Seed investing creates champions of tomorrow

Seed investing plays a crucial role in the economy by creating some of the most innovative, high-growth companies in the country.

But the risky nature of seed investments – financing the commercialization of innovations from universities, research centres and inventors - has meant only a few institutional investors have been willing to get involved. And a three-year downturn in the venture-capital industry hasn't helped to attract more players.

"With the economic uncertainty and collapse of technology stocks in recent years, there just aren't many players making seed investments," said Pierre Pedneau, Chief Executive Officer of Sovar, a Quebec City limited partnership that promotes the discoveries of researchers at Université Laval and Centre hospitalier universitaire de Québec.

"There should be more financing because these are the projects that become the champions of tomorrow."

This year, Sovar signed an unique agreement with the Business Development Bank of Canada (BDC) under which BDC agreed to put up $1.5 million to finance three to five business projects. The deal is renewable each year.

The deal is an initiative of BDC's Technology Seed Investments group. The group was created in 2002 with $100 million to direct to a segment BDC had identified as under-served by the venture-capital market. It has, so far, invested in 15 projects across Canada.

"We are leveraging outstanding technology and innovations to create new businesses," said Robert Inglese, BDC Vice President, Technology Seed Investments. "We are bringing resources and financing to these companies."

Inglese said BDC assists company founders to find professional management, establish corporate-governance structures and evaluate the market potential of their project. BDC also helps businesses to align their activities with what the venture-capital community is seeking.

Early-stage companies received half of all Canadian venture-capital investments in 2003, a much higher fraction than in the U.S.

But Kirk Falconer, Research Director at Macdonald & Associates Ltd., noted that this money has tended to go to firms that have already received venture capital rather than seed-stage projects.

Conditions for seed investments won't improve until the venture-capital industry as a whole rebounds, Falconer said. The industry needs stronger activity in initial public offerings and acquisitions – the mechanisms through which venture capitalists exit from previous investments.

"Until venture professionals start emptying out their portfolios, they're not going to take a lot of resources in a slow market and invest them at the highest risk end of the spectrum," Falconer said.

Angel investors are one important source of financing that start-up companies can tap. Angels are wealthy individuals who have typically run their own companies and can offer crucial guidance to young companies along with money.

They can also open doors to formal venture-capital financing.

Allan Riding, a Carleton University business professor, has found that 57 per cent of angel-financed firms go on to attract venture-capital financing compared to just 10 per cent that did not receive financing from an angel investor.

One entrepreneur, whose firm succeeded in securing seed financing from BDC, said it remains tough to find money.

"It's picking up, but we're not there yet," said Patrick O'Connor, General Manager of Nanometrix Inc., a Montreal nanotechnology company.

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