Photo by Timm Suess
Is there any questions that the Canadian venture captial industry is in turmoil? There is a change that is happening, it might just not be happeing as fast as it could. Mark McQueen talks about the the creative destruction of the VC industry in Canada.
“There’s no robust “new class” of VC firms coming in behind the current oligarchy, with a similar amount of capital to deploy as those they are planning to replace. We are witnessing the destruction piece of the equation, for sure, but not the rebirth that is the essence of “creative destruction” if it is to succeed.” – Mark McQueen, Wellington Fund
While there are a few new players entering the market (I’m looking at you ExtremeVP and Mantella VP), we’re seeing a lot of roadkill. There are firms that are not able to raise their next fund, partners that are on life support, startups that are left to wonder what happen to their partners in raising additional capital. However, many that remain are digging in and fighting for their way of life. They are lobbying for support to “manufacture an environment that is hospitable to their investment style”. Adam Adamou at Caseridge Capital Corporation argues that the existing venture players, the Canadian VC oligarchy, has successfully lobbied for restrictions that have kept out new players including the public/private venture capital that was used to fund RIM.
“The traditional venture capitalists see themelves as the founders of a “Silicon Valley North” and they follow the US trends, which unfortunately do not apply to our Canadian market. They seem to see themselves as avant garde investors in tomorrow’s technology companies, however, they behave more like bankerss[sic] – preferring security and downside protection over opportunity”
Yikes, that’s a damning review of the Canadian venture industry. However, I’m not sure that the suggested alternatives including Capital Pool Companies and the TSX-V are really better choices for Canadian entrepreneurs (or investors). (I’m not an expert on CPCs or TSX-V but when my friends and trusted advisors like Mark McLeod provide commentary, I listen). What I took away from The Adamou Rant is that many of the funds have a vested interest in the maintaining something akin to the current system. Governments should look critically at the numbers being presented and who is presenting them.
The State of a Nation
Is the sky falling? What is the state of venture capital in Canada? Is it really this bad? And why does it matter to early-stage entrepreneurs? Should we all just move to Silicon Valley, New York City, Boston or somewhere else?
The Canadian VC environment has been challenging for a lot of entrepreneurs. As entrepreneurs, you need to understand the environment that you will start, fund, and grow your company. Canada has a strong track record of access to capital, a stable economic policy and should be a great spot for entrepreneurs. It’s also unique. Canadian companies tend to be at a later stage of corporate development and raise less money than their US counterparts. I’ve written about the impact of the state of the funding environment has on startups. And what entrepreneurs can contintue to expect to see, includes:
- The number of investors will continue to decrease
- Valuations will continue to decrease
- Customer uptake will be slower
- Need to become cash flow positive
- Acquiring entities will favour profitable companies
Mark McQueen provides the best summary of state of the Canadian Venture Capital landscape I’ve seen in a while:
- VC investments in Canadian firms hit a 14 year low in 2009
- US venture market saw US$18 billion invested in 2009, Canada saw only $1 billion (5.5%) our economy is approximately 12.5% the size of the US economy
- Up to half of current Canadian VC funds will not be able to raise their next fund
- Ontario government has sunset the $1 billion Retail Venture Capital Industry
- “Section 116” was fixed in the 2010 Federal Budget, however, this is not a silver bullet
- 117 disclosed cross board investments since January 2008 (this includes Canadian investments in US companies)
- Canadian Fund of Funds have lots of capital to invest in foreign led funds: EDC ($1.2 billion); Teralys ($700 million); OVCF ($205 million)
A New Hope
We need to hope that from out of the ashes will emerge a better funding environment for Canadian entrepreneurs. Whether this is led by new funds, angel investors, US funds, or the existing players learning from their mistakes, it doesn’t matter.
We’re starting to see a strong set of the big players making acquisitions across Canada:
- Google acquires Bumptop
- Stand Out Jobs acquired
- DNA13 acquired by CNW Group
- Viigo acquired by RIM
- Opalis acquired by Microsoft
- RedFlagDeals.com acquired by YPG
- GigPark acquired by CanPages
- J2Play acquired by EA
Our startups need real capital to continue to compete on the world stage. But They can’t survive on SR&ED credits alone. We need to hope that this creative destruction happens quickly, so that something can rise from the ashes and we can witness the rebirth of the Canadian tech startup.
