Archive for the ‘ Private Equity ’ Category
The Fall 2011 issue of PRIVATE CAPITAL Magazine was mailed out to CVCA members last week. And the electronic version has been posted on the CVCA home page and here is the link http://tinyurl.com/Private-Capital-Fall-2011 .
Enjoy!
Curated content from Rick Nathan of Kensington Capital Partners, August 9th, 2010
Investors have been on a scary ride in the public markets through the past few days. With near back-to-back 500-point drops, all of the major North American stock market indexes have turned decidedly negative for the year to date. The historic S&P downgrade of US Government debt adds to the weight of worry on investors, alongside falling commodity prices and the continuing risks in Europe and Japan. Most investors have suffered from these rapid and severe declines in public markets.
Private equity investors have greater stability in their portfolios. Of course, all markets are affected by a weakening economy. And if access to capital becomes restricted, the effects will spread to private equity dealmakers soon enough. We saw this happen in 2007-2008, when banks stopped lending, public equity markets fell, and private equity firms found it difficult to buy businesses at realistic prices through 2009.
The correlation between public and private equities is indirect. Private equity portfolios will obviously be affected if the current market correction leads to a sustained period of lower valuations, or a new recession. But only after investors have connected this capital market activity back to the real economy. Private equity portfolios are not seriously affected by day-to-day gyrations in the public markets that do not lead to new economic conditions.
When public market turmoil does foretell a slowdown in the economy, the impact on private equity portfolios is typically muted. The chart below shows the Net Asset Value (NAV) of the Kensington Global Private Equity Fund measured against the major public market indexes in the period from August 2008 through July 2010.
Kensington Global Private Equity Fund vs. Public Market Performance
July 31, 2008 – July 30, 2010
As can be seen in the chart, the sharp declines in the public markets in September 2008 and following did not have as significant an impact on the Fund’s NAV. The values of private companies were re-set more gradually over subsequent months as it became clear that a recession had begun, with weaker prospects for sales and profits across the Fund’s diversified portfolio of more than 100 companies. During that period, the valuations of private companies declined, but nowhere near the levels reached at the depths of the public market panic.
Private companies are valued on Main Street, based on the real economy. Their prospects change with the economic cycle, but not every day or every minute. This can create a sharp contrast to the valuations of public companies established on Wall Street and Bay Street, so heavily influenced by rapidly changing market sentiment, program trading and other immediate distractions.
One reason for the different valuation approach is the lack of liquidity in the private markets. Investors cannot buy and sell at will, and so they see no need to continuously revalue their portfolios. When valuations are prepared, they are based largely on business fundamentals or completed corporate transactions (such as the sale of the company), which results in much less volatile pricing.
An allocation to private equity can therefore act as a shelter from stormy public markets, or at least as a shock absorber. Large institutional investors such as public pension funds have learned this lesson, and continue to increase their allocations in recent years, now in the range of 10% to 20% of total assets.
Individual investors can find similar shelter through a similar allocation to private equity in their own portfolios. A diversified private equity investment such as the Kensington Global Private Equity Fund can add real stability during times of market stress.
Of course, a diversified private equity portfolio such as the Kensington Global Private Equity Fund is not immune to public market fluctuations. Many private equity funds hold a small portion of their portfolios in publicly traded stocks, typically as a result of an IPO of one of their portfolio companies. For example, our Kensington Fund currently holds shares in a company that completed its IPO on the NYSE in June. These shares remain restricted under standard underwriters’ lock-up agreements for a six-month period following the IPO date. As a result, the Kensington Fund will experience some volatility based on this exposure. Public market stress may also reduce our ability to sell additional portfolio companies into the public markets for some time. However, since most of our portfolio companies are in the mid-market where company sales are primarily completed through strategic M&A transactions, this impact should be relatively less significant.
“We believe startups to be the driving force behind job creation and prosperity,” says [CVCA's] executive director Richard Rémillard. “We need to be more attractive to foreign entrepreneurs.” Thanks for supporting the Startup Visa Canada Initiative. It’s been about 5 months since we launched. During that time, the team has been busy reaching out to government officials, influencers and organizations across Canada to gather data and garner support for an alternative visa for entrepreneurs.
Here’s a quick update on our progress:
Chris Arsenault, iNovia Capital joins the Founding Team
Who’s In?
