Help Us Create a Discussion at The Mark About How to Fix Venture Capital in Canada
I’m going to be working with The Mark soon on a project to host a discussion about how to fix venture capital in Canada. To start the process, I’m hoping to reach out to people in our community and get ideas from them on what issues should be covered in this discussion, and who in our community should be speaking out about this topic.
We’re looking for contribution from smart, opinionated people who understand the venture capital industry in Canada, and can offer insight into where it is now and what can be done to fix it. If you’d like to participate, or know someone who should, or have ideas about what issues we should address, please let me know in the comments here or by replying to me on Twitter at @rhh. I’ll also be looking for tweets tagged with #themarkvc.
The Mark has emerged as a superb destination for smart, thoughtful news, commentary and debate in Canada. We’re hoping to create a lively and provocative discussion about this important topic. Will you join us?
Please watch this blog or my twitter feed for more news as we develop this project! And please feel free to help us spread the news.
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There are a couple of things VCs can do better – I have seen firsthand with two startups how they (Celtic House, Brookfield VC arm, Growthworks, Private investors from CI funds) work
They need to spend more time in the following areas :
- understanding startup culture better
- understanding what the reality is (projected by the founders vs projected by the sales guys vs operational reality )
- understand how customers are dealt with both from a delivery and support standpoint
- understand who the main fire fighters are other than the founders and talk to them
- strategy for market share capture are clearly communicated by the founders or CEO to the executers and they seamlessly integrate that to the culture
It’s a discussion that’s more than needed. It’s overdue, pressing, and critical.
Actually, I might go on a limb and say that the time for discussion is over. It’s time to act now, and make changes happen. A surgery might be required, rather than small band-aids. We need new players, and new money.
Those than know what must be done don’t have the money, and those that have the money (or can get access to it) aren’t doing what they are supposed to do. We, as entrepreneurs are left holding the bag, and the few successful ones will get funding from the US.
As a partner in one of the larger Venture Capital Funds in Canada I have first hand knowledge of the space and the issues we face. There is a severe shortage of Venture Capital in Canada. The industry is in turmoil. If we want to foster a culture of research and innovation, we have to provide funding in a large scale manner first to the funds, then to the individual companies. Currently, there are only 5 or 6 institutions in Canada who are potential funders for new venture capital funds. That is not enough to help refuel the sector. We are at the point in the economic cycle that the country should be investing in early stage opportunities. Of course, our nations collective conservative nature kicks in and we do the opposite. VC’s can’t help kick start the entrepreneurial spirit when they themselves are finding it hard to raise funds…
John,
You’ve accurately described the situation, and I’m living this currently, so how do we get out of this vicious circle and get more funds into the VC buckets?
Shouldn’t the VC’s themselves also make their case to the known sources of funds?
I think the Canadian entrepreneurial spirit is here, but it’s being handicaped by a lack of VC funds that are willing to take the early stage risks instead of opting for safer later rounds.
Extreme Venture Partners, though small, has been one of the more active funds over the past two years having assembled a portfolio of 13 Investee Companies.
In our short history we have had the opportunity to work with tremendously talented entrepreneurs working on changing the “way the world works” and have also had the opportunity to work with incredibly talented co-investors in this country. We have an incredibly strong talent pool in this country and a market opportunity to do some great things. The time for VC to get active is now! Coast to coast there are pockets of things being done right, we just need to grow the scale at which they are being done!
Early stage risks also mean more early stage failures. That is the nature of the beast. It is very difficult to expect a VC fund that has limited capital to take that risk.
VC’s have made thier case.
If you look around the world, it starts with governments who help with policy, with incentives and with programs that make venture capital a part of the agenda. Ontario has started with the creation of the Ontario Venture Capital Fund and the Emerging Technology Fund. The problem is that the initiatives are not enough. The feds and the provinces have to work together and develop a well thought out approach. They have to drive the institutions to be more Canada focused in their investment decisions. The intravension being made in traditional industries is understandable on one hand. If you took 25 to 50 percent of this and applied it to developing the new economy industries that can help Canada compete on a global scale, I would argue that we are better off as a nation. The reality is that given the immediate requirements for bailouts, venture capital and related issues are not high on the priority list. While it makes sense to focus on fixing the current broken industries, it is a short sighted view. Unless the collective voices of the those affected, and by this I mean entrepreneurs, are heard, things will not change fast enough. The VC’s speaking out are not enough. So William, start at the grass roots and organise and make sure that your valid concern of lack of capital is heard and heard loud and often.