Many of these exits are modest in size. That's not a bad thing. What I am most excited about with newer funds like Extreme, Mantella and Montreal Startup, is that they can deliver returns (and hence raise follow on funds to stay in the game) on smaller deals. This is the new reality. You need to be able to make money on sub $20M deals. And as Basil Peters would argue, its easier (though not actually easy) to generate those smaller exits.
Ironically, we are also well positioned at the opposite end of the spectrum. Larger companies that need expansion capital can now turn to folks like Bridgescale and Tandem Capital.
In between (i.e Series A and B) is a bit of no-mans' land in Canada at the moment. iNovia is one of the few players. We need more capital here to follow on and expand on the great seed investments being done these days.
Many of these exits are modest in size. That's not a bad thing. What I am most excited about with newer funds like Extreme, Mantella and Montreal Startup, is that they can deliver returns (and hence raise follow on funds to stay in the game) on smaller deals. This is the new reality. You need to be able to make money on sub $20M deals. And as Basil Peters would argue, its easier (though not actually easy) to generate those smaller exits.
Ironically, we are also well positioned at the opposite end of the spectrum. Larger companies that need expansion capital can now turn to folks like Bridgescale and Tandem Capital.
In between (i.e Series A and B) is a bit of no-mans' land in Canada at the moment. iNovia is one of the few players. We need more capital here to follow on and expand on the great seed investments being done these days.
Many of these exits are modest in size. That's not a bad thing. What I am most excited about with newer funds like Extreme, Mantella and Montreal Startup, is that they can deliver returns (and hence raise follow on funds to stay in the game) on smaller deals. This is the new reality. You need to be able to make money on sub $20M deals. And as Basil Peters would argue, its easier (though not actually easy) to generate those smaller exits.
Ironically, we are also well positioned at the opposite end of the spectrum. Larger companies that need expansion capital can now turn to folks like Bridgescale and Tandem Capital.
In between (i.e Series A and B) is a bit of no-mans' land in Canada at the moment. iNovia is one of the few players. We need more capital here to follow on and expand on the great seed investments being done these days.
I agree with Mark.
As Basil wrote very well in his book – the early exit is good & easy. Everyone wins – but it does not a venture capital market make (to wax poetically)
The big plays; the dominant companies that can demand & require expansion capital will be the future of Canada's tech industry.
These take awhile to build, but with http://www.teralyscapital.com and some of the other new funds coming into the market there is a great opportunity to make some great bets while everyone else in the LP & VC market is folding.
This is not unseemlier to how the Web 2.0 wave of innovation was born in the valley.
All the VCs were running scared from the Dot.com bust & a few brave angels & VCs stepped up and created the next wave of innovation.
I believe wholeheartedly that this is what is in store for Canada's future.
I agree with Mark.
As Basil wrote very well in his book – the early exit is good & easy. Everyone wins – but it does not a venture capital market make (to wax poetically)
The big plays; the dominant companies that can demand & require expansion capital will be the future of Canada's tech industry.
These take awhile to build, but with http://www.teralyscapital.com and some of the other new funds coming into the market there is a great opportunity to make some great bets while everyone else in the LP & VC market is folding.
This is not unseemlier to how the Web 2.0 wave of innovation was born in the valley.
All the VCs were running scared from the Dot.com bust & a few brave angels & VCs stepped up and created the next wave of innovation.
I believe wholeheartedly that this is what is in store for Canada's future.
I agree with Mark.
As Basil wrote very well in his book – the early exit is good & easy. Everyone wins – but it does not a venture capital market make (to wax poetically)
The big plays; the dominant companies that can demand & require expansion capital will be the future of Canada's tech industry.
These take awhile to build, but with http://www.teralyscapital.com and some of the other new funds coming into the market there is a great opportunity to make some great bets while everyone else in the LP & VC market is folding.
This is not unseemlier to how the Web 2.0 wave of innovation was born in the valley.
All the VCs were running scared from the Dot.com bust & a few brave angels & VCs stepped up and created the next wave of innovation.
I believe wholeheartedly that this is what is in store for Canada's future.