Supporting Organizations
Startup Visa Canada has also received some great coverage in CVCA Magazine, BC Business, Techvibes, StartupNorth and Hacker News. You can find links to more stories in the Press section on the Startup Visa website.
How You Can Help
- Tell your friends to endorse the Initiative, if they have not already done so.
- Tweet and blog about the initiative @startupvisaca
- Send your local MP’s a message with a link to the site and express your support for Startup Visa Canada
- Follow us on Twitter @startupvisaca and like us on Facebook
The Startup Visa Canada Team
By Chris Arsenault, Managing Partner iNovia Capital
I’ve been an active board member of the CVCA – Canada’s Venture Capital & Private Equity Association – for many years, with somewhat of a focus on helping make the annual main event a unique and uttermost valuable gathering of the minds that define our private capital industry.
I’m predicting that this year’s event will set new groundbreaking records. In fact, I think that this year’s event will break every record we have logged at the CVCA! And why you may ask? Because this year’s event speakers and attendees are made up of the most active and opinionated leaders in our industry.
We have the largest group ever of Limited Partners attending, coming from across North America, Europe and Brazil, which, in turn, is attracting practically every Venture & Private Equity Fund Manager and General Partner in the country.
This year’s Annual conference is being held from May 25-27th in beautiful Vancouver, British Columbia, at the Westin Bayshore.
The speaker lineup is amazing and includes:
Leo DeBever, CEO and Chief Investment Officer, Alberta Investment Management Corporation (AIMCo)
Barry Gonder, Managing Partner, Grove Street Advisors, LLC
Doug Pearce, CEO and Chief Investment Officer, British Columbia Investment Management Corporation (bcIMC)
Maurício da Rocha Wanderley, CIO, Valia
Sebastien Burdel, Principal, Coller Capital Ltd.
Alan Hibben, Managing Director, Mergers and Acquisitions, RBC Capital Markets
John McCoach, President, TSX Venture Exchange
Andrew Rippy, Managing Director - Investment Banking, Pacific Crest Securities
Blair Cowan, Vice-President, Corporate Finance, CIBC
Vipon Ghai, Managing Director, Manulife Capital
Mark Jenkins, Vice-President and Head of Private Debt, CPP Investment Board
Greg Woynarski, Managing Director and Head of the Global Debt Capital Markets Group and Global Co-Head of Credit Capital Markets Group, Scotia Capital
Chris Arsenault, Managing Partner, iNovia Capital Inc.
Jeff Clavier, Founder and Managing Partner, SoftTechVC
John Ruffolo, Senior Vice-President and Head of Knowledge Investing, OMERS
Boris Wertz, CEO, W Media Ventures
Frank Dennis, President and CEO, Swiss Water Decaffeinated Coffee Company
Brett Hodson, President and CEO, Corix Group of Companies
Peter Luit, President and CEO, Livingston International
Tim April , Managing Director, Fund Investments, BDC Venture Capital
Jacques Bernier, Managing Partner, Teralys Capital
Jennifer Brooy, Vice President and Head of Equity, Export Development Canada
Melissa McJannet, Managing Director, Northleaf Capital Partners
Todd Tessier, Vice President, BC Renaissance Capital Fund
Stephen Dent, Partner, Birch Hill Equity Partners
Kelly DePonte, Partner, Probitas Partners
Aaron Gershenberg, Managing Partner, SVB Capital
David Henderson, Managing Director , XPV Capital Corporation
Tim Kelly, Partner, Adams Street Partners
Susan Long McAndrews, Partner, Pantheon
Dave Mullen, CEO and Head of Private Equity North America, HSBC Capital (Canada) Inc.
Deanna Brown, CEO, Federated Media Publishing Inc.
