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PwC Up front | Issue 5 | Harnessing technology

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Up front Summer 2014 39 The corporate VC advantage With strong management teams and deep balance sheets, Canadian corporations have enjoyed strong relative performance. But growing worries about global competitiveness and decreasing productivity suggest that they may not enjoy such smooth sailing ahead. The opportunity: of all the possible sources of venture capital – from pension funds to insurance companies – corporations are the only ones that get multiple bangs for their buck. Besides a shot at high returns on idle cash, they gain early exposure to next-generation and best-in-class innovation that may reshape their industries, plus the chance to build relations with leaders who are creating the companies of tomorrow. Internationally, corporate investment has always been part of the VC ecosystem, with particularly strong participation from the biotech and pharmaceutical sectors. Today, mobile and software are equally robust, with Google Ventures, Intel Capital, Microsoft Corp. and SAP Ventures among the most active players. Once referred to as "dumb money," corporations are now anything but: investing directly or via independent managers, they're highly sought- after syndicate partners. In fact, in 2013, Intel and Google alone did a combined 360 VC funding rounds. Although industry-wide statistics show a 14-to-15 per cent participation rate by corporates in all U.S. financing rounds, this number soars to more than 40 per cent for the 100 biggest deals. What to make of this? Intel is the long-term leader in its sector, and Google is one of the world's fastest-growing innovation companies and an outstanding creator of prosperity and jobs. Both have used VC investing as a strategic tool to enhance their performance. How? By identifying emerging technologies that lie beyond their in-house scope or ability, discovering best-in-class managers and technology teams working outside corporate environments, and exploring new business models and paradigms without risking their core businesses. Intel and Google have also gained a huge competitive advantage in mergers and acquisitions through the ability to acquire companies and teams they vetted with early investments. Canada's chance So where does that leave Canada? The short answer: our corporate sector trails its U.S. counterpart when it comes to engaging VC firms. From 2003 to 2013, the average corporate contribution to total Canadian VC investment was less than half the U.S. level, Thomson Reuters reports – 3.8 per cent versus 7.9 per cent. Worse yet, today Canada lags the 7.7 per cent average we saw in the five years prior to 2003. But, perhaps, most concerning is that nearly all of this current corporate VC investment in Canada comes from U.S. companies. There are a few notable exceptions. They include the Canadian subsidiaries of pharmaceutical companies such as Eli Lilly & Co., GlaxoSmithKline Inc. and Merck & Co., Inc., which have seen the wisdom of partnering with local Canadian VCs. Some cable and telecommunications companies run modest in-house practices. OpenText Corp. recently waded in with several initiatives, but it seems to be the lone Canadian software company practising VC engagement. Finally, a few oil and gas players have made the leap. If only others would follow their example. As corporate Canada confronts the much-debated productivity gap, as governments worry about the hollowing-out of industries and as research and development spending continues to lag that of global leaders, now could be the perfect time to seize the VC opportunity – directly or as a limited partner in an existing fund. We know that Canadian companies can use venture capital to make themselves more competitive and create value for stakeholders. Uf Now could be the perfect time to seize the VC opportunity. Up front Summer 2014 39 Expert opinion Peter van der Velden is President of Canada's Venture Capital & Private Equity Association (CVCA) and Managing General Partner at Toronto-based Lumira Capital Corp. Mike Woollatt is CEO of CVCA. Insights | Growth

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