Hi John,
You should have referred us to your video – http://watch.bnn.ca/headline/june-2009/headline-june-10-2009/#clip181812
which puts all this in perspective.
regards,
anup
The last thing we need is a government led industry. The technology and innovation markets thrive on home runs, and any policy mantra should strive to shine the light on the jobs of the future, and best practices from the home run hall of fame. Almost all of the top tech names [apple, cisco, google, oracle to name a few big guys with $100 Billion market caps] were venture funded…you know that but we need to insure the country hears that drumbeat.
The sector requires a step function change in the total capital flowing in, via asset allocation decisions by the major institutions. Period. If that does not happen, then we will have a CFL team in an NFL world.
I believe the government’s primary strategy should be focused on what it does best… and that is apply tax treatments to make this type of investing too good to pass up for the major institutions making asset allotment decisions.
A secondary strategy would be for the government to make a series of investments into the existing firms with experience who have survived, and let those firms make the bets on the companies as they see fit. If the government goes in directly, they will slow down the market and deals will be politicized, corrupting the whole system.
Finally, there are a number of large public service pension funds who ought to be encouraged to take a longer term view into their investment strategies. It would not take a sea change in their portfolio strategies to have a material impact in our market.
In conclusion, as a start-up owner, I want to make it clear that I would much prefer to seek out Canadian or US VC partners, than go through a process with government run entities for government money. It would be less even fun than filing a SRED application ;-)
Well said Shaun.
As an entrepreneur, I will go to the path of least resistance, which at this point is US VC’s. What Canada needs:
- a new breed of VCs with new attitudes towards risk
- new venture capital, enabled by extraordinary tax or other incentives
It’s that simple.
The entrepreneurs, ideas, start-ups, engineers, people, know-how, etc. are all here. They just don’t have enough rocket fuel to breakaway into global success.
Although I agree that the government offers little value in direct participation, what is needed and what has been done in the past for several other industries is the provision of a tax credit system that rewards VC firms who take on riskier early stage funding for certain types of ventures, most likely tech and digital media.
To risk picking up some heat here, they could even go as far as to set up agency along the same lines as Telefilm to help direct tax credits, distribute additional funding programs and promote the fruits of these projects internationally through political trade channels not as accessible to the private sector. This may smell like state interference, but the unifying effect the Telefilm model arguable contribute to the rise of Canada’s film industry on the international stage and encourage foreign investment.
Hi Martin,
I’m not sure that Telefilm would be the best model to follow. One might argue that Telefilm, the Toronto International Film Festival and a weak Canadian dollar and close proximity to the US during the late 80s and 90s were all contributing factors, i.e., all were required not just one.
I’m wondering if a better model for venture ecosystem development was Yozma in Israel in 1993.
http://www.jewishpolicycenter.org/221/israels-high-tech-boom
http://www.iva.co.il/content.asp?pageId=36
Yozma was an investment matching program not unlike the Ontario Emerging Technologies Fund http://www.ocgc.gov.on.ca/site/en/funds/ontario-emerging-technologies-fund/ (see Suzie Dingwall Williams commentary at http://venturelaw.blogspot.com/2009/03/ontario-government-announces-new.html). Suzie’s says “Some speculate that this is because there is a rising belief at the Ministry that Venture Capital as an asset class in Canada cannot success, and therefore the best option is to use a matching program to attract foreign investment.”
Yozma was used a different approach. The Yozma program was a $100M fund owned by the Israeli government. The program was amatching program that provided matching funds of $10M to 10 funds that brought $10M of foreign captial. The matching funds could then at the end of 5 years be “bought out” by the venture partner for the original amount plus interest. It was a great program of shared risk and incentives for the venture firms.
Yozma had 3 goals:
1. To promote the growth of promising high-tech firms in Israel
2. To encourage the involvement of major international corporations in the Israeli technology sector
3. To stimulate the development of a professionally managed, private-sector venture capital industry in Israel
(From http://books.google.com/books?id=e0bdjUgzLG0C&lpg=PA207&ots=gv_jUUMs9V&dq=yozma%20venture%20goal&pg=PA207#v=onepage&q=&f=false)
These goals are different than the current Ontario and Canadian climate. We have different taxation and foreign investment requirements. We have a current venture industry.
