SPEAKER_05 0:00

Mr. Chair, honorable senators, thank you for the invitation to appear before this committee and for undertaking this important study on access to credit and capital markets for small and medium-sized enterprises. This is an issue that is fundamental to whether Canadian entrepreneurs can build, grow, and stay in Canada. I'm Claudie Rojas, CEO of the National Angel Capital Organization. NACO represents more than 4,000 angel investors and over 100 member organizations across Canada. Our members have invested more than 1.8 billion into over 2,000 Canadian companies. Wealth Simple, Verifin, Hopper, and Kepler Communications each began with an early check from a local angel investor. Together, these four companies are worth over 20 billion US today. They employ thousands of Canadians and serve millions of customers. Innovation-driven firms are a powerful engine of productivity growth. They generate more revenue per employee than the average company. They make other firms more productive. When a Canadian retailer adopts a Shopify, that retailer becomes more efficient. The earliest stages of capital determine the growth trajectory of these innovative firms. Canada has the talent and the research base of a knowledge-based economy. What it has not built is the capital architecture to keep companies, their intellectual property, and our founders at home. The consequences are now measurable. Canada's GDP per capita has fallen at 0.4% per year over the past five years. The worst performance among the top 50 developed nations. Canadian companies at the early stages raise 40% less capital than their US peers. Our top three innovation hubs, Toronto, Waterloo, Vancouver, and Montreal, have lost a combined 66 billion US in ecosystem value over the past five years, costing Canadians 133,000 fewer high-paying jobs as a result. The trajectory is visible at the founder level as well. The U.S. is producing 45 times more high potential startups than Canada. And only one in three Canadian-founded startups are still being founded here at home. Access to risk capital is the single most powerful determinant of growth trajectory, and that trajectory is defined at the earliest stages of company formation. Angel investors bring something that institutional capital does not. They are hyper-local and bring patient capital, mentorship, and domain expertise at the critical early stage of the growth journey. International experience is instructive. The UK, through its enterprise investment scheme, EIS, has mobilized over 33 billion pounds in private investment towards British early stage and growth stage companies. Leading economies are making deliberate choices to address the early stage within a national strategy. Canada has not made that choice yet. Global competition for high potential founders is accelerating. Without bold action to address gaps at all stages, Canada risks losing its talent, companies, and economic sovereignty. Three areas require urgent attention. First, Canada must resource the front end of the capital continuum. Angel investors, seed funds, and the networks that support them need the scale and capacity to consistently fund Canadian companies at the earliest stages. When one check, one mentor, and one local network can determine whether a company stays in Canada or moves abroad. Second, Canada must treat the capital life cycle as a connected system. Early stage investment, growth capital, and the liquidity that comes from institutional investors are sequential stages, not separate ones. A weakness at any one stage compounds across the others. Third, Canada must make a more deliberate approach, must take a more deliberate approach with its tax policy to incentivize private capital participation in the economy of the future, similar to leading jurisdictions like the United Kingdom. Canada's innovation outcomes are decided at the earliest stages of company formation. If we get that right, the rest of the capital continuum has a solid foundation to build on. If we don't, no amount of growth stage capital can compensate. Thank you. I look forward to the committee's questions.

SPEAKER_03 4:34

I want to concentrate on procurement and specifically government procurement and uh and what can the government do uh in terms of its own procurement policies to prioritize SMEs that possess innovative solutions or intellectual property uh that can stimulate demand and enhance the credit availability for SMEs? Because at the end of the day, if you have a purchase order in one hand, financing is available on the other hand. So, and given that the government is the largest purchaser of goods in this country, what more can they do?

SPEAKER_05 5:16

Angel-backed companies have been validated by the private sector. These companies have a higher propensity to service the government uh as a vendor. And so our uh recommendation would be that in addition to prioritizing and ensuring that Canadian companies are the beneficiaries of procurement, that the government look for ways to accelerate the procurement process in order to minimize the administrative burden and look to the private sector where it has already validated these companies and is already supporting them. Thank you.

SPEAKER_03 5:47

I just have one follow-off uh I'll throw it open to both of you.

SPEAKER_04 5:52

Um staying on bank for a minute, uh, if you're a a startup or an SME, maybe not so much the the M's as the the S's, is you're not gonna get bank support without putting putting your house on the line. Um whereas I will always say to startups, like equity's the way because there's no call on it if you get bumps in the road. So do you want to comment on the the debt side versus the equity side of the equation for startups?

SPEAKER_05 6:21

I can comment on um some years ago we uh partnered with one of the at large national banks on a credit product to um in which they relied on our network as a validation mechanism. Uh and so if if a startup had raised capital from a qualified angel investor within our national network, then uh beyond a certain threshold, then the bank would um would forego the personal guarantee. Uh so we we are seeing an attempt to address these issues. Um however the the level of support isn't at the stage in which it will enable companies to in in this country to be as competitive as they would be if they had the support of an SME focused bank with a higher risk profile.