Matt Klainer, Business Development Manager , Google
Michael Shim, Vice President, Mobile Partnerships, Groupon
Jim Orlando, Managing Director, OMERS Private Equity
Scott Stedman, Partner, The Yucaipa Companies
Gary Rubinoff, Managing Director, Summerhill Venture Partners
Chris Wormald, Vice President – Strategic Alliances, Research In Motion
Paul Deninger, Senior Managing Director, Evercore Partners
Jennifer Morais , Senior Principal, Funds and Secondaries, CPP Investment Board
Jim Pittman, Vice President, Private Equity, PSP Investments
Rakesh Saraf, Portfolio Manager, Private Investments, Alberta Teachers’ Retirement Fund Board
Lincoln Webb, Vice President, Private Equity & Infrastructure, BC Investment Management Corporation
Miguel Ferreira, Head of International Markets, Tarpon
Tim Formuziewich, Managing Partner, Brookfield Brazil
Miguel Perrotti, President, Invest Tech
Maurício da Rocha Wanderley, CIO, Valia
Duncan Littlejohn, Managing Director for Latin America, Paul Capital Partners
Michael Woolhouse, Senior Principal, Private Investments, CPP Investment Board
Sidney Chameh, Chairman, ABVCAP Founder and Partner, DGF Investimentos
Martin Pose, Partner, TozziniFreire Advogados
David Snow, Founder & CEO, Privcap
Bing Gordon, Partner, Kleiner Perkins Caufield & Byers
Don Mattrick , President, Interactive Entertainment Business, Microsoft
Neil Young, CEO, Ngmoco
Stephen Todd Walker, Managing Director, Oppenheimer & Co., and Author of ‘Wave Theory for Alternative Investments’
And yes! The rumors were well-founded. Entertainment before the traditional Scotch Tasting Evening on the 26th will be provided by none other than “Great Canadian Entrepreneur and Entertainer Howie Mandel”
HOWIE MANDEL
Howie Mandel, one of the biggest names in comedy, will entertain us after dinner. Howie Mandel has remained a constant force in show business for over 30 years. This summer he embarked on his latest endeavor as a judge on NBC’s hit talent competition series “America’s Got Talent” alongside Sharon Osborne and Piers Morgan. Howie recently received an Emmy nomination for “Outstanding Reality/Competition Host” for “Deal or No Deal” and a Daytime Emmy nomination for “Outstanding Game Show Host” for the syndicated version of the show.
So if you are not registered and are looking for “the place to be” later this month, then LINK TO CONFERENCE WEB SITE, SPEAKER LIST & AGENDA and register today – we are almost sold out!
See you in Vancouver!
by Chris Arsenault, iNovia Capital
I had the pleasure of meeting Miriam Varadi, author of Merchants of Enterprise, in 2008 and had the pleasure of participating in her research on the Canadian Private Equity landscape. Since then, the book has been doing extremely well, and continues to be the basis of on-going discussions on the subject across Canada and the USA.
Most recently, the Goldman Sachs/Facebook deal generated heated discussions and placed private equity front and center again. Miriam feels that this Facebook deal is a victory for private over public markets. Here is what she had to say in a recent BNN interview:
Merchants of Enterprise, Private Equity in Canada: The Color and Controversy is the first Canadian book to take you behind the scenes and expose the inner workings of our private equity industry. This book is all the more authoritative because she gained on-the-record access to many of the biggest dealmakers in the field.
The book’s goal is to demystify private equity by creating more public awareness, to educate and to inform. The lack of transparency in the past has lead to worrisome trends in regulation abroad. The aim here is to create openness in this area, which inspires dialogue and trust.
This easy to understand book will be of interest to professionals, entrepreneurs, investors and their advisors. Since the publication of the book, Ms. Varadi has acted as a spokesperson on private equity topics and given interviews on BNN and CBC. She also moderated a private equity panel discussion at Rotman’s Business School.
You can get a copy of Merchants of Enterprise at Chapters online.
This post was originally written for the Private Capital Privé winter 2010 edition of the printed magazine. And was Curated for nextMontreal on November 22, 2010.
No point in letting a good crisis go to waste. Opportunity emerges during times of market challenge. At the tail end of perhaps the toughest decade that the global – and Canadian – venture capital industry has endured, a flurry of new fund managers has hit the fundraising trail in Canada and successfully raised first-time funds.
It takes guts, and patience, to launch a new venture at times like these. You may have heard that the venture industry in Canada has been declining for years, that LPs are ‘pruning’ managers rather than adding new ones, and that raising a new fund is nothing short of a suicide mission. Nonetheless, you can’t say that entrepreneurial spirit and guts are not alive and well in the Canadian venture capital industry.
Compelling market opportunities, good teams, and perseverance in a difficult fundraising environment is paying off for a new generation of emerging VC managers in Canada. In more than one way, we are witnessing the re-birth of the Canadian venture capital industry.
