The Case for Canadian Venture Capital

As a lawyer for entrepreneurs, I am often frustrated by my clients’ reluctance to seek local venture capital. There is a persistent view that Canadian venture capital is somehow second best to American or other foreign funds. This may or may not be true. (My own view is that having a rock star U.S. VC backing you won’t make a good business great; it may, however, help you fail more slowly.) What is clear is that there remains a growing divide between entrepreneurs and venture investors which needs to be addressed.

While this may seem to be about you, this post in fact is all about me. The continued health of my business depends on an expanding, sustainable base of good, well-fed entrepreneurs. I don’t believe this is achievable unless there is an alignment of startups and venture capital into one community. While there are many aspects to this issue, at its heart, it’s a question of marketing.

Is there any other industry that has so sharply felt the impact of negative publicity as has venture capital? Take a look south of the border: one day, everyone’s trading tips on the best place in Carmel to park your MIG. Then Blackstone files a prospectus disclosing private equity executive compensation and CEO Stephen Schwarzmann holds a few multi-million dollar parties. Next thing you know, Congress is overhauling its taxation of carried interests for everyone. Venture Capital may be the worst marketed industry out there.

Canadian private equity has been tarred with the same Blackstone feather in the public eyes, if only because it has not provided an alternate mission statement to the public at large and entrepreneurs in particular. I tip my hat to those labour-sponsored funds, who, in their heyday, tried to make the connection between job creation and local investing. Very few would argue, however, that the public right now sees much difference between venture capital and vulture capital.

If Canadian innovation is to scale, there needs to be a call to action for all participants in the ecosystem. This is a marketing exercise that needs to be led by you, the VCs. When was the last time you went to a bootcamp? Provided sponsorship dollars to entrepreneur-generated initiatives? Extended your channels in the US to provide a broader network for your portfolio? Many of these events are not immediately accretive to you, but they are vital to community creation. Let me re-phrase that; there has never been a more vital startup community, but it is one being fostered largely without VC involvement. This must not continue. The need to take a long-term approach to deal flow has never been greater.

Of course, it always helps to have a deep-seeded conviction that local partnering between VCs and startups matters. For me, this is the biggest missing piece: a mission statement that everyone can embrace. It’s also the easiest to solve. Think of the consequences of leakage (one of the most polarizing terms in the international development community). Every dollar of investment that comes from outside Canada ultimately leaks profit and wealth creation outside of Canada. There cannot be sustainable growth if the benefit of local innovation is reaped beyond our boundaries by private equity tourists. Every entrepreneur should feel a moral (if not economic) imperative to include Canadian VCs as part of its growth plans, and to serve as ambassadors for you abroad, directing deal flow from beyond your way (leak unto others as they leak unto you).

It’s time for you to make them believers.

  1. Suzie I really enjoy reading your stuff. I am at Ivara Corp (www.ivara.com) a VC backed company in Burlington Ontario and I have to say I have not been involved in the exodus of money raises to US VC’s although I do know through peers that it does happen. My last three startups have all had Cdn VC partners. Having said that, I have heard from associates and do agree with your messaging, suggestions and call to action as I think it is really important that we (VC’s and Comapnies as partners) communicate more and gain better alignment. I thought what Rick Segal did a couple of months ago (http://ricksegal.typepad.com/pmv/2008/04/five-big-less-1.html#trackback) where he did a bit of a roadshow to try to understand and address issues around perceptions of VC’s was a great idea and starting point.

    It is also great to see some progressive companies like RIM step out and take the bull by the horns recognizing the importance of continuing to foster the entrepreneurial community through their recent fund announcement.

    Great topic for the conference, hope it gets spome traction and we figure out how to take the next step from what Rick started with his roadshow.

  2. Suzie, I agree with your points and have looked into supporting Dutch companies (my heritage) abroad. The problem remains that full life-cycle support is non existent in Europe – not sure about Canada – and that in the end we are no longer building companies that are limited by geographical reach and therefor:

    1/ As a portfolio company you raise funds where you get the best terms
    2/ You run the company where the ecosystem and adoption rate matches your needs

    If and when those things exist in Canada (or elsewhere), investment philosophies like the one you describe can indeed flourish. The CVCA is a great start especially when it teaches Canadian VCs how to differentiate and compete.

    In the end, the best way for a (new) VC to succeed is to find an investment niche, and not to replicate Silicon Valley. The technology markets are changing and I think there is plenty of opportunity to create new investment differentiation (see my blog). Just like technology itself, it is sometimes better to wait a few iterations and a new philosophy for investing can flourish. And that new approach may just come from Canada.

    Enjoyed your blog.

    Regards,

    Georges
    Managing Director, The Venture Company