I’m a former (recovering?) VC so my comments could either be sour grapes or a shill for the VC collective. With that disclaimer out of the way.
We need to be careful with the broad strokes and wide definitions because there are many different segments to the VC world and some of them, along with the people in them, work well. Others simply blow chunks.
Seed/Series A rounds, the founders, and much of angst surrounding both, seem to get all the attention. And that’s probably correct. A business that is on path, generating some revenue, and is looking for later stage funding can get this in Canada. In fact, most of the long term VCs, the people who have been doing this for 10 years are totally comfortable in this space. Those companies can usually get funding on merit and all the normal VC cha cha..
It is the seed/series A stuff where we see many of the more pronounced problems.
1. Nobody knows a damn thing when they start something from scratch. Stuart @Trip Harbor has gone through zigs and zigs while yours truly is getting lots of good customer feedback, validation, etc, before claiming to *know* where I’m going. The scratch thing is direct from the founder’s brain and it needs to be validated, refined, etc. Having said that, a VC who wants 80 gigs of market data, 400 spreadsheets, 10 years of projections, is in the wrong asset class. Period. Many funds do not have start up in the fund’s DNA and as such we have a perfect storm of founder frustration, analysis paralysis, and potential great businesses heading out of the country.
The solution is to simply accept this reality and create funds which not only target this stage of company but do it with people who either lived it or love it. LPs who get it. The Government’s attempts to inject capital into this market can put the money into these types of funds and then get out of the way. Mark Skapinker or Ron Conway funds off a napkin and simply bets on the people to figure it out. This laughable “stage agnostic” label many firms in Canada use should be banned because it sends a seriously bad message about what the firm will/won’t fund. JLA funded PlanetEye off a napkin, Tungle off a power point deck so my former firm earned the right to use that label. Others, not so much.
What we need to encourage is getting a set of funds that target stages specifically with the people/funds to make it work.
2. Embrace failure.
I dunno how many times I’m going to have to say this but Canada needs to get failure in perspective. Failure equals experience and if we treat it like that, we can grow talent in a way that makes companies better along with investment opportunities better.
3. Fail fast.
You can build, test, and see if the dogs will eat it, for under 100k when it comes to software. Again, in this class of investments, software, get a structure in place that allows 100k or so to be thrown at something to see if it works, if not, kill it, rinse and repeat. Most firms don’t have the infrastructure to do this without massive legal fees, overhead, etc, etc. Without picking on any one firm, I’m pretty comfortable in saying that most funds in Canada who claim stage agnostic, couldn’t do a $50k or $100k investment if you put a gun to their head. Besides not being in the DNA, the structure simply doesn’t support it.
That’s just a few off the top comments.
Canada is an amazing place to build a company and I’m doing it now. You can get funded in Canada. I did. You can build a market in Canada. I am. This discussion is important.
Rob -
Not sure if this thread is still alive, but a few folks have asked me to chime in.
In broad strokes, there’s no VC money in Canada right now because (a) the “play money” that wealthy families and funds used to give VCs died when portfolios crashed last year, and (b) the last time there was real VC (XDL, Skapinker, VenturesWest, Albright) everyone had lousy returns. So even as the Bronfmans et al feel comfortable allocating risk capital again, it sure won’t go to VCs. We sort of have the market we deserve, based on the returns over the last ten years. If you had an extra chunk of cash to risk, would you put it in the hands of a Canadian VC? Or would you put it in China? Real estate? Gold? So many choices, most of them with better track records.
I wish Albright well and always have, and I certainly admire the money that iNovia and GrowthWorks put out. But it’s not exactly a vibrant market. It’s far easier to raise capital in New York, even with all the losses. Just a lot more doors to knock on, and a lot more people who won’t miss $1M or so.
Guys like Osama Arafat and David Ossip can raise whatever they want from wherever they want because they’ve made people money in the past. VC or angels, call it what you want, with or without the VC intermediary. But their example isn’t that common.
