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"Highway to Heaven": Investing in Canada's Path to Prosperity

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Charlie Coffey, O.C.
Executive Vice President
Government Affairs & Business Development
RBC Financial Group
5th Annual Angel Investor Summit
The Westin Hotel
Ottawa, Ontario

Monday, October 24, 2005

Paul, thank you for the wonderful introduction. I read a piece in the Ottawa Business Journal (OBJ) on September 6th that put a grin on my face because it was classic Paul LaBarge at work. At that moment, I knew what my opening would be for these remarks. As Paul and at least OBJ editor, Leo Valiquette will recall, the story headline was Business leaders jeer tax grab, referring to Ontario's plan to eliminate the 15-per-cent tax credit it gives investors "who pour their money into labour-sponsored investment funds (LSIFs)." Paul's quote, in part, went like this:

"Finding angel investors for early-stage companies and substantial (venture capital) VC opportunities for more mature businesses, is already a real trick. Make it less attractive to the moneymen and you're asking for trouble. The impact of the LSIF was that it was a cushion during the ("tech wreck") in 2000. U.S. venture capital ran for the exits and other funding ran for the exits as the meltdown started. The angels got fried and the LSIF was the only capital available. If the market starts to rise and the Americans come in and we've eliminated the front line that allows us to keep the head office in Canada, it will encourage people to come in and loot and plunder our companies."

Interestingly enough, the Province has now committed to an "orderly wind-down of this tax credit" by the end of the 2010 taxation year. Time will tell how this one unfolds, however one thing is sure…Paul, you continue to set the pace on these type of issues with your voice and leadership in action - you're simply one of those people who keeps raising the bar (no pun intended) for all of us!

I'm delighted to join you at the 5th annual Angel Investor Summit - the timing is great since we're celebrating small business this month. It's also a pleasure to see familiar faces in Ottawa and from across the country - and it's always gratifying to see many RBC clients in a room. Angels and angel organizations are alive and well in Canada and so is entrepreneurship! I must admit that hearing about "purple angel" and the "band of scoundrels" - now the Ottawa Angel Alliance - piqued my curiosity throughout the years! I'll chat with Laurie Davis about this later…

RBC Financial Group has supported the National Angel Organization (NAO) and this event right from the start. We believe that angel investment can be likened to a highway to heaven for burgeoning entrepreneurs, especially those involved in knowledge-based industries (KBI). As Henry Vehovec, honourary chair and founder of the National Angel Organization often says: "Early stage capital plays a pivotal role in the creation of businesses….there's considerable capital out there; (sometimes) the money isn't actively chasing the deals." By the way, I'm sure Terry Matthews will have much to say about chasing the deals, so don't miss his remarks tonight!

This morning you were treated to an opening presentation by my colleague Craig Wright, so I know you have a solid picture of the growth and opportunity for investment on the Canadian business landscape. What I want to do in the next few minutes is address the opportunities and challenges faced by entrepreneurs in breaking through the barriers to growth and commercialization and highlight the importance of bridging the gap between entrepreneurs and the investment community. It's clear that more leadership in action is required by Canada's governments, financial institutions, educators and other stakeholders, including private investors, if promising small-to-medium enterprises (SMEs) are to emerge successfully in the global economy. It's also clear that angels and angel investments have a huge impact on entrepreneurship, knowledge-based industries and Canada's path to prosperity - these investors and investments cannot be minimized or marginalized - rather, they must be encouraged.

Let's move forward by looking back first. In the early 90s, Canadian investment in research and innovation was below par with other G7 nations. To make a long story short, Canada didn't have national objectives or goals that would drive us to success on the world stage in the knowledge-based economy (KBE).

More recently, Canada has embraced a renewed confidence and willingness to try new things and compete in new ways. It required big changes from all of us - from provincial and federal governments, from academia, from industry groups and from financial institutions. Governments significantly increased their investments in research and research infrastructure - and we now have the National Innovation Strategy. Academic institutions are taking, very seriously, their responsibility to capture economic value from the enormous investment in research. Small companies with great ideas discovered they can get attention from customers in the U.S., in Japan, in Germany - that they are "world class." Financial institutions introduced specialized banking programs for knowledge-based industries. In other words, Canada established new partnerships and new ways of doing things. As a result of the changing environment, angel and venture capital investment is on the upswing. And we're not just seeing more money, we're seeing smarter money.