SPEAKER_04 7:07

Short question, follow one. Um over to you, Mr. Rojas. On your your list of three points, uh your last point was uh a more desirable approach on tax policy, and you referenced the UK and the EIS. Um can you tell us me a little bit more about the EIS and then maybe your top couple tax policies? And we've heard many, but we want to keep on reinforcing from various uh sectors what people think about it.

SPEAKER_05 7:35

So, as a starting point, I think what's what we can take from the EIS system is that it is a system. Uh it it incorporates companies, it it's mindful of companies at each stage of the capital pipeline. And so within EIS, there is also a seed enterprise investment scheme that recognizes the higher risk profile of seed stage companies. EIS itself provides 30% tax relief, so in this in this country it would be the equivalent of a 30% uh national investment tax credit. SEIS, so companies with a higher risk profile, receive a 50% tax relief to the investor, I should be clear. And then in addition to the investment tax credit, which within our frameworks mobilizes new supply of capital into the ecosystem, it mobilizes new investors. There are also capital gains deferral for when an individual uh exits uh exits an investment from another sector and puts that money into British-based companies. And there's also capital gains exemption, which is quite powerful. It sends a very clear signal that if you invest in these companies that drive the economic growth of the future, uh, that you don't have to worry about the capital gains component at the end. And the reason why all of this is important is because it corrects for the the ultra high risk, the the risk of losing the entirety of your capital when you are an investor. So it corrects for a market failure, and that's why uh a tax policy, it should not be a silver bullet, it should be a comprehensive system that that understands the full capital continuum and the risks at all stages.

SPEAKER_06 9:13

Thank you. Thank you, Senator. Moving now to Senator Deakin for five minutes to be followed by Senator Yesinko.

SPEAKER_00 9:20

Senator Should we be focusing on companies that I mean the CCI has uh got a definition of the types of companies that it that we need really need to focus on? Maybe I'll go to you, Mr. Raw, to to add into this. I just want to know what what are the companies themselves that we should be making sure the policies make it move the needle on so we can measure the effect. Because right now, those companies are leaving the country. So let's describe them so that we can start to build get that relationship built, we know who to invite to the table and get government to pay attention to.

SPEAKER_02 9:58

That day, it was much smaller. The the orientation to the companies was and everyone was growing fast. And that has died, essentially, it in at some era over our time here. And so I just think when if you cut off your pipeline of relating, you're not gonna find the gems.

SPEAKER_05 10:19

The it's critical that we let the private sector lead. The private sector can see things that others don't. There's a it's there's idiosyncratic value to be captured by these high growth companies that quite often it it's it's not um it can't be perceived by in uh by government. And so I'll give you an example. Um Wealth Simple. Wealth Simple raised a hundred and uh so Wealth Simple in 2014 was looking to compete with the large banks. Most most people would not think that that is something that that could succeed. Uh our Angel Investor of the Year wrote a $250,000 check into Wealth Simple. They now have $100 billion in assets under administration, they raised capital across the full pipeline, and they have a value of US $10 billion. That is not something that government would have determined in advance, but the private sector can.

SPEAKER_06 11:48

Thank you, Senator. Maybe second wrong. Senator Senko to be followed by Senator Lafreda.

SPEAKER_07 12:02

And I want the response that you forget. We say that some 4% of entrepreneurs with entrepreneurs at taille moyenne, I parle même pas des petits, have de la difficulty to obtain the capital de risk. D'après vous, what are the reasons or qu'est-ce qu'on devrait faire pour améliorer that accès là au capital de risk.

SPEAKER_05 12:55

The starting point is is recognizing that there are barriers. It's system-wide. So we need to address the system, and then to your point around recommendations, we need to to look at at the steps that we can take that are actionable. I can tell you what we have done. I like the phrase, if you see it, you can be it. Um and we hear this across um across a wide range of women entrepreneurs. And so in in 2017, we started tracking the number of women angel investors in our network. And it was embarrassing. It was 14%. But if you don't measure it, you can't change it. That number has steadily increased. And over the last three years, the number of women angel investors within our network, so our national network of 4,000 angel investors across the country, has been steady in the range of about 35 to 37 percent. The value that women investors bring is that it one, it creates spaces in which women entrepreneurs feel welcome. It helps overcome things like unconscious bias, which by definition we don't know that we have. Um and then what it also does and what we've seen is that um angel investors bring purpose. Um and women angel investors um in in some cases bring uh a commitment to take a higher level of risk on women-led companies, recognizing that if you're a women-led company, you have had to overcome many more barriers than your male counterparts. Thank you, Mr. Chair. The we did root cause analysis. So with the in partnership with the Startup Genome, what we found was compounding gaps. And these compounding gaps are challenges at all stages of the capital pipeline. And it is contributing to the erosion and the loss of companies at all stages in in different ways. And so we identified that there is a 30 percent seed stage gap. So when a company is raising capital in Canada, um 30 percent uh fewer companies raise raise that seed stage capital, that early stage capital. This compounds, it has cascading effects. 40 percent at series A, so a 40 percent deficit of companies raising series A capital. And then that compounds further into a 50 percent series B gap. This compounding effect it creates issues at all stages of the capital pipeline. And the challenge that we have as a country is that we tend to focus on the top floors of a skyscraper, and we don't understand that it's the breadth and the depth of the foundation that determines the magnificence of the structure itself. And and as a result, what is occurring is that entrepreneurs are leaving to other jurisdictions, to other countries that do understand that, in which they can gain access to capital at a greater rate, and there's there's three dimensions to access to capital, and I'll focus on one in particular that tends to be overlooked. We are, and we must continue to be, a nation of builders and risk takers. However, our SMEs spend an extraordinary amount of time with the administrative burden, rather than building their companies, of raising capital, of applying for government programs. The administrative burden is a distraction from company building. So if they do succeed, they end up becoming third or fourth in market if they get to that later stage. And when you're third or fourth in market, it's rational to sell as opposed to being crushed by your competition. There's one company in particular, uh, straight from the founder, they sold their company for $100 million in the West, because if they didn't, uh they would have been crushed by their competitor. That that early exit contributed to the success of uh something called Harvest Builders, um, an accelerator in that region that gave rise to neo-financial, a multi-billion dollar success story. So exits and liquidity are important. Early exits are suboptimal, and those early exits tend to come from this compounding effect that begins at the earliest stages.

