Why Venture Capital is essential to the Canadian Economy

By Gilles Duruflé

CVCA has just released its comprehensive study on the impact of venture capital in Canada on economy, jobs and innovation.

The report (i) explains what venture capital is and how it adds values, (ii) describes how the Canadian venture capital industry developed compared to the US industry and how it differs from the US, (iii) measures its impact on the Canadian economy in terms of jobs, economic growth, innovation and exports, (iv) through various success stories, illustrates its long term “snowball effect” generating a pool of business angels, entrepreneurs and managerial talent which benefit the next generation of technology start-ups and, finally, (v) underlines the present contraction of the Canadian venture capital industry and its growing gap with the US industry which is a major threat for the Canadian technology and innovation ecosystem.

Here are the major findings

Between 1996 and 2007, Venture Capital investors financed 2,175 technology companies in Canada. 1,740 of those are operating in Canada in 2008. In addition, prior to 1996, it financed 15 companies that are still operating and have sales larger than $ 50 million in 2008.

On average these 1,755 companies have sales of $ 10.5 million and employment of 47 direct jobs. They are a mix of small, medium and large companies.

In aggregate, they generate sales of $ 18.5 billion:

  • $ 15.4 billion in ICT,
  • $ 1.9 billion in Life Sciences,
  • $ 1.0 billion in Other Technologies.

They employ 63,955 people in Canada and 17,760 abroad.

In addition, they generate 83,549 indirect jobs in Canada for a total of 147,504 direct and indirect jobs generated in Canada which represents 1.3% of all private sector employees in Canada. Indirect jobs are jobs generated in other companies through the purchase of goods and services from these companies. They are calculated on the base of industry-weighted employment multipliers provided by Statistics Canada.

The 51,050 direct jobs in Canada in ICT venture capital-backed companies represent 8% of the total sector employment and the 5,069 direct jobs in venture capital-backed Biotechnology companies represent 34% of total employment in that sector (graph 12).

Gross domestic product (GDP) is the measure of total value created in the country during one year. In 2007, the contribution of venture capital-backed companies to the Canadian GDP was    $ 14.5 billion, 0.94% of total GDP: 0.54 % directly through compensation, profits and taxes paid by these companies and 0.40% indirectly through the activity generated in other companies and sectors in Canada due to the goods and services bought by these companies.

The impact of venture capital-backed companies on the Canadian economy is however quite significant: 150,000 jobs (1.3% of all private sector employees) and nearly 1% of GDP. The impact on growth is also important, since venture capital-backed companies which responded to the survey grow more than 5 times faster than the overall economy. Moreover, their impact on innovation (R&D and patents) and exports is very substantial.

There are additional major benefits beyond these economic measures. (i) Successful venture capital-backed companies generate wealth and talent which are reinvested in the next generation of technology start-ups; (ii) they create serial entrepreneurs; (iii) they allow investments by business angels, and (iv) they provide a source of experienced management talent. Alongside business angels, venture capital funds play a critical role in linking these pools of wealth and talent to new start-up companies. This is what we call the “snowball effect” and it is illustrated by the success stories of Q9 Networks, Axcan Pharma, Taleo, Creo and ALI technologies.

But the report makes clear that the picture is not all rosy.  While we know that Canada’s venture capital sector is younger than its American equivalent, the figures in this report demonstrate that venture capital investment in Canada has declined relative to foreign markets. 

In the period from 2003 to the third quarter of 2008, relative to the size of the economy, the investment pace in Canada has been 60% of what it was in the US and the gap is widening.  Between 2003 and the first 3 quarters of 2008:

  • Venture capital investment in the US increased by 17%, from 0.18% to 0.21% of GDP
  • Venture Capital investment in Canada meanwhile decreased by 35%, from 0.13% to 0.085% of GDP and investment by Canadian funds in Canada from 0.10% to 0.06% of GDP

This decline in investment is strongly related to the decline in fund raising by the industry.

Given the importance of venture capital’s impact on innovation and on the overall economy, the report concludes on a call to all parties – governments, investors, venture capital funds and entrepreneurs – to work together to build a strong, permanent, Canadian venture capital industry.

Link to full report ENGLISH FRENCH

 

  1. Some great facts here. Look forward to reading the full report. I guess my big question is:

    over this period (1996 -2007) what are the $ in (invested) vs.$ out (exits)?

    Is this a compelling asset class for LPs?

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