The Canadian government has pledged $400 million to help increase private sector investments in early-stage risk capital and to support the creation of large-scale venture capital funds led by the private sector. The Venture Capital Action Plan, recently announced by Prime Minister Stephen Harper, is aimed at helping Canadian startups access the capital they need to grow and create jobs.

“Our government understands that Canada’s long-term economic competitiveness in the emerging knowledge economy needs to be driven by globally competitive, high-growth businesses that innovate and create high-quality jobs,” says Harper. “We will provide the resources needed to put Canada’s venture capital industry on the path to sustainability and ensure Canada’s high-potential firms have the resources they need to succeed.”

The lack of a vibrant venture capital sector in Canada has long been recognized as a major barrier that has kept promising research from being translated in Canada into useful products. In order to come up with a viable way to boost the sector, the Canadian government held extensive meetings with key stakeholders during the summer of 2012 on how to go about structuring its support.

“In light of the highly competitive global capital market, this provides Canada with a strong competitive advantage to leverage the capital it needs to innovate,” says Andrew Casey, president and CEO of the trade group BIOTECanada.

Based on the results of the meetings, Canada came up with the Economic Action Plan 2012, a comprehensive plan for deploying $400 million in new capital over the next seven to ten years. The goal is to demonstrate that Canada’s innovative companies represent good investment opportunities and that private sector investment and decision-making is central to their long-term success.

The biggest portion of the new capital, $250 million, will be used to establish two new large private sector-led national funds of funds that will be managed by an experienced private sector general partner who has a substantial presence in Canada. These funds will be big enough to be credible lead investors in venture capital funds that have committed to invest one-third of their total capital in Canada-based companies. Investments will be targeted at companies developing marketable products in the information and communications technologies, life sciences, and cleantech sectors, high-growth sectors where Canadian firms have existing strengths.

Up to $100 million will go to recapitalizing existing large private sector-led funds of funds, in partnership with provinces. Finally, up to $50 million will be invested in three to five existing venture capital funds in Canada. The plan also includes actions to help establish networks that link investors with innovative companies.

The government will be calling on experts in the private sector for advice on the selection of the management of the large-scale, national fund of funds, and venture capital funds into which the money will be invested. Proposals by interested potential investors willing to co-invest in Canada-focused funds are being solicited through the first week of February.

In March 2012, Merck invested $35 million to launch the $50 million Merck Lumira Biosciences Fund in collaboration with Lumira Capital, Teralys Capital, and other partners to provide investment capital to support early-stage life science innovation in Québec. Designed to provide capital to fuel innovation as well as attract life science entrepreneurs to the province, the fund is a novel collaboration between a drugmaker, a specialized venture capital firm, and a Canadian technology fund of funds, as well as other limited partners. Lumira will manage the fund. The launch of the fund is part of Merck’s commitment to invest $100 million over five years in biopharmaceutical research and development in Québec, announced in 2010 after it said it was phasing out company operations near Montreal.