Many of these exits are modest in size. That’s not a bad thing. What I am most excited about with newer funds like Extreme, Mantella and Montreal Startup, is that they can deliver returns (and hence raise follow on funds to stay in the game) on smaller deals. This is the new reality. You need to be able to make money on sub $20M deals. And as Basil Peters would argue, its easier (though not actually easy) to generate those smaller exits.
Ironically, we are also well positioned at the opposite end of the spectrum. Larger companies that need expansion capital can now turn to folks like Bridgescale and Tandem Capital.
In between (i.e Series A and B) is a bit of no-mans’ land in Canada at the moment. iNovia is one of the few players. We need more capital here to follow on and expand on the great seed investments being done these days.
I agree with Mark.
As Basil wrote very well in his book – the early exit is good & easy. Everyone wins – but it does not a venture capital market make (to wax poetically)
The big plays; the dominant companies that can demand & require expansion capital will be the future of Canada’s tech industry.
These take awhile to build, but with http://www.teralyscapital.com and some of the other new funds coming into the market there is a great opportunity to make some great bets while everyone else in the LP & VC market is folding.
This is not unseemlier to how the Web 2.0 wave of innovation was born in the valley.
All the VCs were running scared from the Dot.com bust & a few brave angels & VCs stepped up and created the next wave of innovation.
I believe wholeheartedly that this is what is in store for Canada’s future.
Like iNovia Capital, many emerging Canadian VCs (Rho Canada, MSU-founders Fuel, Georgian, BB fund, Tandem, ID Capital) are working hard on building out our own ecosystem, from the grounds up and this time with ties into the valley and elsewhere as needed. The above exits you mention are somewhat like baby steps, well needed, but not home-runs to hang our hats on. We are seeing less and less mistakes whereas VC either under-funded utmost promising high growth opportunities or worst over-funding (crazy burn without validation) deals. One deal at a time we are seeing the rebith of Canada's tech sector.
Like iNovia Capital, many emerging Canadian VCs (Rho Canada, MSU-founders Fuel, Georgian, BB fund, Tandem, ID Capital) are working hard on building out our own ecosystem, from the grounds up and this time with ties into the valley and elsewhere as needed. The above exits you mention are somewhat like baby steps, well needed, but not home-runs to hang our hats on. We are seeing less and less mistakes whereas VC either under-funded utmost promising high growth opportunities or worst over-funding (crazy burn without validation) deals. One deal at a time we are seeing the rebith of Canada's tech sector.
Like iNovia Capital, many emerging Canadian VCs (Rho Canada, MSU-founders Fuel, Georgian, BB fund, Tandem, ID Capital) are working hard on building out our own ecosystem, from the grounds up and this time with ties into the valley and elsewhere as needed. The above exits you mention are somewhat like baby steps, well needed, but not home-runs to hang our hats on. We are seeing less and less mistakes whereas VC either under-funded utmost promising high growth opportunities or worst over-funding (crazy burn without validation) deals. One deal at a time we are seeing the rebith of Canada's tech sector.
Like iNovia Capital, many emerging Canadian VCs (Rho Canada, MSU-founders Fuel, Georgian, BB fund, Tandem, ID Capital) are working hard on building out our own ecosystem, from the grounds up and this time with ties into the valley and elsewhere as needed. The above exits you mention are somewhat like baby steps, well needed, but not home-runs to hang our hats on. We are seeing less and less mistakes whereas VC either under-funded utmost promising high growth opportunities or worst over-funding (crazy burn without validation) deals. One deal at a time we are seeing the rebith of Canada’s tech sector.
Chris you're right, I failed to mention the emergence of new players like iNovia, Founders Fuel, Mantella, Extreme. It will be interesting to see if Georgian actually closes the OVCF. Tandem is a great later stage company. And we're definitely starting to see our friends from south of the border (Rho, Grandbanks, Bridgescale and others – Panarama & Altos) look to Canada for later stage deals.
The interesting piece you mention is building up “our own ecosystem”. I think for the first time, there are a group of partners that realize they aren't lone wolves. They need each other. They need an ecosystem of entrepreneurs, of other funders, of customers, of media organizations. This is a change. A huge change. Montreal is definitely leading the way in the development and support of the ecosystem. The leading role that Teralys, iNovia, MSU/Founder Fuel, Flow Ventures, Austin Hill have taken is great.