Canada has always been, and continues to be, a venture market that is dramatically underserved by capital, and so there is plenty of room for new entrants – indigenous, entrepreneurial and from outside our borders. Over the last year, against all odds, a new generation of emerging “entrepreneurial investors” teamed up around specific domains and market segments, built strong teams the same way a startup builds an A-team, and launched into a world of opportunities and chaos.
Impressive accomplishments on the fundraising trail by upstart GPs has created a dramatically changed landscape in Canadian venture capital. Not to belittle the effort, it should be pointed out that some of these debut funds were on the money raising trail for a few years. And now we have a whole new crop of opportunities being pursued, by a whole new crop of new venture investors. Global digital media funds, global water business funds, expansion capital where none existed before in Canada, to name a few.
Capital: $100M first closing
First Close: May 2010
Partner Locations: Vancouver and Shanghai
Investment Focus: Digital media
Sources of Capital: Numerous Canadian and foreign institutional, corporate and private LPs.
Team: Paul Lee is the former president of Electronic Arts responsible for the worldwide studios, as well as an active and successful angel investor. Glenn Entis is the former chief visual and technical officer of Electronic Arts and former CEO of Dreamworks Interactive. Divesh Sisodraker is the former CFO of Taleo Corporation, former CEO of Pivotal Corporation and former finance head at ALI Technologies (McKesson). Jason Chein is former general manager of EA China and former Asia developer relations with Microsoft’s Xbox group.
Capital: $100M+
First Close: February 2010
Partner Locations: Toronto
Investment Focus: Water technologies and water-related businesses
Sources of Capital: Canadian and International institutions.
Team: XPV’s team is a marriage of investment expertise, sector knowledge and deep industry operating experience.
“Tenacity, focus and an enormous team effort has positioned XPV to capitalize on the growing investment opportunities now present in the water sector,” said David Henderson.
Capital: $50M+, first closing
First Close: July 2010
Partner Locations: Toronto
Investment Focus: Growth equity firm investing in expansion and later-stage enterprise software and information aggregation companies.
Sources of Capital: Institutional investors form Canada and the U.S.
Team: Georgian Partners Justin LaFayette, Simon Chong and John Berton; all have hands-on experience in operating and managing expansion stage technology ventures.
Capital: $300M first close
First Close: November 2009
Partner Locations: Toronto, Montreal and Vancouver
Investment Focus: Later-stage Canadian technology companies
Sources of Capital: Anchored by commitments from BDC, EDC and Teralys, which sponsored the formation of Tandem in collaboration with two of Canada’s best- known business leaders.
Team: Tandem’s managing partners – David Bookbinder, Andre Gauthier, Christopher Legg and Alex Moorhead – all have significant investment and entrepreneurial experience domestically and internationally.
“Tandem is the only Canadian based growth equity fund, this give us a unique advantage in both sourcing and working closely with our portfolio companies,” said Christopher Legg.
Capital: $20M
First Close: March 2010
Partner Locations: Toronto
Focus: Invest in domain expert entrepreneurs who are building early stage mobile and Internet software companies, surrounding them with an ecosystem of experienced operators to get their ideas from conception to market.
Sources of Capital: A family owned commercial and residential real estate developer
Team: The main investment partners are Robin Axon and Duncan Hill. Robin is ex-Ventures West and Duncan was an EiR at Ventures West and previously founded Think Dynamics (acquired by IBM back in 2003).
“At MantellaVP we believe strongly in maintaining alignment between founders and investors. We work shoulder to shoulder with entrepreneurs to build their business, and provide the right capital at the right time. This ensures that at all stages of the company’s evolution, a good outcome for the founders is a good outcome for everyone,” said Duncan Hill.
Capital: $50M initial closing
First Close: October 2010
Partner Locations: Montreal
Investment Focus: Seed stage venture capital firm investing in Internet, software, mobile, digital media, social and casual gaming startups.
Sources of Capital: Invest Quebec, Fonds FTQ and private LPs
Team: John Stokes, JS Cournoyer, Alan MacIntosh, Mark MacLeod, Austin Hill and Daniel Drouet, who have all been entrepreneurs, angels and/or VCs.
