Time to Double Down
As low oil prices starve provincial coffers, it’s time to ante up on Alberta’s economic diversification
by Tim Querengesser
Everyone in Alberta lives with the problem daily. Our fortunes are latched to the stormy rise and fall of oil and gas, and that includes our government revenues. When things are good, they’re very good; when things are bad, well, check back with us in a decade. Back in 2009, a few people came up with a radical idea to change that: $100 million of public money to be invested in private companies via private venture capital funds, rather than government handpicking companies. The concept was the Alberta Enterprise Corporation. It would have just one shareholder, the Alberta government, and a board of directors to invest $100 million in private, technology-focused VC funds.
The key innovation was that the investments would be conditional, requiring VC firms receiving money to maintain a presence in the province, the better to get to know Albertan companies. And each dollar the AEC invested in funds would also have a multiplier clause, requiring $3 of private money to be added. If it all worked, the AEC would attract VC investors, contacts and mentors, and those VCs would invest in tech startups and spur the knowledge economy forward. The result, eventually, would be economic diversity, and the investments would also generate returns for government when the AEC exited. AEC’s chairman, Paul Haggis, says the model, “hits the sweet spot for developing the economy by building on our strengths of energy and agriculture to diversify away from digging things up and sending it south, to the value-added side of the coin.”
But talk about timing. Today the AEC is entering what Haggis calls phase two of its business plan. And as Kristina Williams, president and CEO of the AEC, notes, VC funding often works in five year cycles. Phase one takes five years to perform the due diligence to invest, then another five years is required to grow companies and attempt to make an exit with a profit. As a result, Williams says, Alberta won’t know the actual performance of AEC’s investments in VC funds (and in turn, in companies) for at least another five to 10 years.
And that right there is the AEC’s current problem. Just five years into the corporation’s long-term goal of seeding a vibrant VC ecosystem in Alberta, it’s asking government for another $100 million of public money. But that ask comes at a time similar to five years ago. Last time it was a burst mortgage bubble; this time, an oil-price shock, but the end result is the same: the economy is weak and government is cutting spending. Newly elected Premier Jim Prentice suddenly faces a $6-7 billion revenue hole and has promised to slash investment. “The days of thinking that surplus budgets free up spending are over,” Prentice told the Edmonton Chamber of Commerce in mid-December. The irony is not lost on anyone: Were Alberta less dependent on oil revenues – say, through a more diverse, value-added economy – Prentice would have easier choices and the need for the AEC would be minimized. But as it stands, the need is still apparent and the risk that the positive changes AEC has created will start disappearing is real. “We need to have additional capital for investment within the next six to 12 months, to ensure that we don’t have a [funding] gap and start losing VC and as a result, companies,” Williams says.
Will Alberta agree with her at a moment when every cent is being counted? Or perhaps, fortuitously, can it afford not to?
Ken Bautista says the AEC has already been a game-changing success but needs more time. The co-founder of Startup Edmonton says the long-term effects of AEC investments into VC funds will take decades, but that many “value-adds” are apparent today. There’s the creation of the A100, a group of successful Alberta tech founders eager to either jump into a new project or lend advice and contacts for promising startups. There’s also the revitalization of the Venture Capital Association of Alberta, which had gone dormant for nearly 10 years. “I don’t think we’re going to see the results of the initial cash outlay from the VC side for another 10 to 15 years, but we now have the infrastructure and framework, which is the biggest value of this initial setup, because it spawned all of this stuff,” Bautista says. But the AEC’s bigger goal of economic diversity will take decades, he says. “It’s a long-term thing and sometimes people lose sight of that.”
As a former startup entrepreneur, several of Bautista’s own ventures have links to the VC world – indeed, the AEC helped spark Startup Edmonton in 2011 by linking investors and VC funds to Bautista’s dream. “That was actually one of the things that was missing,” he says of the linkages. “It wasn’t the first time funds were available for startups [in Alberta]. But this one was focused on scalable companies. That was the big gap – there were things happening but it was all disconnected.”