Chris you're right, I failed to mention the emergence of new players like iNovia, Founders Fuel, Mantella, Extreme. It will be interesting to see if Georgian actually closes the OVCF. Tandem is a great later stage company. And we're definitely starting to see our friends from south of the border (Rho, Grandbanks, Bridgescale and others – Panarama & Altos) look to Canada for later stage deals.
The interesting piece you mention is building up “our own ecosystem”. I think for the first time, there are a group of partners that realize they aren't lone wolves. They need each other. They need an ecosystem of entrepreneurs, of other funders, of customers, of media organizations. This is a change. A huge change. Montreal is definitely leading the way in the development and support of the ecosystem. The leading role that Teralys, iNovia, MSU/Founder Fuel, Flow Ventures, Austin Hill have taken is great.
Chris you're right, I failed to mention the emergence of new players like iNovia, Founders Fuel, Mantella, Extreme. It will be interesting to see if Georgian actually closes the OVCF. Tandem is a great later stage company. And we're definitely starting to see our friends from south of the border (Rho, Grandbanks, Bridgescale and others – Panarama & Altos) look to Canada for later stage deals.
The interesting piece you mention is building up “our own ecosystem”. I think for the first time, there are a group of partners that realize they aren't lone wolves. They need each other. They need an ecosystem of entrepreneurs, of other funders, of customers, of media organizations. This is a change. A huge change. Montreal is definitely leading the way in the development and support of the ecosystem. The leading role that Teralys, iNovia, MSU/Founder Fuel, Flow Ventures, Austin Hill have taken is great.
Chris you’re right, I failed to mention the emergence of new players like iNovia, Founders Fuel, Mantella, Extreme. It will be interesting to see if Georgian actually closes the OVCF. Tandem is a great later stage company. And we’re definitely starting to see our friends from south of the border (Rho, Grandbanks, Bridgescale and others – Panarama & Altos) look to Canada for later stage deals.
The interesting piece you mention is building up “our own ecosystem”. I think for the first time, there are a group of partners that realize they aren’t lone wolves. They need each other. They need an ecosystem of entrepreneurs, of other funders, of customers, of media organizations. This is a change. A huge change. Montreal is definitely leading the way in the development and support of the ecosystem. The leading role that Teralys, iNovia, MSU/Founder Fuel, Flow Ventures, Austin Hill have taken is great.
Excellent post David. But I think you are being a little pessimistic!
Yes, the traditional, big, US style VC funds don't work anymore. But the biggest reason is that entrepreneurs don't need them anymore. The world has evolved past them.
I am sitting in a hotel in Silicon Valley working on tomorrow's opening keynote for the national Angel Capital Association meeting. I titled it “It's the Angel's Time”. I won't try to summarize it all here, but the video will be on my blog in a couple of weeks.
The good news is that Angels can provide enough capital for 99% of today's startups. And Angels actually IMPROVE the company's chances of success according to research out just last month from the Harvard Business School.
So today there are actually more investors than in the past. Better investors. And their numbers are growing.
The Angels down here are worried that valuations are going UP too fast.
Austin – thanks for mentioning my Book.
Excellent post David. But I think you are being a little pessimistic!
Yes, the traditional, big, US style VC funds don't work anymore. But the biggest reason is that entrepreneurs don't need them anymore. The world has evolved past them.
I am sitting in a hotel in Silicon Valley working on tomorrow's opening keynote for the national Angel Capital Association meeting. I titled it “It's the Angel's Time”. I won't try to summarize it all here, but the video will be on my blog in a couple of weeks.
The good news is that Angels can provide enough capital for 99% of today's startups. And Angels actually IMPROVE the company's chances of success according to research out just last month from the Harvard Business School.
So today there are actually more investors than in the past. Better investors. And their numbers are growing.
The Angels down here are worried that valuations are going UP too fast.
Austin – thanks for mentioning my Book.
Excellent post David. But I think you are being a little pessimistic!
Yes, the traditional, big, US style VC funds don't work anymore. But the biggest reason is that entrepreneurs don't need them anymore. The world has evolved past them.