“The Web and mobile web are creating major disruption, incumbents are being challenged and new markets being created. The productizing and commercialization of ideas can be done with significantly less capital and as innovation is becoming harder to realize internally, established companies are using acquisitions to fuel revenue growth…what a great time to be starting a business … or a venture fund!” said John Stokes.
Capital: undisclosed
First Close: Started investing in November 2007
Partner Locations: Vancouver
Investment Focus: Consumer Internet, social media, online commerce
Sources of Capital: personal investment fund of sole partner, Boris Wertz
W Media has completed over 20 investments to date, with a majority done in the Pacific Northwest. WMedia also has a unique connection with Vancouver based Bootup Labs.
Incubators 2.0 (aka “Accelerators”):
In the late 1990s, the first wave of private incubators arrived on the scene in Canada, emulating the models of their U.S. counterparts. A few short years later, precipitated by the technology and equity market implosion, this part of the Canadian venture and startup eco-system entered extinction. Various government programs attempted to fill some of the gaps in providing services (but usually not capital) to the new generation of post-bubble era technology startups. Now, nearly a decade later, with an explosion of new startup activity in Canada’s major technology clusters in Vancouver, Montreal and Toronto, a new wave of entrepreneurially driven accelerators – such as Montreal StartUp, Vancouver’s Bootup Labs, Ontario’s BaseCamp (Mantella-related), Extreme Ventures NeoTech, Bolidea and newly-launched Year One Labs – are taking the Canadian startup landscape by storm.
Newcomers such as these are helping build a more savvy roster of entrepreneurs eager to attract follow-on financing from VCs. Some are already generating exits before VCs have an opportunity to get a seat at the table; witness Extreme’s two visible exits, one to Google and the other to Electronic Arts, within its first few years in operation. All provide hands-on support at every stage of a company’s creation and growth – from business development and marketing to financing and team development – to help facilitate early market traction. Oh yeah, and some also have cash, which, not surprisingly, still matters an awful lot to most startups, even if the amounts they need are smaller.
Silicon Valley comes calling:
Not alone in their optimism for the Canadian investment landscape, the new crop of Canadian venture capital players are also joined by a number of new entrants from the Silicon Valley who are exhibiting keen interest in the Canada. In each case, there is knowledge of the Canadian market opportunity owing to one or more partners having roots in Canada.
Altos Ventures, Bridgescale Ventures and Panorama Capital – all Sandhill Road firms – have made investments in Canadian companies during 2010. All three firms focus on expansion-stage venture financing, while making selective earlier-stage investments on occasion. The deals being done by these Valley funds split quite evenly between Western Canada and central Canada. What is most striking is the visibly increasing commitment of partner time to the Canadian market. In the case of Bridgescale, two Canadian-based partners have been added, both in Toronto, including the October 2010 announcement that Derek Smyth – the final partner remaining at now defunct Edgestone Venture Capital – was joining the Bridgescale team. Bridgescale is the first Silicon Valley firm to locate partners in Canada. A betting man might wager that they won’t be the last.
This fall, Silicon Valley’s technology accelerator on steroids, Plug and Play Tech Center, announced expansion plans into Canada. CEO Saeed Amidi made the announcement at a private gathering in Vancouver (where he also happens to have a second home), stating a keen personal interest in “strengthening and leveraging the bridge between Canada’s technology sector and Plug and Play’s industry and venture capital network in the Valley.” Virtually every major technology company in the acquisition game, and a list of venture capital funds that appears only in the wildest dreams of most Canadian entrepreneurs, is partnered in some way with Plug and Play in Sunnyvale, California. Plug and Play plans to set up shop in Vancouver in 2011 and its venture arm Amidzad Ventures, which has seed funded dozens of Valley startups including major players such as PayPal, comes along with the deal.
Canada goes calling in China. Russia comes calling in Canada:
With only a few short years into a landmark fund structure involving a major corporate capital commitment from Research In Motion, alongside commitments from U.S. and Canadian institutional LPs, the Black Berry fund managers – a new partnership between JLA Ventures and RBC Capital – announced the first closing of a new Blackberry Partners China Fund. With $100M+ in initial commitments, this vintage 2010 fund represents a first in Canadian venture capital – a Canadian venture fund manager successfully establishing an international fund. Interestingly, VanEdge Capital, which closed during the same month as Blackberry China, also has designs on Asia, and one of its initial three partners is based in Shanghai. Previous attempts to establish funds with an Asian focus, including efforts over the past decade by private independent managers such as McLean Watson and even the Canadian government’s own BDC Venture Capital, have not taken flight.
