October 2008

1. A presentation toIndustry Canadaby the CVCARepresenting over 1,500 Canadian members with $75 billion under management in the Buyout, Mezzanine and Venture Capital sectors October 2008

2. Venture Capital Trends External Scan • Growing awareness of the challenges facing the Canadian venture capital industry, and the impact this will have on innovation, commercialization and productivity. • Both the Conference Board and World Economic Forum have produced reports showing that Canada is lagging in innovation. • The to-be-released report of the Council of Canadian Academies as well as the Wilson Panel on Competitiveness call attention to the plight of the VC industry. • Deloitte LLP’s recent study described the situation as a “crisis” (released 12/07): • “Outlook for the Canadian VC industry is bleak given its ecosystem is broken and there is no solution at hand”; • “If not fixed in the near term, the Canadian VC ecosystem will collapse”; and • Behind China (34%) and India (24%), Canada is attracting the attention of just 11% of U.S.-based VCs as a primary country for expansion. • Provincial governments of Alberta, British Columbia, Quebec and Ontario have new programs in place to begin to partially address these challenges. • The Canadian Venture Capital & Private Equity Association recently released four practical proposals that could be adopted by the federal government to stimulate investment in information technology, biotech and life science, clean technology and alternative energy. • These were just a few of our targeted ideas.

3. Venture Capital Trends (cont’d) External Scan (cont’d) • Domestic R&D spending is rising, yet commercialization is dropping. • According to the non-partisan U.S. Information Technology and Innovation Foundation, the annual estimated costs of Senator Obama’s specific campaign proposals to improve U.S. innovation are US$85.6 billion, while Senator McCain’s totaled US$78.8 billion. • “there is wide agreement among economists and other experts that the capacity to innovate is central to growth, quality of life and success in the global marketplace — a point on which the candidates agree.” Source: The New York Times, October 18, 2008. • The 36% drop in the S&P 500 this year will severely impact the allocations that pension funds make in 2009 to all “alternative asset classes”, including venture capital. • If Pension Fund X manages $10 billion, their assets may have been allocated 45% bonds, 50% equities, and 5% alternatives. Their equity portfolio is likely down 10.1% in value YTD ($500 million) as of Sept. 30th, 2008, according to an analysis by RBC Dexia (source: The Globe and Mail Oct. 18/08). • The need to restore the equity component of the pension fund could mean no new allocations in 2009 to any alternative asset class managers. • For others, the 10% drop in the value of the equity component of Pension Fund X will mean that they are presently “overweight” the alternatives category (assuming they were already at a 5% weighting), which will also cut off new commitments and possibly follow-ons for at least the next 12 months.

4. Venture Capital Trends (cont’d) Overview • Canada’s venture capital sector is in crisis. • 2005: $1.7 billion invested in 560 companies via VC transactions; • 2007: $1.8 billion invested in 412 companies; • Flat on the dollar front, but far fewer companies got financing as VC’s prepared for a bleak funding horizon. • 2008 first half: $636 million in 202 companies. • Much of this new money went into existing portfolio companies, which amplifies the 33% annualized drop in VC funding year-over-year. • As such, Start-up companies are finding it very difficult to raise capital. • Mid-stage private companies with existing funding are finding few syndicate partners are available to raise the next round. • Venture Capital funds outside of Quebec are having a very difficult time raising a new fund. • 2005: $2.2 billion raised for VC funds (private and labour sponsored) • Of which $672 million went into private VC funds • 2007: $1.2 billion • $464 million into private VC funds • 2008: Ventures West, a pre-eminent 30 year-old VC fund, closed their Montreal and Ottawa branch offices and dispatched their staff in those regions.

5. Venture Capital Trends (cont’d) Overview (cont’d) • Ontario companies are being hit extremely hard: • 2005: attracted $769 million of VC investment (45% of national total); • 2007: $450 million (25% of national total), and almost half of that amount came from U.S. investors. • The co-ordination in Quebec of the FTQ, CDP and provincial government has led to the creation of several new private VC funds with more fresh capital than is currently available anywhere else in Canada. • British Columbia’s early-to-mid stage tech industry relies primarily on the labour-sponsored industry (GrowthWorks) for much of its capital.