During this journey, RBC has played an interesting role in helping to bridge gaps and break down barriers for entrepreneurs. As a national financial institution, we participated in "on the ground" issues as well as contributed to public policy. And we built what we originally called our KBI bank. We did this by learning from a decade of experience in banking high tech in the Ottawa cluster and we reached out to experts in other areas to advise us.

The three pillars of our KBI strategy have always been specialization, innovation and networks. And today, KBI is a cornerstone for RBC's North American strategy. Our specialized relationship managers provide customized financial solutions and support for companies at all stages of their lifecycle - from start-up financing to going public. They also bring a rich network of relationships with industry, government and academia to their clients and leverage the extensive capabilities of RBC Financial Group.

As many of you know, our KBI team focuses on information and advanced technology, life sciences and health care, as well as media and entertainment clients. And members of the group are here today and for the entire Summit. I would like to recognize Mark Usher (Toronto) and the Ottawa team of Christine McCrady, Greg Commons, Andrew Arnott, Luke Clare and Matt Kellow. I also want to single out RBC's Chethan Lakshman, who among many activities in corporate communications, lent his skills and support to the NAO publication, "The Primer for Angel Investment in Canada."

We're proud of our KBI clients, their marvelous success stories and their contribution to helping break down barriers and bridge gaps. For example, Semiconductor Insights (SI) has grown from a small consulting firm to one of the world's pre-eminent firms in its field. As the leading technical advisor to the microelectronics community around the globe, SI's international client base spans Fortune 500 enterprises, governments, legal firms, start-ups and venture capitalists. Within the semiconductor industry, SI has participated in virtually every major licensing campaign over the past 15 years, and counts 47 of the top 50 companies among its clients. It's good to see more leadership in action with President and CEO Doug Smeaton in the house, who's also wearing his Canadian Advanced Technology Alliance (CATAAlliance) hat!

QNX Software Systems (a Harman International company) is another example of a leadership in action client. In July, the U.S. National Institutes of Health acknowledged QNX's Neutrino realtime operating systems for "helping to advance the understanding of human vision and improve on measures to prevent disease and trauma in future generations." Not too long ago, RBC's Christine McCrady was one of QNX's key advisers for sourcing patient capital and providing an innovative banking financing package. With executive talent like QNX President and CEO Dan Dodge, the business relationship continues to be a win/win/win, as the knowledge-based industry is winning too!

RBC Financial Group has also looked at ways to participate in the venture capital market, particularly through RBC Technology Ventures. The story of RBC Technology Ventures is one about a "positive conspiracy" of industry, government and academia. The focus is on early stage venture financing, starting with seed capital. And the business model is one of creating funds with like-minded partners to invest in promising sectors in Canada that have real research strengths. These sectors include biotechnology, information technology, engineering, physical sciences, and agri-food technologies.

Of course keeping one step ahead of technology innovation can be a challenging task. RBC's response has been to create the RBC Strategic Technology Fund (STF) to help its businesses stay abreast of technological and competitive advancements. Started in 2001, the STF's mandate is to invest in early-stage, privately held software companies that are developing innovative technologies for firms in the financial services industry. Think of it as RBC's eyes and ears on technology in the external market place.

For RBC and the small business market, we know there is room for improvement, and we take this challenge seriously. We continue to make improvements in the range of our business offerings, taking pains to make entrepreneurs feel more welcome, heard and valued. We continue to improve our resources to deliver new, targeted information related to business competitiveness, profitability and growth. And we continue to improve our training programs so that account managers better understand the climate in which this critically important segment of corporate Canada operates.

However, the collective "we" need to do more for entrepreneurs and the knowledge-based industry…we need to do more when it comes to investing in the path to prosperity.

After all, the future prosperity of a country is inextricably linked to its capacity for continuous innovation and entrepreneurship. Retaining and attracting talent will be one of our greatest challenges in the years ahead as nations compete for top talent. Unless we create attractive opportunities, this talent will be more tempted to go elsewhere. By investing in new research opportunities, we are already attracting talent home. Management at both small and large companies must do their part in attracting and retaining talent. Over the years, many academic studies have offered the view that what ultimately counts in determining the international success of a nation's business sector is the depth of managerial talent. Angel investors, the venture capital industry and financial institutions all need to feel confident in the management skills of those running businesses in which they might invest.

It's not enough to have a good business idea. What matters just as much is the ability to design and execute a credible business strategy. The biggest single reason why smaller businesses fail to get the financing they want is because investors do not have confidence in their management ability. If Canada is to succeed in commercializing new knowledge from its universities, research hospitals and other institutions, it must do a better job of training managers who can create commercial success from new knowledge.

