Canada as an Investment Destination

By October 28, 2016Articles, News, Verdex News

A version of the following article originally appeared in the Summer 2016 issue of GAI Gazette, the premier magazine of Global AgInvesting. Verdex Capital was a sponsor of GAI Ag Tech Week in 2015 and 2016 and is an active participant in their conference series.  

By Mark Carlson, Managing Partner

Over the last few years, Canadian startups have made inroads into the international technology community. Companies such as Hootsuite, Shopify, and Desire2Learn all acquired customers and funding on both sides of the border, and foreign investors began to take notice of new ventures coming out from the north.

Canada has also made waves in the Ag tech sector. Agrisoma Biosciences Inc. and Enterra Feed Corporation, for example, both raised funds from foreign investors last year[1]. Most notably, Farmer’s Edge recently raised $58 million in a round that included Kleiner Perkins Caufield & Byers. All of the above companies began in Canada and continue to base their operations in the country.

Why is it the time right for foreign investors to fund Canadian companies?

As 2016 began, the Canadian dollar reached lows that had not been seen for 10 years. While the weakening of the Canadian dollar compared to the U.S. dollar evidenced a downturn in the Canadian economy in general, it brought a silver lining to Canadian companies seeking foreign investment, especially for technology startups[2]. The Canadian advantage for foreign investors suddenly made the news. However, the falling loonie is only part of the story. There are other factors to consider.

Canada has a federal tax incentive program, called the Scientific Research and Experimental Development (SR&ED) Program. Companies can qualify for a refundable tax credit on certain R&D expenditures conducted in Canada of 0.35 for every dollar that they spend. That tax credit is significant especially when that figure is grossed up on scale that is equivalent to a USD netback of $0.26 with an exchange rate of CAD 0.75, which is the 2016 average to date.

Another advantage of Canadian companies is their operational cost savings. With salaries alone, employees of companies based in Canada do not cost as much as their counterparts located in the Silicon Valley, Boston, or Austin, for example. Even though a systems engineer or developer receives an annual salary of $90,000[3] in these tech centers and in Alberta, $90,000 CDN is roughly $68,000 USD. This gives investors more value for their money when it comes to technical resources.

Investors are also generally able to get better valuations in Canada, apart from the dollar incentive. Company valuations are safely insulated from the forces that drive up the numbers in the more traditional startup cities.

Taxes are also much lower in Canada, and specifically in our home province of Alberta. For a $68,000 programmer, Alberta statutory deductions are $14,683[4], and in Silicon Valley, though it varies based on zip code, it is upwards of $18,810[5].

The Canadian private and public sectors spend about 1.6% of their GDP on agricultural research technology and know-how. Though this does not seem like a lot when compared to the United States, which spends about 2/3 more than Canada, it is important to note that on a per capita basis Canada‘s population is less by a 10-fold, which means this is an impressive commitment to funding agricultural technology. It might also be contended that Canada should invest at a higher rate to find markets for its substantial agricultural output. But is all this spending working? Not as well as it could be. Canada seems to have limited market insights, linkages, investment, talent, and similar building blocks that drive adoption from research in one of the most historically important markets to the south of its border. Interestingly, venture and private equity in the red-hot Ag sector are serving to scale both the theoretical and practical insights gained from R&D investment, and we will see if this leads to better outcomes for Canada.

Citing key findings from a federal report State of the Nation 2014: Canada’s Science, Technology and Innovation System[6]:

In 2013, Canada ranked 10th in government funding of business R&D (as a share of GDP). Its 4th-place ranking in indirect funding and 28th in direct funding reflected the federal government’s greater reliance on indirect funding mechanisms.

Put another way, the government is interested having industry take an increasing lead in absorbing or at least channeling the use of government contributions based on prospect for commercialization. This is another reason that U.S. interest in the Canadian innovation system should be appealing as American entrepreneurs with a generally improved access to the U.S. markets examine options for early funding of innovation in what is ultimately a global market in agriculture.

There are also the intangible advantages – while the Canadian startup scene has some significant differences to the scene in the U.S., our cultures are closely connected. Investors based in the U.S., or those who spend much of their time there, can readily travel to Canada and share common business culture.

 

[1] https://agfundernews.com/canadian-agtech-sector-ripe-for-opportunities.html

[2] http://www.theglobeandmail.com/report-on-business/small-business/sb-money/plunging-loonie-could-be-boon-for-startups-seeking-venture-capital/article28278744/

[3] CDN: https://occinfo.alis.alberta.ca/occinfopreview/info/browse-occupations/occupation-profile.html?id=71003291 US: https://angel.co/salaries

[4] http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2016-Personal-Tax

[5] https://smartasset.com/taxes/california-tax-calculator

[6] http://www.stic-csti.ca/eic/site/stic-csti.nsf/vwapj/STIC_1500_SON_Report_e_proof4.pdf/$file/STIC_1500_SON_Report_e_proof4.pdf

 

Leave a Reply