6. Venture Capital Trends (cont’d) Overview (cont’d) • Declining domestic VC investment across Canada is a consequence of three factors: • Ontario’s labour-sponsored fund industry is being shuttered by the Provincial government over the next few years. • Unlike their U.S.-based brethren, private VC funds are raising less capital from Canadian pension funds and other institutional investors. • Key potential limited partners, such as CPP Investment Board, are no longer making direct investments into Canadian VC firms. • In 2004, CPPIB had $125 million allocated to a VC Fund-of-Fund program, plus direct investments in Celtic House ($50MM), Edgestone ($50MM), Lumira ($200MM), Skypoint ($25MM) and Ventures West ($50MM). • Today, CPPIB only allocates $150 million to their new VC Fund-of-Fund program and committed zero new $ to direct domestic VC funds since 2005. • Simply put, CPPIB was once a lead LP for several key funds. Since 2005, CPPIB’s $500 million in the domestic Tech and Lifescience sector has morphed into a $150 million commitment, managed by a 3rd party. • CPPIB will say a $50 million commitment to a local fund “doesn’t move the needle”, but it sure has moved the needle downwards for the Canadian VC industry. • Some LPs will point at returns as the reason commitments are down. Many local VCs claim their own returns exceed the U.S. VC benchmarks. BCIMC, CDP, OMERS and OTPPB have not added new domestic Tech GPs in 07/08

9. Venture Capital Trends (cont’d) Overview (cont’d) • Increasing investment in private Canadian companies by foreign-based VC funds has not “back-filled” the drop-off in local capital. • And while some herald increases in foreign investment, many U.S. investors eventually move the HQ south of the border. The headline of a November 30, 2007 Boston Globe article was “R&D up there, head office down here.” • Loss of talent and expertise has multiple repercussions. • The next start-up will take place in the U.S. • Canada doesn’t develop a senior executive or Sales & Marketing expertise.

10. Venture Capital Trends (cont’d) Current Role of Federal Government • Fund of Fund programs at EDC and BDC appear to be going in different directions and enjoying differing success: • EDC’s program is increasing from $750 million to $1.25 billion, although much of that capital will go to foreign-based funds. • BDC had just $76.8 million actually invested in VC Funds (at cost) as at 3/08, up marginally from $67 million as at 3/07. • EDC’s Equity Group will lead an VC round, while BDC’s VC Group will not (by policy). • In 2008, EDC is beginning to replace BDC as a provider of mid and late stage VC equity capital in Canada. • BDC’s VC team headcount has been reduced, and the number of new Tech, Biotech and Clean tech companies being funded dropped to an all-time low in 2007. • Of its $10 billion book of business, only $500 million is invested in venture capital ($76.8 million in Funds and the balance in direct co. investments). • At the same time, BDC’s subordinated debt group is competing directly against the private sector to win business away from firms such as RoyNat and Wellington Financial LP.

11. Issues and Ideas Issues to Address / Ideas to Consider • The CVCA struck a task force of senior VCs, with the task of generating a list of practical ideas that could immediately stimulate the commercialization of new technologies currently being developed by entrepreneurs, small private companies, universities and Canada’s network of Centres of Excellence. • The key concern is that between 2002 and 2007, venture capital investment in early-stage Canadian companies dropped 42%, a trend that is continuing in 2008 (source: Thomson Reuters data). • Although we focused on just four key areas, our team of senior industry players developed a variety of ideas that could be considered by policy-makers. • The four ideas are: • Improving the Scientific Research and Experimental Development program (SR&ED) tax credit program, which would effectively stimulate the growth of small companies; • Setting up a third-party managed fund of funds similar to those funds recently established in Alberta, British Columbia and Ontario to help fuel the growth of vibrant, leading-edge companies; • Enabling greater use of government procurement/offsets to encourage domestic as well as foreign multinational investment in Canadian venture capital funds; and • Creating an incentive for large Canadian corporations to invest in Canadian VC funds, where an investment in a VC fund would receive the same tax treatment that is currently available for in-house research and development.

12. Issues and Ideas (cont’d) Issues to Address / Ideas to Consider (cont’d) • Improve the Scientific Research and Experimental Development program (SR&ED) tax credit program, which would effectively stimulate the growth of smaller knowledge-based companies: • Idea is to award $1.50 of credits for each $1 approved under the SR&ED system, provided the “bonus” capital was used from commercialization and sales development. • Limit candidates to private companies with sales <$50 million. • This would put capital directly into the types of firms that are experiencing challenges with raising capital. • Set up a third-party managed fund of funds similar to those funds recently established in Alberta, British Columbia and Ontario to help fuel the growth of vibrant, leading-edge companies: • We believe a $300 million national fund would be suitable for this effort. • Must be managed by a 3rd party. • 100% of the $75 million allocated under the 2008 Budget for a “late stage fund” could be used to finance this initiative.

