CANADIAN VENTURE CAPITAL MARKET

By Michael Herman

Historically, the Canadian venture capital sector has played a vital role in the development and success of Canadian technology, life sciences and other knowledge-based companies. Unfortunately, the domestic venture capital market has never fully recovered from the 2001 bust of the technology boom. In recent years, venture capital performance in Canada has slowly improved; however, the credit crunch, which morphed into a financial crisis, has significantly impacted the Canadian venture capital community.

In 2008, venture capital investment in Canadian companies declined 36 per cent compared to 2007. Notably, investment by foreign (primarily U.S.) venture capital firms dropped from 41 per cent of the total invested to 28.5 per cent. All sectors have been affected by this reduction in investment, except cleantech where investment approximated 2007 levels. VC-backed companies are also receiving smaller amounts; the average amount invested per firm declined to $3.6 million in 2008 from $5.0 million a year ago. A key reason for the decline is the reduction in U.S. venture capital investment as U.S. VCs tend to participate in larger deals compared to investments without U.S. participation. With the decline in the Canadian market, venture capital fundraising activity in 2008 dropped slightly relative to 2007 results. Unfortunately, fundraising activity in both years was the lowest on record since the mid-1990s.

In comparison to Canada, investments by venture capital funds in the U.S. showed modest declines of 8 per cent in 2008. In addition, while U.S. fundraising activity was down 21 per cent, 2007 was a phenomenal year.

Most impressively, the Kesselman and Kesselman PricewaterhouseCoopers Israel MoneyTree^TM; Report reveals that venture capital investment in Israeli companies increased by 14 per cent through September 2008, the best performance since 2001. The Report's authors caution that such investment levels cannot be sustained and expect declines in the foreseeable future.

The difficulties for Canadian venture capital funds offer opportunities for foreign investors. While U.S. venture capital investment in Canada is down this year, it had increased sharply in 2006 and 2007 as U.S. funds filled the gap between the cash requirements of Canadian technology, life sciences and other knowledge-based companies and the amount of funding available from Canadian venture capital firms. Canada continues to be a global leader in basic research and development; however, the existing funding gap negatively impacts the ability of Canadian companies to commercialize their innovations. Israeli investors who survey the Canadian landscape are very likely to find both numerous opportunities for profitable investments in these Canadian companies and Canadian venture capital firms which are more than happy to co-invest with them.

DOING BUSINESS IN CANADA

By Ned A. Steinman

The Canadian economy is heavily dependant on exports. In fact, over 40 per cent of Canada's GDP is dependent upon exports, but Canada is also a relatively large market and is seen as an attractive place for foreign investment and a consumer of foreign goods. In Canada, customs duties can be levied on some imported goods, and such goods and some services are subject to the federal Goods and Services Tax. Every province in Canada (except Alberta) also imposes a retail sales tax. The federal government also restrict the import of certain goods. The importation of some items, such as certain weapons, explosives, oil and gas is heavily regulated, if not prohibited. The Canada-Israel Free Trade Agreement came into force January 1, 1997, and removed tariffs from industrial products of Canadian or Israeli origin. Duty-free access or low duties have been applied to a variety of agricultural and fisheries products exported by both countries, which for Canada includes such items as grains and grain products, beef, maple sugar, alcoholic beverages and processed foods. When importing goods into Canada, packaging and labelling laws regulate the information that must be provided to consumers on product labels. All labels must contain certain information in both English and French.

Foreign companies seeking to do business in Canada have other considerations to address in advance whenever they want to enter Canada to conduct business. Immigration is often a key factor when considering larger investments and placement of workers in Canada. In fact, Canada has several special government programs that assist certain foreign workers to obtain work permits including one specifically designed for software workers.

The establishment and acquisition of Canadian businesses by non-Canadians is regulated at the federal level with laws that have the two-fold function of promoting foreign investment and reviewing significant investments to ensure that they are of “net benefit to Canada.” The threshold for review of investments from WTO countries, including Israel, is $312 million, except where the business is in a culturally sensitive sector such as publishing, film and music, where the thresholds are substantially lower. Investment in Canada by a non-resident is almost never rejected under the review process, although some applicants have accepted recommended changes to their transaction or have withdrawn their application.

Gowlings has prepared a complete guide for doing business in Canada located at http://www.gowlings.com/Services/doing-business-in-canada. In that Guide, you will find detailed information on the structure of business in Canada and all aspects of the legal requirements to consider when investing in Canada.

CANADA ISRAEL CHAMBER OF COMMERCE

By David A. Rubin

The Chamber was re-launched in 2006, having not been active for several years. During 2007 and 2008, the Chamber rebuilt its organization. Leslie L. Dan CM, Chairman of the Board, "It is my honour and privilege to serve as Chairman of this enterprising endeavour, as we enthusiastically embark on a mutually advantageous business experience."

The following are material highlights:

• Re-incorporated as a not-for-profit Canadian corporation to promote trade, investment and business between Israel and Canada;
• Established Boards of Directors and Governors of 25 and 50 individuals respectively from across Canada and from a variety of business, trade and investment sectors;
• Appointed an Executive Committee which holds monthly telephone conference meetings;
• Created an outstanding website which, among many features, enables new members to join, and provides extensive information about the Chamber and bi-lateral business opportunities between Canada and Israel (www.canadaisraelchamber.com);
• Held an initial reception and meeting for the Directors and Governors on August 28, 2008 at the home of Leslie Dan;
• Engaged a Project Manager and held approximately 30 different events in Toronto, Ottawa and Montréal; and
• Opened an office in Toronto and is in the process of engaging additional senior staff.

New members are welcome and you are urged to review the details and joining procedure on the website www.canadaisraelchamber.com. If you have any questions regarding membership, please contact David A. Rubin, President at (416) 862-3520.

GOWLINGS WELCOMES HENRY OHAB

Patent Services & Israeli Early Stage Companies

Israeli Early Stage Companies may be especially interested in having Gowlings prepare and file their U.S. patent applications directly in the United States Patent Office. With the recent addition of Henry Ohab, registered U.S. patent attorney in the Intellectual Property Group at Gowlings' Toronto office, U.S. and Canadian patent applications (or simply U.S. patent applications filed alone, for that matter) may now be prepared and prosecuted at a single source.

The cost benefits of having U.S. and counterpart Canadian patent applications prepared and prosecuted at a single source should not be overlooked, as this approach negates the involvement of multiple foreign associates. Henry is licensed to practice as a Foreign Legal Consultant in Ontario by the Law Society of Upper Canada. Henry's background includes legal as well as engineering experience with several high technology companies in California's Silicon Valley region. He has drafted and prosecuted computer hardware, software, user interface and mechanical patent applications, and has done so within the context of involvement in several patent litigation cases, encompassing diverse technology products such as handheld computer devices, computer data networking and programmable semiconductor devices.