On Friday, the Canadian Venture Capital and Private Equity Association (CVCA) followed in the footsteps of other Canadian innovation organizations, issuing an open letter to Minister of Small Business Mary Ng calling for stronger supports for Canada’s startup community.
“These three actions will provide the liquidity necessary for Canada’s high growth startups to survive this acute time of crisis.”
The CVCA, which represents over 1,800 individual members and over 290 member organizations across Canada, called for the federal government to address the current needs of high growth startup companies and the entire innovation ecosystem. The group suggested steps the government could take to better support the ecosystem, which has (like many other small businesses) been hard hit by the current economic impacts of COVID-19.
The CVCA highlighted three measures the government could take, based on input from its community, including paying Scientific Research & Experimental Development (SR&ED) tax claims, providing investor liquidity to BDC, and improving the wage subsidy, which Prime Minister Justin Trudeau announced was increasing to 75 percent Friday morning.
In response to Trudeau’s announcement on Friday, CEO Kim Furlong told BetaKit that the CVCA is pleased to see the 75 percent increase and tax deferrals, noting that the measures will “go a long way to keep Canadians on the payroll and increase the critical need for liquidity in the market.” She also urged the government to adopt the other recommendations in the CVCA’s letter, as a fulsome way to address the needs of the innovation community.
“Canada’s small, innovation-based firms are particularly vulnerable to the liquidity challenges resulting from the measures implemented to curb the COVID-19 pandemic,” the CVCA noted. “Taken together, these three actions will provide the liquidity necessary for Canada’s high growth startups to survive this acute time of crisis, sustaining our innovation ecosystem.”
Along with increasing the wage subsidy, the CVCA’s second recommendation was to pay all SR&ED tax claims on an expedited “no review” basis. The organization called for all current claims to be viewed as legitimate with each company’s CEO providing an attestation that their claims are legitimate, with an agreement to a future audit if the CRA should request one.
“For 2020, the government can proactively pay companies an interim six-month SR&ED payment based on the prior year’s filing,” suggested the CVCA. “There are no incremental expenditures for the government associated with this recommendation, however, it would have an immediate, material impact on companies that make up Canada’s innovation ecosystem.”
The CVCA is also calling for the government to provide “adequate capital” to the Business Development Bank of Canada (BDC), in order to maintain liquidity and the continued flow of investment dollars into Canada’s innovation ecosystem.
While BDC is currently part of the government’s emergency loan program for businesses, which received an additional $12.5 million on Friday, the CVCA is asking for additional capital for investors and funds. “This is especially important as, traditionally, foreign investors have retreated in times of crisis, further compounding the liquidity challenge,” says the CVCA in its letter.
It called for BDC to provide matching convertible note loans, on a one-for-one basis with General Partners (GPs). CVCA suggested that while the loans accrue interest they would have no payment obligations for up to 36 months, at which time the note could be converted into equity at the BDC’s discretion.
“The CVCA understands that in the past, BDC’s strategic investment group established a similar mechanism for promising early-stage start-ups,” the letter reads. “In the current context, we recommend that this program be available to venture-backed companies of all stages.”
The CVCA also called for BDC to help close rounds for GPs that are currently raising, citing the difficulty to close given the current uncertain market. “This will lead to prolonged fundraising timelines and the inability to start deploying capital into the market, resulting in a severely constrained flow of capital into the Canadian innovation ecosystem, especially in 2020,” CVCA wrote. “The BDC has an important role to play in shoring up this gap through the rapid allocation of dollars to close these funds, thereby accelerating the flow of venture capital investment into innovative start-ups throughout 2020.”
In the letter, CVCA also called for BDC to temporarily modify lending parameters, a move that could increase liquidity for startups and small tech companies that don’t typically qualify for those types of loans. To this end, CVCA asked the government to defer principal and interest payments to the BDC and waive covenant ratios, in order to avoid defaults.
While Furlong applauded Friday’s federal announcement, she told BetaKit, “the current structure of the bank loan program assumes pre-existing relationship with financial institutions that most startups don’t have. While we are encouraged by the steps taken today, we urge the government to quickly move forward and adopt the recommendations outlined in our letter to Minister Ng today.”
“Private equity and venture capital play a critical role in the Canadian economy. Canadian venture capital has made tremendous strides in recent years,” CVCA notes in the letter. “It is imperative that government and industry work together to take immediate action to ensure safeguard its progress and to secure the future promise inherent in Canada’s robust innovation ecosystem.”
“We look forward to working with all levels of government to ensure Canada’s small businesses and entrepreneurs overcome this crisis,” added Furlong.