The Wall Street Journal recently reported that VCs are heading for the door. “Not since the dot-com bust has the industry experienced as much turnover as it is now”. Partners from some of the biggest funds have retired or otherwise moved on. The same is true at all levels of these funds.

Healy Jones, a friend and former Associate at Atlas Ventures gave his very personal account of why he recently left the VC industry here. Its definitely worth reading. What should we make of all this turnover? Is this just part of the normal cycle of expansion or contraction that all industries go through? Or is there a bigger story here?

While the WSJ article talks only of contraction, there is still growth taking place in the industry. PEHub recently reported about five new and relatively small early stage funds.

VC in Canada

Here in Canada, we’re getting set for what I hope is a period of big growth, due in larger part to the Quebec government’s $ 700M commitment to investing in innovation and entrepreneurship. Jacque Bernier’s Teralys Capital fund of funds is getting set to have a big impact! Alberta’s largest fund manager has also recently announced a $1B commitment to private equity investing.

So, who’s got it right?

As I look at these varying stories – tier 1 US VC funds like Atlas, Bessemer and Vantagepoint downsizing, while the Canadian space gets set to expand, you have to ask who’s got it right? Is Canada crazy or inspired to be expanding? Are the US funds that are downsizing smart or unlucky that they can’t get more capital now?

Traditional investing theory says: buy low and sell high. While public markets (led by the tech-heavy NASDAQ) have recovered somewhat from the beating they took after the U.S. credit crisis, startup valuations are still down. So, from the point of view of pricing, now is a great time to be investing.

In the absence of another big market shock, then the primary buyers of startups and their products and services should see a broad-based recovery. And with all this new capital coming in, the Canadian industry can afford to take a long term view. So, I’d have to conclude that the decision to invest in the industry is inspired, and timely. With one but…

A new approach

If these new VC funds execute on the same model of the past, then we should expect poor returns. in its 2009 report on emerging Canadian Software companies, PwC reports that “the median Canadian VC has shown a cumulative-since-inception return of 0%”. This is for a 10 year period that includes the end of the last bubble. Two years from now, those returns will be negative. More of the same just won’t get the job done.

The new commitments to VC and PE in Canada are coming from public / governmental sources. That’s all good, but for the long term health of the industry, private pension players need to be drawn back into the mix.

I am hearing a lot of encouraging talk about new models and approaches to VC investing – especially at the seed and early stage level. We have a small market here in Canada. We have to do things differently. People cite the Israeli-model as a great way to build a successful startup ecosystem.

Bottom line for me: I am truly excited for the future. I am looking forward to seeing these new funds come online and for some fresh thinking (from all players) about how best to build great, valuable companies. So, from where I stand, the state of the Canadian VC industry is looking good.

Update:
I guess the Canadian VC industry just got even better: The Canadian government has announced $ 350M in new commitments to venture capital: $ 260M for BDC and $ 90M to invest in new, private funds. You can read about it here.