Report 1—Venture Capital Action Plan
Audit at a Glance Report 1—Venture Capital Action Plan
What we examined (see Focus of the audit)
This audit focused on the Venture Capital Action Plan. The Department of Finance Canada, the Business Development Bank of Canada, and Innovation, Science and Economic Development Canada (formerly Industry Canada) have roles and responsibilities for the Action Plan. We examined whether those federal organizations properly assessed the policy need, and designed and implemented the Action Plan in order to meet its stated objectives. We also examined whether the two departments and the Business Development Bank of Canada, consistent with their roles and responsibilities, measured and monitored the performance of the Action Plan against the stated objectives and intended outcomes.
Why we did this audit
This audit is important because the government chose to commit $400 million for the purpose of supporting innovation, and for creating jobs and growth.
What we concluded
We concluded that the Department of Finance Canada, the Business Development Bank of Canada, and Innovation, Science and Economic Development Canada assessed the policy need for the Venture Capital Action Plan prior to the Budget 2012 announcement and subsequently held extensive consultations with stakeholders to determine how to allocate the money. However, the selection of fund managers did not always adhere to sound practices because the process had important shortcomings with regard to fairness, openness, and transparency.
We also concluded that Action Plan activities were properly monitored. However, better performance indicators would help to measure the policy outcomes of the initiative and inform future policy decisions. Also, better public disclosure of the Action Plan’s performance could benefit the Canadian venture capital market. Finally, the Action Plan did not include an exit strategy to foster the transition to a self-sustaining, privately led ecosystem.
What we found
Creation of the Venture Capital Action Plan
Overall, we found that the Department of Finance Canada, the Business Development Bank of Canada, and Innovation, Science and Economic Development Canada assessed the policy need prior to the announcement of $400 million for early-stage venture capital in Budget 2012.
We found that when it made the announcement, the Government of Canada had not decided how to allocate the money. The government then held consultations with stakeholders, a process that helped to design the Venture Capital Action Plan. The government faced difficulty in convincing private-sector investors to participate in the Action Plan, which contributed to delays in implementation. Among the factors behind the reluctance were low returns, as well as strict international regulatory requirements for certain private-sector investors. Further, management fees could amount to approximately $250 million of the total amount ($1.35 billion) committed to funds of funds over the lifetime of the Action Plan.
Recommendation. We made no recommendations in this area of examination.
Recommendation. We made no recommendations in this area of examination.
Overall, we found that the Department of Finance Canada, with the support of the Business Development Bank of Canada and Innovation, Science and Economic Development Canada, met its short-term goals of establishing two large-scale national funds of funds, recapitalizing two funds of funds, and providing $50 million to four high‑performing funds. The government treated the selection of funding recipients as an investment process. Therefore, no federal government policies applied except the procedures for reviewing investment opportunities. The Department of Finance Canada established its own procedures to choose the fund-of-funds managers and high-performing fund managers of the Venture Capital Action Plan. The processes used to select fund managers were a blend of public- and private-sector practices. Together with the Venture Capital Expert Panel appointed by the Minister of Finance to make the selection, the three organizations assessed the applications and interviewed applicants. However, we found some significant shortcomings in the selection process for fund managers.
This is important because a fair, open, and transparent selection process would encourage enterprises in the venture capital industry to have confidence in the way the Government of Canada chooses fund-of-funds managers and high-performing fund managers. The shortcomings encountered could lessen the willingness of other investment managers to participate in a similar selection process in the future.
Recommendation. When making investments that are similar to those of the Venture Capital Action Plan, the Department of Finance Canada and Innovation, Science and Economic Development Canada should fully respect the values of fairness, openness, and transparency while meeting the purposes of the investment. This will maintain the venture capital industry’s confidence in selection processes run by the Government of Canada.
Performance measurement and reporting
Overall, we found that the Business Development Bank of Canada properly managed the monitoring and reporting of activities of the Venture Capital Action Plan. The Business Development Bank of Canada also effectively transmitted the information that it gathered to the Department of Finance Canada and Innovation, Science and Economic Development Canada. However, the Performance Measurement Framework put in place by the two departments had a limited set of performance indicators and was not sufficient for assessing how the Action Plan fostered Canadian innovation and strengthened the economy.
This is important because performance assessments are necessary to inform the future of the initiative; and for proper assessment, officials need to have a complete set of metrics on which they can rely to evaluate the performance of the Action Plan. According to various stakeholders, a decision about the future of the initiative might have to be made by the 2019–20 fiscal year. By then, the Action Plan’s high-performing funds as well as funds of funds will have invested most of their capital and will need to start fundraising again for follow-up funding.
Recommendation. To appropriately assess the performance of the Venture Capital Action Plan and inform decision making, the Department of Finance Canada and Innovation, Science and Economic Development Canada should expand the Action Plan’s Performance Measurement Framework by considering the inclusion of performance metrics, such as:
- exit performance of recipient companies,
- recipient companies’ export growth and their financial performance,
- new patents and patent citations, and
- the number of new or additional key investment personnel and lead investors.
To increase transparency, the two departments should report publicly relevant information about Action Plan activities and performance.
Recommendation. In formulating future interventions such as the Venture Capital Action Plan, the Department of Finance Canada and Innovation, Science and Economic Development Canada should allow for an early exit of the public-sector partners.
Entity Responses to Recommendations
The audited entities agree with our recommendations, and have responded (see List of Recommendations).
|Report of the||Auditor General of Canada|
|Type of product||Performance audit|
|Completion date||26 February 2016|
|Tabling date||3 May 2016|
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