13. Issues and Ideas (cont’d) Issues to Address / Ideas to Consider (cont’d) • Enable greater use of government procurement/offsets to encourage domestic as well as foreign multinational investment in Canadian venture capital funds. • We understand that a VC commitment may count as an Industrial Regional Benefit under current rules. • This should be formalized, and encouraged within the universe of participants. • Rather than buy $25 million of rivets, a foreign supplier could invest $25 million in a VC Fund. The spin-off benefits are obvious, and the impact is far greater on the national economy. • Create an incentive for large Canadian corporations to invest in Canadian VC funds, where an investment in a VC fund would receive the same tax treatment that is currently available for in-house research and development. • The idea is to encourage more corporations to become limited partners. • Beyond the recently-announced BlackBerry Partners Fund (RIM, RBC and Thomson), few VC Funds enjoy corporations as LPs, other than banks and life insurance companies. • If $1 of corporate expense for R&D is tax deductible, why not $1 of capital invested in a venture capital fund that itself is investing in companies that are undertaking R&D?

14. Issues and Ideas (cont’d) Other Issues / Ideas to Consider • Section 116: Despite the 2008 Budget announcement, this problem appears to not yet be fixed. • Lifetime Capital Loss Exemption: While Angel Investors can enjoy a lifetime capital gains exemption on their first $750,000 profit, there is no deduction for losses in start-up companies in the absence of a gain on a different investment. If you start up your own business and lose money, that loss can be deducted against other income as an “Allowable Business Loss”. But if you make that same investment in a Start-Up as an Angel Investor, there is no deduction – only the ability to balance it out against other gains. • Increased Awareness: Initiate an international campaign to increase awareness of the Section 116 change (once implemented) and to use the offices of DFAIT to encourage international investing in Canadian Fund Managers. • At the present time, DFAIT is very skilled when it comes to helping Canadian firms export their wares, but there is no current ability (or mandate) to help Canadian funds attract international capital to our country. • Tailor a flow-thru share concept for technology, biotech, life science, alternative energy and clean tech private companies.

15. Issues and Ideas (cont’d) Other Issues / Ideas to Consider (cont’d) • Research and Development Cost Offsets: An extension of the “offset” concept particular to the Healthcare arena relates to potential alternative uses for the capital flowing from the implications of Bill C22 where in exchange for the increased protection, brand-name manufacturers committed their firms to increase R&D activity so that the R&D/S (sales revenue) ratio increased from 4.9% in 1987 to 10% in 1996 (Office of the Auditor General of Canada 1998: para. 17.11). Based on Industry discussions with many of the brand-name manufacturers they have often indicated that they are “challenged” to find meaningful solutions/places to deploy this capital – a simple amendment to make investments in VCs a qualifying use of capital would be a huge win for our industry – bringing capital and strategic insight – without a federal cost implication. • Clearly this concept could be extended to all industry groups that the Government felt were “strategic” for the new economy including IT, Cleantech, Biotech, and other emerging knowledge-based industries.  Companies could be granted a full R&D expense allocation for all investments in Canadian-based VC firms carrying out more that 50% of their investment activity in the designated areas. • This would afford these companies a cost effective window on new and emerging technologies and companies, while at the same time offering both the VCs and the investee companies access to highly commercially focused partners. • Would have to include some caps on the maximum allocation as a % of revenues, but this approach should be close to revenue neutral for the Feds and potentially highly accretive if successful (taxes realizations from return, and from new companies funded and built via these funds).

16. Participants • Mark McQueen, President & CEO, Wellington Financial LP • Involved with Wellington Financial since inception of Fund I in August 2000; full-time since December 2004. • Wellington Financial is currently managing its third fund, a $400 million program launched in 2006. Limited partners include the Ontario Teachers Pension Plan Board, Clairvest Group Inc. (CVG:TSX), the Canadian Medical Protective Association, Export Development Canada, Industrial Alliance, the Canadian Commercial Workers Industry Pension Plan, etc. • Managing Director and Head of Technology Investment Banking at Orion Securities, now Macquarie Capital Markets (2000-2004). BMO Nesbitt Burns M&A Group (1996-2000). Bank of Montreal (1993-1996). Executive Assistant and advisor in the Prime Ministers’ Office (1991-1993). • CVCA Director and Chair of Government Relations Committee; member of Sunnybrook Hospital Foundation Governing Council; appointed by the federal government to the board of directors of the Toronto Port Authority in 2007; current or former member of many public and private boards. • Richard Remillard, Executive Director, Canadian Venture Capital & Private Equity Association • Executive Director of CVCA since Nov. 2003. • President of R C G from 1996 - 2003. • VP, Government Relations, CBA from 1990 – 1996. • Assistant to Minister of Finance from 1984 – 1990. • Sits on several Boards. Degrees from the LSE and McGill