through tax credit program to support the growth of a cleantech economy? What could we do to mirror other countries like Australia or Mexico that have used capital gains reductions as a way to encourage private investment into public companies?

This could have huge impacts on our national economy. For example, if we look at 2018’s TSX Venture 50, those 50 companies created 2,500 jobs, and they all had plans to accelerate expansion into 2019.

One of the main considerations to improve the competitiveness and attractiveness of our capital markets would be to start thinking about streamlining private placement and prospectus offerings by being more reliant on the continuous disclosure obligations of public companies. That is one of the beautiful things about public markets: the transparency, continuous disclosure obligations, and financial reporting. These key features breed a responsibility to the investment community and to the broader stakeholder base. Ensuring we have the best, most attractive system in place could attract more capital to our markets. It could also encourage some of our companies to go public earlier which would enable more public investors and broader Canadians to participate in the growth of those companies. This is important to investors – a company’s early years are when the biggest phases of wealth creation occur.


What is your perspective on regulation in the Canadian economy – especially in its ability to enable the development of new, emerging industries?

It is worth taking a quick step back and looking at what we mean by Canada’s future economy. We are in a global trend towards sustainability and getting off of resource dependence, but Canada has to recognize that our economy is substantially driven by the resource industry. 

The mining industry has played a huge role in BC being self-sufficient, and in Toronto and in the case of Toronto Stock Exchange specifically, our public markets have become a globally renowned destination for mining companies. Furthermore, the energy industry has funded all of our social programs across Canada in various ways. Those two industries – mining and energy – have been major economic drivers for Canada and we need to find ways to leverage that global position in the future.

We need to recognize that the Canadian mining and energy industries have some of the most ethically-produced, environmentally-friendly ways of developing resources, and their success has allowed them to contribute to future industries or products like electric vehicles through the mining of the metals in batteries. The IHS Chemical World Analysis forecasted that by 2020, there will be 772 pounds of plastic inside every vehicle. To do that in the best possible way, we need the support of the resource industry.

If we look at Canada’s resource industry from that perspective, our resource companies have around 5,500 projects under exploration and development, and over half of those projects are in foreign countries. Also, roughly 50% of the world’s mining companies are listed here in Canada. So when you look at the number of international companies or international projects that are using Canadian capital markets, investors, banking, and the research community to support their growth, I think this naturally lends itself to Canada and Canadian companies developing new technologies and ways for these industries to become more efficient and to find ways to do their business more sustainably.

The success of the Canadian resource industry also drives the success of Canada’s non-resource industry. Investors diversify their successes into other sectors. Resource companies invest into energy efficiency technologies. Mining companies help drive the adoption of renewable resources to power mines that are producing the inputs to electric vehicles. 

It’s important for our future economy to support these companies. Real job growth is coming from the private sector, and those companies are being supported by private investors. Our regulatory model is globally unique because we understand the need to have a right-sized regulatory model while understanding that entrepreneurs are out there undertaking risky ventures. It’s really exciting to see how this regime that was developed in support of the resource industry is now being leveraged by technology companies and the broader innovation sector to list early, and grow by leveraging public venture capital. We need to continue to make sure that we are adapting the disclosure processes appropriately for a transparent market. Also, we must look at whether there are things we can do to ensure that the right metrics are being disclosed on companies that may not be profitable yet. I think the Canadian Securities Administrators (CSA) has done a great job commenting on a number of these things – now it’s time to actually implement it.

We must act on this quickly because capital is mobile and constantly looking around the globe to find the best opportunities. We need to ensure that in Canada, we are creating an environment where the best opportunities can grow. Unfortunately, we have neutered our resource industry in a number of ways and put regulatory hurdles in front of it and its companies.As such, capital that is looking for countries and industries to invest in is now going elsewhere. I agree that we need to be finding ways to be more sustainable and to shift into an innovation economy, but we cannot do this at the expense of the industry that currently supports all of Canada’s social programs.