March 14, 2012
I read Preston Manning and Jack Mintz’s article (“What Venture Gap?”) in the March 8 edition of the Post with great interest and some puzzlement.
From my perspective, a significant gap has emerged in the balance between the supply of, and the demand for, venture capital financing in Canada. This gap needs to be addressed for Canada to develop the world-leading high technology companies we require to improve our lackluster record in successfully commercializing the innovations that are bubbling through our incubators, research institutions and universities. In this regard, it is worth recalling that venture capital has proven itself to be the essential building block in the U.S.,Israel, Canada and elsewhere for the development of high growth companies across the entire spectrum of high technology industries from information and communications to pharmaceuticals and clean tech.
On the supply side, venture capital investing volumes are a fraction of what they were over a decade ago. In 2000, the venture capital industry invested just under $6 billion while last year that number stood at just $1.5 billion. For entrepreneurs and their companies this situation means that they are only able to raise about 40% of the capital available to their U.S. counterparts. This under funding is causing many of our most talented entrepreneurs to go to where there’s greater capital availability – namely, the U.S. – and remain there, to the detriment of the Canadian economy.
Ultimately, venture capital investments are driven off the amount of capital available to venture funds themselves. Here too, worrisome trends have developed. Major funders have all but disappeared and the venture capital industry itself is in a capital drought. For instance, in 2011 not a single dollar from outside Canada found its way into our funds.
On the other hand, demand for risk capital is surging. Governments have laid the basic foundation by their huge support for R & D through a plethora of effective support programs, the most notable of which is the SR & ED one. Importantly, there has been considerable growth of business incubators and accelerators across the country, much like the well-known MaRS Centre in Toronto, whose activities are fostering the development of a new and vibrant generation of high technology entrepreneurs.
To sum up, venture capital supply and demand are incontestably out of synch.
And, we need to act.
Gregory J. Smith