Canada must find its niches. And we must do so quickly because the rest of the world won't wait. This is where the roles of finance, government and education come together. We need a financial system that enables growth; government policies that encourage, facilitate and reward growth; and an educational system that produces both the people capable of generating new ideas and people with the management skills necessary to successfully exploit new ideas. This will require both public and private capital. This is not an ideological issue. It is a practical question of finding what works best.

Partnerships are an important part of the equation, so it was good news to hear that the NAO and CATAAlliance are "aligning" in a strategic move to strengthen Canada's technology industry voice for business growth. As CATA President John Reid stated in August: "We're in full alignment with the NAO in its efforts to encourage investment in Canadian SMEs through seeking adoption by federal and provincial governments of legislation providing qualified and eligible investors (individual and corporate) with a combined 30% Innovation and Productivity Tax Credit (IPTC)."

On July 6, Sasha Nagy of The Globe and Mail wrote in his piece "Angels on their side", that British Columbia's tax-credit program has been credited with boosting private investment and bringing angels back to the B.C. technology sector. Nagy quoted Bruce Gitelman, co-chair for public policy at the NAO: "Angels are a godsend to new business ventures, funding 30-40 times as many entrepreneurial firms as the venture capital industry. There's a 'commercialization gap' in Canada, one grown out of Ottawa's increased university research funding. We're about $5 billion short in terms of the money needed to commercialize all (research and development) that is going on in Canada…we need angel investors who will spend the time and effort to get the effort to the point where they are ready for the venture capital companies."

And speaking of angel investors...the recently launched Winnipeg Angel Organization (WAO) is also gaining attention. On October 8th, columnist Martin Cash's piece, "Winnipeg Angel group running" was the feature story on the business page of the Winnipeg Free Press. In part, Cash says: "The Winnipeg Angel Organization (WAO) -- is up and running as an electronic investing network and its well-heeled group of private investors has directed about $500,000 into a handful of confidential deals with companies who likely would not otherwise gain access to such investment capital." It's great to see managing director Ken Cooper here and to hear him say: "In Winnipeg, we are getting more deals than the angels can handle." Ed Shinewald, owner and founder of Melet Plastics in Winnipeg and one of the 33 angels who joined the network went on to say: "There are tons of people out there with ideas who don't know how to get them off the ground…since most of the companies who are pitching their ideas are in the early stage of their development, investment from angels might be the assistance that puts them on the road to success." I'm also pleased to note that Duncan Jessiman, Jr. and Robert Warren are among the WAO board of directors. Ken, Kirk Dudtschak is RBC's new Regional President based in Winnipeg - we'll make sure you meet him very soon!

As Mark Dietrich knows very well, the Medical and Related Sciences (MaRS) Discovery District will bring together the best-in-class of scientific/business/academic communities to facilitate commercialization. This is not just a Toronto initiative. "It's about linking science, entrepreneurship and finance to create new commercial opportunities and good jobs for Canadians. It's about positioning Canada in the knowledge-based economy. It's about generating future wealth to sustain a high quality of life for Canadians." And those are the words of John Evans, the chair of MaRS.

In closing, I want to introduce a hot off the press CD entitled 'The New Entrepreneur's Toolkit.' It's not only a start-up kit for business, it's another good example of partnerships at work…a collaborative initiative involving the CATAAlliance, LaBarge Weinstein Professional Corporation, the National Angel Organization and RBC Financial Group.

The CD is designed to offer some guidance and recommendations to individuals starting a company, whether they're early stage technology companies or something else altogether. Start-up businesses often struggle with creating their first business plan, understanding legal requirements and accessing government programs. The New Entrepreneur's Toolkit has pulled together practical resources, including web links, to help executives meet these challenges and build a strong foundation for growth. One of the key messages is that the support of trusted advisors - bankers, lawyers and accountants (and perhaps an angel) - can make all the difference in the world. By all means, please pick up a CD on your way to the next session. Sandra and Catarina will point them out to you!

Finally, we can all do our part in ensuring the right leaders and circles of influence understand the opportunities facing entrepreneurs - and we can help enlist them in our joint mission of "breaking through the barriers to growth." With the help of angel investors, the country can build on the strength of the knowledge-based economy and entrepreneurship. And this means that the highway to heaven may very well be one of the best investments for Canada's path to prosperity!

Thanks very much…and now let's hear from you.