SPEAKER_04 17:14

Primarily to you, Mr. Rojas, but I'm certainly glad to get your input. Um, democratization of um investment. So uh your angel investors are probably 99.5 percent accredited investors. Um, but we've heard from earlier witnesses that people are free to invest in cryptocurrency and uh the markets that project what things are gonna happen. They can throw their money around, but the securities regulation restricts democratization. And and people that want to put small money in just can't get into the system and probably would be more supportive of nationalistic opportunities as well. Uh we have FTQ in Quebec, that is a fund that raises up to 5,000 from workers per year, gets matched with two 15% tax credits. How do we democratize a bit more? Um, and do you think that that will help bring more capital into the marketplace? Uh just last point. The recent strong Canada Fund or whatever is talking about issuing bonds so that people people can participate. That's in major projects. We need to get them into SMEs.

SPEAKER_05 18:19

Good too. And to the question related to um democratizing access to capital, it's very important that when when investors put their capital at risk, that those are well-informed investments. We have a national network of 100 early stage investment organizations, including angel networks, that help educate new investors so that they can put their money, their capital at risk into companies, qualifying companies, companies that are worthy of that capital and that are likely to succeed. And so it it we have consulted with the regulators. Uh, I did um uh early in my law career, uh spend some time in the corporate finance branch and at the Ontario Securities Commission. I can appreciate the challenge that they have of ensuring that they're protecting the integrity of the capital markets and protecting investors. Um I I I'm hopeful that we will continue to see the kind of leadership that we have across the regulators around uh recognizing that the accredited investor exemption is one, it's a proxy for protecting investors. It it assumes a certain level of sophistication. And um, but educating those investors and ensuring that they have the appropriate level of education as it relates to this asset class is important. And I would emphasize that um education as it relates to this asset class is not the same as having a CFA charter, which I have, or being a trained lawyer, which I am, or having an MBA from a large business school. Um it this asset class has a very unique dimension to it. And so knowledge sharing, which takes place throughout the angel networks across the country, best practices between angel networks is the best way to protect investors and to an increase to increase access to uh to capital and to dump democratize this important asset class. Thank you.

SPEAKER_00 20:04

Uh high value exporters. They're the companies we really want to support, I think, in this country. Um right now there's uh $4.5 billion being spent through 134 different programs in Ottawa. Uh there's no KPIs associated with those programs. Um, if you could, with a written response about what you would do differently in that regard, to have it driven by investment and turn that $4.5 billion around into something that we know will have KPIs. Thank you.

SPEAKER_05 20:36

My contribution would be ensuring that as we think about these frameworks, uh, we're approaching it from a fulsom perspective. We we suffer as a country from silver bullet reasoning, uh, hoping that one thing, one tax mechanism, one particular sector will turn everything around. And uh there tends to be reactionary policy. There is much that we have learned over the last 35 years as it relates to the development of the innovation economy in other jurisdictions and in this country. We had the labor-sponsored investment funds in the late 90s. We learned one lesson there. Within our framework, we see that as supply of capital that moved into the ecosystem, but we did not have the deployment mechanisms necessary. Um, IP-rich companies, knowledge-based companies, they need capital at the formation stage in order to be globally competitive. And there's a power law that is often overlooked. Uh the the government has a desire, uh governments of of all stripes uh sometimes have an inclination to try to pick winners. That is not possible. Uh you cannot pick the Blackberry of the future in advance. You can't. Jim, Jim did, many of us would not have been able to. We have to let the private sector lead. We have to let it lead en masse, and it will find the IP and it will find the companies and the founders and back it with risk capital and surprise us with the wealth simples and the blackberries and the hoppers and the Shopify's of the future.

SPEAKER_06 22:01

So Carly, thank you for your time and uh we appreciate very much. We will suspend temporary.