More evidence of the growing international presence of Canadian venture capital is found in the Russian-Canadian partnership led by Rusnano, who has recently announced plans to partner with John Varghese, CEO and managing partner of Canadian venture fund manager VentureLink. Varghese plans on assembling a new nano-technology focused fund that will pursue investments from a Canadian base. Is this a sign? A new direction for Venture Capital? A new Canadian reality? The Fund will invest in Canadian companies that have the potential for global expansion. The wrinkle or added benefit of the partnership with Rusnano is that each investment will have a corporate sponsor in Russia prior to the first investment being made. Thus the go-to market strategy of each company will be established with a customer that can be referenced, facilitating global expansion. Can we say procurement assistance?
Domain expertise, cross-border partnerships, a growing network of valuable industry and private capital relationships, value-added support, seed acceleration facilities and teams: these are all trends gripping Canadian venture capital. A brave new world – with brave new leaders – is evolving, and fast.
Co-written by Chris Arsenault and Steve Hnatiuk
NOTE: this post was originally written for the Private Capital Privé winter 2010 edition of the printed magazine. And was Curated for nextMontreal.
This is a repost from the amazing video-blogger Kristina Tomaz-Young of Venture Cap TV
Welcome to our THREE part video cast series of the Canadian Venture Capital 2010 Conference. And, what an event it was! Check out the must see videos below, here for the link to file of all speaker bios and here for the link to the picture gallery.
Prominent leaders from the private equity and venture capital community participated in record breaking attendance! It’s speaks much to the energy that the CVCA passionately commits to the industry.
Sleeves were rolled up, ideas were churning….you could literally feel the exciting energy pulsating throughout the crowd at the panel discussions and in the hallways. Lessons & opportunities were shared, valuable contacts were made, and fun was also most definitely had at the evening gala with their Entrepreneur of the Year Award and the hilarious Rick Mercer show, not to mention the Scotch tasting event and great mingling!
This year’s theme was Driving Innovation. And we were privileged to learn from impressive keynote speakers like Glenn Hutchins co-founder and co-CEO of Silver Lake and red carpet panelists including Jacques Bernier (Managing Partner of Teralys Capital), Chris Albinson (Managing Director of Panorama Capital & co-founder of the C100), Paul V. Lee (Managing General Partner of Vanedge Capital and so many more who shared their perspectives and sector possibilities to explore. If you’d like a full line up of the presenters and their bios, please click here. Conference Chair David Adderley of Celtic House Venture Partners and his organizing committee certainly put on an unforgettable, valuable conference for the private equity and venture capital community.
So if you’re raring to go…come check out:
Before we dash, a few words of thanks for the accomplishments, kindness and generosity of our colleages..so:
And, thank YOU for visiting VC-TV. Come back again real soon!
(*Please note that out video casts are normally posted very soon after each event or interview. This was the first time we were delayed. We’re a start-up, and like many start-ups, we ran into some start-up challenges. But, solutions were actively sought, situations were co-operatively resolved, and we’re so pleased to share our coverage of the event with you. And this time, rather than one videocast released at a time, here’s all three! We hope you enjoy them!)
by Mark McQueen, Wellington Financial LP – originally posted on July 8, 2010
For fear that the Business Development Bank of Canada hasn’t tasked their management consulting team at McKinsey with stakeholder meetings in relation to the “BDC Venture Capital” strategic review currently underway (see prior post “Playing catch-up” July 7-10), David Crow asked me to share my simple suggestion with all of you.
I warn you: the idea isn’t all that novel. HSBC did it when they recenly spun out their six global private equity arms to the local management team. TD Bank did it when they handed TD Capital Private Equity Partners to the Toronto-based group that now goes by NorthLeaf Capital Partners. Quebec’s FTQ did it in 2008 with their 35 early stage venture capital investments. It’s not very complicated.
If BDC CEO Jean-Rene Halde is concerned about the 5% of his total assets (yes, sadly just 5%) that are tied up in money-losing VC deals, my suggestion is simple, and it works for everyone: Spin out the BDC Venture Capital arm to its management team.