I am sitting in a hotel in Silicon Valley working on tomorrow's opening keynote for the national Angel Capital Association meeting. I titled it “It's the Angel's Time”. I won't try to summarize it all here, but the video will be on my blog in a couple of weeks.
The good news is that Angels can provide enough capital for 99% of today's startups. And Angels actually IMPROVE the company's chances of success according to research out just last month from the Harvard Business School.
So today there are actually more investors than in the past. Better investors. And their numbers are growing.
The Angels down here are worried that valuations are going UP too fast.
Austin – thanks for mentioning my Book.
Excellent post David. But I think you are being a little pessimistic!
Yes, the traditional, big, US style VC funds don’t work anymore. But the biggest reason is that entrepreneurs don’t need them anymore. The world has evolved past them.
I am sitting in a hotel in Silicon Valley working on tomorrow’s opening keynote for the national Angel Capital Association meeting. I titled it “It’s the Angel’s Time”. I won’t try to summarize it all here, but the video will be on my blog in a couple of weeks.
The good news is that Angels can provide enough capital for 99% of today’s startups. And Angels actually IMPROVE the company’s chances of success according to research out just last month from the Harvard Business School.
So today there are actually more investors than in the past. Better investors. And their numbers are growing.
The Angels down here are worried that valuations are going UP too fast.
Austin – thanks for mentioning my Book.
Hi Basil,
I haven't talked a lot about angel investors. I'm happy to see a new breed of Canadian angels emerging. Jordan Banks, David Ceolin, Robert Montgomery, Austin Hill, Boris Wertz, Jonathan Erhlich, Greg Wolfond and others. There is a great opportunity in Canada. The result of lower valuations, startups that have customers and are later in the corporate development, trending towards profitability make it a great ground for these investments.
My biggest concern is that a lot of these investors made their cash not in software or on the Internet (all those listed above are software and Internet veterans). This means that they may have unrealistic expectations about the entire process. That's a very different concern but it does mean that we continue to need savvy investors (just think of the “super angels” in the US – Ron Conway, Chris Dixon, Chris Sacca, Mike Maples and others – would anyone say they are unsavvy).
Hi Basil,
I haven't talked a lot about angel investors. I'm happy to see a new breed of Canadian angels emerging. Jordan Banks, David Ceolin, Robert Montgomery, Austin Hill, Boris Wertz, Jonathan Erhlich, Greg Wolfond and others. There is a great opportunity in Canada. The result of lower valuations, startups that have customers and are later in the corporate development, trending towards profitability make it a great ground for these investments.
My biggest concern is that a lot of these investors made their cash not in software or on the Internet (all those listed above are software and Internet veterans). This means that they may have unrealistic expectations about the entire process. That's a very different concern but it does mean that we continue to need savvy investors (just think of the “super angels” in the US – Ron Conway, Chris Dixon, Chris Sacca, Mike Maples and others – would anyone say they are unsavvy).
Hi Basil,
I haven't talked a lot about angel investors. I'm happy to see a new breed of Canadian angels emerging. Jordan Banks, David Ceolin, Robert Montgomery, Austin Hill, Boris Wertz, Jonathan Erhlich, Greg Wolfond and others. There is a great opportunity in Canada. The result of lower valuations, startups that have customers and are later in the corporate development, trending towards profitability make it a great ground for these investments.
My biggest concern is that a lot of these investors made their cash not in software or on the Internet (all those listed above are software and Internet veterans). This means that they may have unrealistic expectations about the entire process. That's a very different concern but it does mean that we continue to need savvy investors (just think of the “super angels” in the US – Ron Conway, Chris Dixon, Chris Sacca, Mike Maples and others – would anyone say they are unsavvy).
Hi Basil,
I haven’t talked a lot about angel investors. I’m happy to see a new breed of Canadian angels emerging. Jordan Banks, David Ceolin, Robert Montgomery, Austin Hill, Boris Wertz, Jonathan Erhlich, Greg Wolfond and others. There is a great opportunity in Canada. The result of lower valuations, startups that have customers and are later in the corporate development, trending towards profitability make it a great ground for these investments.
