Cover story, as published in Private Capital, Q4 2015
The Conference Board of Canada’s most recent Innovation Report Card includes some impressive venture capital benchmarks, but there’s much more to consider when looking beneath the surface.
Decreased venture capital investment levels in peer global markets, which are largely a lingering byproduct of the financial crisis, coupled with brisk, but isolated investment activity in select geographies here in Canada raises questions about our ability to sustain a high ranking when conditions improve elsewhere. Perhaps, even more importantly, these findings put the focus on what actions should be taken to bring improvement to Canada’s weaker markets, of which, there are quite a few.
Increased venture capital investment, primarily in Canada’s large provinces, coupled with lagging investment in European countries since the recession have resulted in Canada moving from being one of the weakest performers to one of the strongest. Specifically:
- Canada’s ranking has improved from third worst in 2009 to second best in 2014 in venture capital investment, relative to 15 peer countries. Canada earned a B grade and a fifth place ranking overall.
- Canada’s venture capital investment has more than doubled, from nearly $1 billion (.07 per cent of GDP) in 2009 to over $2.3 billion (.12 per cent of GDP) in 2014.
- The number of companies receiving venture capital in Canada has increased from 378 in 2009, to 416 in 2014. Peak levels of approximately 450 companies receiving venture capital in 2011 and 2012 have not been met in recent years.
- The vast majority (80 per cent) of Canada’s venture capital investment in 2013 was later stage, with only 20 per cent taking the form of early stage financing. This falls well short of international trends where more than 60 per cent of venture capital targets early stage financing. The report notes that Canadian venture capital took a much more balanced approach in 2009, when financing was more evenly split between early and later stage.
Provincial venture capital investment levels and rankings vary widely, from A to D-, with six provinces receiving a D or D- ranking. Specifically:
- Both BC and Quebec rank as A’s in terms of venture capital investment (representing .16 per cent and .14 per cent of GDP, respectively), outpaced only by the US (.17 per cent of GDP).
- Although companies in Ontario received more venture capital money than that of other provinces, the venture capital investment level of .11 per cent of GDP was sufficient to earn a B ranking.
- Propelled by two venture capital deals totaling $60 million in 2014, Newfoundland and Labrador received a C ranking.
- Canada’s remaining provinces received a D ranking in venture capital investment, with Manitoba and Prince Edward Island receiving a grade of D-.
- Substantial increases in venture capital investment levels from 2009 to 2014 have occurred in four provinces; Ontario (117 per cent), BC (91 per cent), Alberta (81 per cent), and Quebec (61 per cent). All other provinces have experienced declines.
- In terms of the number of Canadian companies that received venture capital funding in 2014, the highest levels occurred in Quebec (151), Ontario (142), BC (60), Alberta (27), and New Brunswick (19). The remaining provinces ranged from one to nine companies receiving venture capital.
Canada’s much improved ranking was assisted by the fact that, with the exception of the US, venture capital investments declined in all of the other peer countries between 2009 and 2013. Canada weathered the recession better than many countries, contributing to more stable venture capital investment levels. In fact, venture capital investment levels have now returned to the pre-recession level of $2.3 billion. Contributions from the Venture Capital Action Plan (VCAP) have helped, as well as the ongoing participation of BDC Capital, which the study cites as Canada’s largest and most active early stage technology investor.
Venture capital investment in Canada from foreign sources has continued to rise. Traditionally, it has represented approximately 30 per cent of the total, but increased to more than 37 per cent in 2014 from US sources alone. Clearly, venture capital investment levels are positively impacted by foreign participation and our own public policy that encourages investment.
However, we must also be wary of the fact that Canada is currently standing out in a cohort that is performing well below its pre-recession standards. What we do next to continue to separate ourselves from the pack now could have long-standing consequences.
Viewing Canada’s current position of strength as an opportunity to make the necessary improvements to “lift the level of all boats” is a much more proactive approach than simply benefiting from the rise of the tide.
Improving venture capital investment levels across the country and generating long term sustainability are important areas of focus. The Conference Board cites a number of factors that contribute to establishing a successful level of venture capital investment, including the presence of those with money to invest, companies that are investment worthy, and a means to connect the two.
Much could be said about the challenges of establishing venture capital pools in particular geographic areas and the difficulties of allocating a portion of funds in existing pools to investments with a higher risk profile. Regardless, fueling the venture investment process requires a stable of “investor ready” companies, enabling venture capitalists to invest well, work with high potential businesses, and generate the returns that are so important in attracting fundraising over the long term. These are critical components in generating a sustainable venture capital environment.
Venture capitalists recognize that the presence of investor ready businesses and the right approach to get there are, in many ways, the fuel for generating a vibrant investment environment. Too often, the focus tends to be on leading with capital, and although this approach might find some initial success to “get money out”, it does little to generate the level of returns to stoke the fire for the long term.