Overnight, BDC VC would become Canada’s…
(please check out full post here)
Trees are falling in the forest.
The sound you didn’t hear the other day was the fracturing of one of Canada’s best known venture capital firms. One of the teams that had the experience and track record to be a survivor in the ever-shrinking Canadian VC industry. One of the firms that had been tagged to likely make it through the Star Chamber.
One of the firms that, like so many others, was once backed by some of the biggest LP names in the land. One of the firms that has had to replace those very same big LP names as folks increasingly pulled their horns in — one after another — on direct fund allocations over the past five years.
What happened?
repost by Chris Arsenault, Managing Partner at iNovia Capital
Earlier this month I was invited by Rob Hyndman to post some of my views on the topic of: The Future of Venture Capital in Canada, as part of a series of posts at The Mark – Canada’s daily online forum for news, commentary, and debate. 
I ended up posting a short view of the “VC Ecosystem”, outlining only but a few key elements critical to having a stronger and most importantly a viable tech industry supported by venture capital in order to compete on a world wide basis. David Crow, added some valuable comments relating to “Creating a Venture Culture” so as did ex-VC and entrepreneur Rick Segal, tech CFO Mark MacLeod and others, participated in the discussion and shared their views on the topic. If you haven’t read the posts, I strongly suggest you give it a read.
I fundamentally believe in the early stage venture capital model that supports promising high growth tech startup entrepreneurs. And through my efforts and those of my colleagues and partners at iNovia Capital, MSBi Valorization, the CVCA, the C100 and numerous other initiatives, we are trying to make the model work by approaching venture capital the same way you one would build any other tech business: with the right people/team at the right time (entrepreneurs vs. operators); by building a strong network of knowledgeable partners with complementary skills sets and long term relationships; and by understanding what startups and entrepreneurs need from their early stage VC’s and deliver results/returns to our Limited Partners while properly managing expectations. Building an Ecosystem takes time, commitment and passion.
Building an Entrepreneurial Ecosystem requires the right culture and mindset! For the last 12 years I’ve dedicated my entrepreneurial life towards helping to build successful tech business via my role as an active early stage investor. Over this same period of time I’ve witness important changes across the Canadian VC landscape which continues to evolve and now seems to be driven by a more entrepreneurial culture, one that includes Venture Capital savvy Entrepreneurs that understands the role of VC funding more than ever before. Hopefully the pieces will continue to fall in place and we will see the next generation of successful Canadian tech entrepreneurs that will change the way we work and live be funded by Canadian VC’s.
Earlier in March I was given the opportunity/challenge to discuss Entrepreneurial Venture Capital by giving a, “fast, 15 seconds per slide, 5 minute 20 slide presentation” at Ignite Montreal. 
My presentation was specifically on the topic of trying to communicate how to “Make Venture Capital Work”. I really like the Ignite presentation model, but it’s indeed a challenging concept, too bad I ended up doing the basic mistake of trying to say too much in too little time… thus not saying as much as I could if I would of said less!
So, many entrepreneurs these days are talking about “How the Venture Capital Model is Broken”, which is the wrong way to address the lack of capital Canadian entrepreneurs face! The VC Model isn’t broken because it never really worked in the first place, period!
With the exception of the 1980’ and the few last years of the Internet bubble, the model has never been successful for the masses, but has been only for a handful. And, when it comes down to Canadian numbers, we have to account for an additional level of difficulty: the fact that Canada doesn’t have the “weight” of numbers in its favor. Not only does Canada have a less mature IT and Biotech industry when compared to the US, it also has a small and nascent private equity and venture capital industry, and still only has a handful of privately managed venture capital funds today.
The stories about the highly successful technology entrepreneurs as well as those about the rockstar venture capitalists (note: over 80% of all venture capital returns are generated by less than 25% of the venture capital funds out there) created the impression that the only thing needed to build a high valued successful startups was an entrepreneur with an idea and an investor with cash! This meant that venture capitalists could blame poor returns on unsuccessful entrepreneurs while those entrepreneurs could blame their failures on the lack of capital or restrictions tied to the capital they did raise.