My biggest concern is that a lot of these investors made their cash not in software or on the Internet (all those listed above are software and Internet veterans). This means that they may have unrealistic expectations about the entire process. That’s a very different concern but it does mean that we continue to need savvy investors (just think of the “super angels” in the US – Ron Conway, Chris Dixon, Chris Sacca, Mike Maples and others – would anyone say they are unsavvy).
As an entrepreneur in the trenches, I see the tide turning as well. It's part new thinking/investment thesis and part availability of funds for the earlier stages that are the riskiest from a VC point of view.
VC's have to take the risks in the early stages, but if they start with a no risk attitude, that's the wrong starting approach, or at least it disqualifies a large segment of opportunities.
Whereas US VC's err on the side of risk-taking and aggressive investing, the Canadian VC's tend to err on the conservative scale, although we're recently seeing fresh and bold moves from this new breed that you are identifying.
As an entrepreneur in the trenches, I see the tide turning as well. It’s part new thinking/investment thesis and part availability of funds for the earlier stages that are the riskiest from a VC point of view.
VC’s have to take the risks in the early stages, but if they start with a no risk attitude, that’s the wrong starting approach, or at least it disqualifies a large segment of opportunities.
Whereas US VC’s err on the side of risk-taking and aggressive investing, the Canadian VC’s tend to err on the conservative scale, although we’re recently seeing fresh and bold moves from this new breed that you are identifying.
Good work David, and thanks for mentioning my recent article on the VC industry. One of the points that I wanted to make clear in my note on the VC oligarchy is that the statistics that are used by the embedded VC's are apple to orange comparisons between the Canadian and US markets. The Canadian figures exclude public market activity which are a larger piece of the pie for earlier stage companies in Canada relative to the US. In other words – the numbers are skewed to exclude a lot of Canadian activity. I don't mean to imply that this skewing of the data is intentional – but it does serve a lobbying interest. Basil also approaches it from a different perspective – that of the angel that is increasingly an important part of the mix. If we add in the activity that is not included in the official figures that are often bandied about – we should find that things are certainly not as bad as the embedded VC's would have us believe.
Good work David, and thanks for mentioning my recent article on the VC industry. One of the points that I wanted to make clear in my note on the VC oligarchy is that the statistics that are used by the embedded VC’s are apple to orange comparisons between the Canadian and US markets. The Canadian figures exclude public market activity which are a larger piece of the pie for earlier stage companies in Canada relative to the US. In other words – the numbers are skewed to exclude a lot of Canadian activity. I don’t mean to imply that this skewing of the data is intentional – but it does serve a lobbying interest. Basil also approaches it from a different perspective – that of the angel that is increasingly an important part of the mix. If we add in the activity that is not included in the official figures that are often bandied about – we should find that things are certainly not as bad as the embedded VC’s would have us believe.
Good work David, and thanks for mentioning my recent article on the VC industry. One of the points that I wanted to make clear in my note on the VC oligarchy is that the statistics that are used by the embedded VC’s are apple to orange comparisons between the Canadian and US markets. The Canadian figures exclude public market activity which are a larger piece of the pie for earlier stage companies in Canada relative to the US. In other words – the numbers are skewed to exclude a lot of Canadian activity. I don’t mean to imply that this skewing of the data is intentional – but it does serve a lobbying interest. Basil also approaches it from a different perspective – that of the angel that is increasingly an important part of the mix. If we add in the activity that is not included in the official figures that are often bandied about – we should find that things are certainly not as bad as the embedded VC’s would have us believe.
Good work David, and thanks for mentioning my recent article on the VC industry. One of the points that I wanted to make clear in my note on the VC oligarchy is that the statistics that are used by the embedded VC’s are apple to orange comparisons between the Canadian and US markets. The Canadian figures exclude public market activity which are a larger piece of the pie for earlier stage companies in Canada relative to the US. In other words – the numbers are skewed to exclude a lot of Canadian activity. I don’t mean to imply that this skewing of the data is intentional – but it does serve a lobbying interest. Basil also approaches it from a different perspective – that of the angel that is increasingly an important part of the mix. If we add in the activity that is not included in the official figures that are often bandied about – we should find that things are certainly not as bad as the embedded VC’s would have us believe.