The establishment of connections is already evident on the ground. Enertech Capital, a VC firm that targets the energy industry from well head to pipeline, was created in 1996, and had offices in Toronto, Montreal and Philadelphia. But since 2012 it has also had a Calgary bureau. “Alberta Enterprise was instrumental in us setting up an office here,” says Eric Schmadtke, vice-president of EnerTech and the firm’s Alberta representative. Wally Hunter, the firm’s managing director, adds that the AEC’s $15 million investment in EnerTech, in 2012, helped fast forward its move into the Alberta market. “We had already intended to look at hiring a guy in Alberta prior to AEC making the investment – we felt we needed someone on the ground there to find interesting opportunities for us,” Hunter says. “The [AEC] has done a great job of building an ecosystem that was almost non-existent when we first started to go out to Alberta. There were a few funds looking at technology and a few funds looking at IT, but there was no balanced ecosystem. AEC was really the catalyst to drive that.”
EnerTech has invested in several Alberta companies, including HPC Energy Services, Markwater (recently rebranded as Western Oilfield Equipment) and Filterboxx. And EnerTech is just one of seven funds the AEC has invested in. The corporation’s approach has been to distribute money by economic sector rather than concentrate exclusively on one area of the knowledge economy. In addition to the Accelerate Fund, launched with a $10 million investment in 2012, investments have been made in $10 million to $15 million chunks in funds that target agricultural innovation, energy innovation, the IT sector, mobile technology and clean energy. One of the AEC’s investments, the US$15 million stake in Chrysalix Clean Energy, a fund from Vancouver, resulted in an office being opened in Alberta only to close. Aside from that, however, the investments have drawn larger VC firms to not only have a presence in Alberta but also an office.
Bautista says the Accelerate Fund has been critical for small capital raises for early stage Albertan companies such as Advanced Flow Technologies, Zephyr Sleep Technologies, Mover, Granify, DriveWize and Mitre Media, as well as those featured in Alberta Venture, including Surface Medical and Login Radius. And he says at the same time, bigger institutional VC firms are being attracted to Alberta. “The presence of capital changes things,” he says.
The AEC has dispersed $60 million of its $100 million, with a further $30 million committed and the final $10 million to be committed “within months,” Williams says. And she says some results are already viewable through data. Historically, Alberta received just six per cent of all VC investment in Canada, according to Thompson Reuters research. But in 2011, Williams notes the research shows it received 9.6 per cent, and in 2013, 8.3 per cent. Further, Williams says, 23 Alberta tech companies have received some $230 million in capital as a result of AEC seed investments. Still, before breaking out the champagne, Alberta might want to consider that compared to Quebec, where the Teralys VC fund of funds has invested more than $700 million of public dollars since 1998, the province is still lagging.
So the situation is rather clear for a lot of people, just like it probably was in 2009. Provincial coffers, often decimated by over-reliance on oil resources, are again empty. At the same time, one potential solution to these woes is asking for money to fix the problem. What will happen this time when AEC requests another $100 million, as Williams says it will?
For its part, the government’s messaging has a fence-sitting quality to it. David Dear, a spokesperson with Alberta Innovation and Advanced Education, says that in government’s eyes, AEC “has been a success.” He says the corporation’s investments are still active but that the government is considering its next move. “Although refinancing is of course one option open to us, we haven’t made any decisions yet,” Dear says, in a written statement. “Any decisions we do make about the corporation would likely be part of government’s budgeting process in upcoming fiscal years.”
That’s particularly worrying for Bautista, who sees the current economic slump as the perfect time for government to be investing in something other than the resource economy. To create a healthy startup ecosystem, “You need the right mix of public and private [investment],” Bautista says. “I was talking with the founder of Startup Iceland. Iceland totally crashed and bailed, and now the government is really supportive of startups and entrepreneurship as a way to bring it back.” He says he replied that the situation is similar in Alberta, except we have oil, which means there’s a cushion, and a resulting lack of urgency.
“That’s a challenge,” he says of the oil cushion. “And I think a lot of that cushion [in Alberta] has been created because the government – that’s a leadership thing to me. There should be urgency and you can’t have dependence on one thing forever.”
Haggis, who’s also director with Canadian Pacific Railway and once oversaw one of Canada’s largest pension investment funds, says the AEC is the highest use of capital Alberta has among its many choices. “We think we have the best argument for a return on the money, with a fair return on the investment, commensurate with the risk, and that as a public policy it continues to diversify the value-added side of the economy.” And the irony of the situation – an over-reliance on one resource limiting investment in diversification – should be the impetus for an investment in AEC, Williams says. “I think now is the time for the government … to make sure we look at how to diversity the province for the long run so we don’t have this reaction every time the oil price goes up and down.”