As a Canadian in Silicon Valley, venture capitalist Ann Hanham has done it all. Her distinguished résumé includes taking the first stem cell device for approval to the Food and Drug Administration, as well as taking public a number of companies.
But after being away for over two decades, Ms. Hanham is coming home – not because the venture capital business in Canada is thriving, but because it isn't. And she wants to change that.
"It is heartbreaking that so much talent and so much brilliant research isn't being commercialized," says Ms. Hanham from San Francisco, where she is currently a managing director at Burrill & Company, a venerable venture capital firm that invests money on behalf of partners such as Unilever NV, Archer- Daniels-Midland Co. and Nestlé SA.
The numbers tell a grim story. In 2000, the height of venture capital activity in this country, $5.9-billion was invested in 1,007 Canadian startups, according to Thomson Reuters. Last year, just $1.5-billion was raised by 444 Canadian firms.
To improve that dismal record, Ms. Hanham is putting her Silicon Valley contacts and experience to work. Her goal: assemble a $200-million biotechnology and life sciences fund that invests in both stellar university research as well as burgeoning companies in industrial chemicals, agricultural biotechnology, life sciences and biofuels that need capital. She is moving back to the country to run it.
For her, this endeavour isn't about the money to be made. It's about rescuing all the Canadian research that is created, only to die.
Canada's spending on science research and development, per capita, is in the top tier globally – a recent report pegged federal R&D spending at $7-billion, largely through tax credits – but its return on those investments is practically negligible. Our universities have some of the brightest minds around, but very little of their work sees the light of day.
"It's so obvious when you go to Toronto or other [Canadian]places that there's way more technology than there is money to fund it," said Mike Powell, general partner at venture capital firm Sofinnova Ventures in Silicon Valley. Originally from Toronto and armed with a PhD in physical chemistry from the University of Toronto, he now lives in California and keeps up with what's happening back home.
Governments and angel investors – typically wealthy individuals who invest in startups – fund a lot of early-stage research that typically results in prototypes. But as soon as a Canadian biotech company needs more than $10-million to grow, there is almost no way to get it from domestic sources.
Typically, successful small biotechnology companies that receive venture capital funding ultimately go public, allowing their private backers to exit, or they get sold to a pharmaceutical behemoth or other corporate buyers, such as Monsanto Co. In these markets, IPOs are hard to swing even for larger, more established companies, and corporations won't spend wildly because of economic constraints. That means early backers have trouble cashing in profits.
Because so many potential sources of money have vacated the field, the Ontario government has flirted with proposing a venture capital tax credit of up to 35 per cent. But that can only accomplish so much. Investors must take big risks to get involved in startups, and to date few have been willing.
From afar, the easy answer is asking Canada's behemoth pension funds to step up. But in 2001 the federal government changed its rules and allowed these funds to hold a greater percentage of foreign investments. With the whole world to invest in, there's less reason for them to put money into small Canadian upstarts.
Life sciences and biotech are at a particular disadvantage. Other tech startups, like mobile phone app developers, have a lot of media hype around them right now, and their products are also easier for an investor to understand than, say, a new molecule used to treat pancreatic cancer. Science research also requires more funding over a longer period of time. On average, a life sciences startup will need $100-million to $120-million before it develops its product enough to be sold or go public.
Nick Galakatos, managing partner at Clarus Ventures in Cambridge, Mass., says life science venture capital investors are more timid in this environment. These days, they require a startup to be further along in its development before they offer up some cash. Rather than invest on a bold idea, they might look for products that have already been tested on dozens of patients.
Yet studies that have shown that investing in life sciences and biotech can actually yield better returns than other forms of technology. A study by Bruce Booth and Bijan Salehizadeh published in the science journal Nature America found that from 2000 to 2010, health care venture investing yielded an average return of 15 per cent for investors who have sold their shares, substantially more than the technology venture sector.
Ms. Hanham thinks Canadian firms can show that kind of growth, as long as they are taught to think about marketing across borders. "Every company that this fund will invest in will go global from day one," she says.
U.S. firms now have to do the same, something they aren't used to. Because North America was the historical leader in development, the continent's life sciences startups don't think to look for competition outside their borders. Recently, a Canadian firm approached Ms. Hanham with a solid business plan, and she replied: "Well, this is great, but do you know there's a company in Singapore that's two years ahead of you?"
"I spend a lot of time in Asia, and I can tell you, they're going to eat our lunch if we don't get moving," she says.