The math is the same for a Canadian venture capital fund as it is for a US venture capital fund. Investors in venture capital funds usually expect a high IRR (internal rate of return) – Top tier venture capital expected returns in the +30% IRR, a rate that is far above banking rates due to the high level of risk involved. A Venture Capital fund will usually has a ten year life and will require a certain level of management fees over that period. Therefore, in order to understand the type of capital that needs to be returned to the investors of the Fund (the Limited Partners) one needs to plan on generating three times (3x) return of capital to be successful and part of the Top tier firms that are able to continuously raise additional capital and funds.
In a nutshell, that means that a $100M size fund must return approximately $300M in order to generate the expected level of returns of a Top tier fund! So, knowing that for an early stage venture capital fund, one can expect it owning on average 20% of any given company in a portfolio of around 15 companies (for a $100M size fund), this would translates into $1.5 billion of aggregate portfolio enterprise value at exit, or $150M in cumulative EBITDA based on a 10x EBITDA exit valuation, needed to generate those type of returns. That’s pretty demanding! Managing expectations also sets the bar as regards the type of actions that will be put forward to achieve those expectations. Maybe it’s time we set an aggressive but achievable bar that would benefit the whole industry, no?
Reality is that entrepreneurs operate in a living “Ecosystem” that feeds itself by growing and building new connection. No party can do it alone! The community feeds itself off its own growth. High growth technology companies need venture capital to succeed and the venture capitalists need to back successful entrepreneurs to generate strong returns. Not only do we need to have better return expectations for venture capital funds, we also need better collaboration within the community to build networks strong enough to support promising technology companies and deliver high shareholder value.
The more successful entrepreneurs are, the more successful venture capital funds will be, leading in turn to more funding for entrepreneurs.
We have to learn how to expect more and know how to get more. Yes, funds and large institutional investors like pension funds and insurance companies should expect better returns from their venture capital investments. The last 10 years of Canadian venture capital returns represent -0.2%, yet expectations were in the unrealistic + 30% range, while solid manageable returns should be more in the 15% level. Large institutional investors can help themselves achieve such realistic returns by selecting fund managers with entrepreneurial backgrounds and experience with building successful companies. Managers who think and act like the entrepreneurs they back are better suited to select the ones who understand how build a successful start-up and have the most chances of succeeding.
Likewise, entrepreneurs should expect more from themselves, their teams and their investors. Entrepreneurs need to understand what is expected from the capital they raise and they can do this by selecting the right potential investors and doing due-diligence on them, by understanding the ecosystem they are operating in and making sure they surround themselves with people who are stronger than themselves, and generate stronger returns by setting themselves up for success.
High but achievable expectations create and define leaders!
Entrepreneurs are natural leaders, because they are able to execute on ideas, they transform opportunities into tangibles such as jobs, products and profits. So by having more entrepreneurs funding other entrepreneurs, we have more chances of building a sustainable ecosystem. It takes time to build a viable company, and by understanding the type of returns that are expected from the different source of funding, entrepreneurs and fund managers alike will be able to create a model that works.
The venture capital model is broken only to those who don’t understand it
those who aren’t willing or interested in investing the energy to adapt it to their reality. Like other industries, the venture capital industry will continue to evolve over time.
I’m looking forward to seeing the level of returns over the next five to 10 years as the Canadian venture capital industry begins this evolution – where entrepreneurs are funding entrepreneurs
Now, some questions for you:
- What do limited partners think of the emerging number of entrepreneurial driven Venture capital Funds?
- What do entrepreneurs think of the new breed of entrepreneurial VC’s?
- Is the Canadian market mature enough to trigger the level of collaboration required to build a strong ecosystem around Canadian technology companies?
- What is expected by the entrepreneur of the early stage VC’s (other than the obvious $)?
- How will you be part of the “make it Happen” generation?
For those interested in participating, take a look at the following few links to recent articles and you’ll get a feel for the energy and around the subject:
The Mark: The Future of Venture Capital in Canada
La Presse: Jacques Bernier, de Tralys: le goût du risque
Tech vibes: Venture Capital Funding Outlook In Canada
Financial Post: Venture capital finally gets a break
TechCrunch: Strength In Numbers: Canadian Entrepreneurs Flock To The C100
CVCA: Canadian Venture Capital Investments in 2009 – Lowest recorded in 13 Years
StartupNorth: What is being a startup really about?
Bootup Labs: Startup Visa Canada
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