And of course there’s angel money, but it’s not in $10M slabs. Generally under $500K (I’ve seen under $50K). Then again, that’s about all it takes to get something going these days – more than angel investors, there’s an entire “angel economy” of people doing work on the side. Even those with full-time jobs don’t know how long they’ll last, and are eager for diversification.
As far as I can tell, the government is the main source of risk capital. Tax credits, as Martin suggests, are a part of this – but you have to spend the money years in advance of getting those checks.
For our part, we’re turning our attention to some of the cultural funding mechanisms, because they rightly perceive a lack of Canadian content online. To date they seem to have mostly funded TV show websites and Flash games, deeming pedestrian content sites not interactive enough. But far more than half of all Canadian eyeballs go to US sites, and even as we repatriate some of those eyeballs for Canadian advertisers, there just isn’t enough premium Cancon sites to go around.
I apologise for coming in so late, I wish I had been in earlier.
All of the comments have relevance but I think Rick Segal is on the right track on several points particularly ‘Fail fast, early, and cheaply.’
But there are some other structural problems that need attention.
(I have started 7 companies, 4 successes, ran Canada’s largest industrial design firm specialising in medical electronics and other high-tech applications, designed and developed over 200 products for start-ups, SMEs and multinationals, have consulted with Industry Canada over last 5 years looking at innovation in general, started Innovation Enterprise last year with colleagues to create a national network of organisations, firms, schools, governments, to develop some ‘best practices’ for incubators etc.)
1. One of the greatest barriers in this innovation space is conventional wisdom; we all drink the same kool-aid, in this case the belief that technology is the saviour of our society or at least the pathe to continued prosperity. This mantra is rampant throughout the developed world and is rapidly motivating the developing world too. And it makes a lot of sense, but the reality is somewhat different. OECD figures show that only 6% of new businesses are based on a new technology, another 6% use some technology, but 88% use no new technology (apart from off-the-shelf products.) So when the VCs complain that there are not enough good ventures around that is partially because they are only looking at 6-12% of available deals. If VCs became more comfortable taking risks on a wider variety of ventures, they might find their risks more broadly distributed and might find the success rate improving with bottom line results. Over 140,000 companies are started in Canada each year and 130,000 close; there is so much churn that if VCs can’t find investment opportunities, it is not because they are not available!
2. Another area that Rick mentions is the ‘napkin deal’ level of investment by Mark and Ron. I think the greatest impediment to the whole arena is the persistent habit of treating early stage ventures like mature companies. (Shaun mentions the fun of SRED applications.) Early stage ventures are by definition doing something different or they have no chance of survival as an undifferentiated competitor. It does not take a rocket scientist to identify a key point of differentiation, be it technology, marketing, distribution, pricing or whatever (Hopefully more than one) but it also does not require a precisely detailed five year forecast because that is unknowable at the outset.
Maybe it would help if every employee of a VC were required to have started at least one success and one failure to demonstrate understanding and empathy. Some years ago I coined the phrase, “We need a culture of innovation and the climate to sustain it.” Empathy from VCs would help.
3. Many (most?) new ventures are started by the young and inexperienced. Trying to get them to behave like corporate big boys is counterproductive. Far better to surround the founders with those skill sets and make sure they are listened to rather than forcing a neophyte to do a crash course in accounting. Let the idea fly, make mistakes, change course and be agile. Investors know that the founders will likely be replaced as leaders at some stage so there is no benefit from killing the goose.
4. Regarding Culture above, it has to start early. Most children are naturally creative and experimental but as they move up the education ladder they are increasingly presented with rote learning and by the end of high school there is precious little creativity left. Add to this that in many parts of the education system, entrepreneurship is not regarded as a legitimate career path, and you have neither interest nor encouragement! In university specialisation takes hold and along with contempt from faculty it is a wonder that any emerge at all. (There are universties who are entrepreneurship boosters; Stanford, Waterloo, MIT, and others but they are the minority.) We need to infect young minds – no, let them stay infected – and get the numbers of starts up. Then the pro’s can work on improving the success rate!
I could go on but I won’t. I’ll look forward to any response.
John.
John – thanks so much for the contribution. I’ll ask that you watch this space – we’ll be launching this conversation soon at The Mark, and your contribution to the discussion there would be much appreciated. Should be in about two weeks, and I’ll make a note here when it launches. Much appreciated.