The question is whether or not Canada is simply too small a region to support a domestic venture capital industry. The issue came up again in conversation with a good friend here in the Valley yesterday over the attractiveness of starting a 5-state regional venture fund in a relatively under-served market. I thought the idea would only work if there was a critical mass of entrepreneurs and investment opportunities. I argued that Canada is like a small region in the US that, while under-served, does not have a critical mass of entrepreneurs or investment opportunities. The Canadian VC industry is collapsing because the domestic VC funds have tried (been compelled by their institutional investors) to build portfolios by solely investing in the “best” Canadian companies. How can you succeed when you can only choose to invest in the best company in a relatively small region when American VCs have a broader selection of talent and opportunity? You can’t and that is why the returns have been dismal.
This has nothing to do with the quality of the entrepreneurs and opportunities in Canada. There are opportunities (we have four great companies in our portfolio) and there are some talented entrepreneurs. Just not enough to support a VC industry that is restricted to such a small geography. Foreign investors are already active and pursuing high-quality deals in Canada. It was recently reported that foreign investments in Canadian VC-backed companies are averaging $3.8 million, while domestic investments in similar companies average just $1.1 million. There is nothing wrong with this, even though some will argue it may lead to our best companies leaving Canada. Yes, that may happen. Companies relocate primarily because of talent, networks and access to capital. Silicon Valley is a compelling place to operate because, in the IT industry, it is the centre of the universe. So, Canada needs to build a competitive eco-system underpinned by a talented entrepreneurial and technical workforce that makes Canada a compelling place to do business.
Canadian-based VC funds can be successful if they are not bound solely to the Canadian geography. At the same time, we need to do more to attract US-based VCs to invest in Canadian opportunities. If Canadian entrepreneurs can be globally competitive then they will have no problem attracting VC funding.
June 7, 2009 at 2:37 pm
This is a convoluted message. It is not clear if there is rational behind the observation or if there is an observation and “conclusion”.
In my opinion, there are plenty of opportunities to invest in Canadian start-ups either as seed money or early rounds. The grass is not greener in the US or Europe and the relative advantage is with home grown industries. The Canadian VCs need to pull themselves together and start seriously engaging with Canadian start-ups. Otherwise, the better/lucky ones will raise with off-shore VCs and the investors will stop committing money to the VCs!!!
June 7, 2009 at 9:50 pm
Not a convoluted message at all. Good companies will not have any problem finding capital – Canadian or foreign. As to Canadian opportunities, the point is that VCs need to invest in the best opportunity not just the best opportunity in Canada. Thanks for posting your comment.