The Return of Vancouver Venture Capital?

Brent Holliday

| June 3, 2009

We need venture capitalists (and the Maple Leafs) to have a good season.

The venture capital industry in Canada is looking a bit like the Toronto Maple Leafs these days. Like the Leafs, the venture capitalists (VCs) are vital to a lot of passionate Canadians. And as with hockey rivalries, VCs and entrepreneurs coexist with a mix of admiration and hatred – sort of like Maple Leafs fans and Montreal Canadiens fans.

Even if you don’t like VCs (or the Leafs), you have to admit that we need them to be successful once in a while. As with the Leafs, it seems like a long time ago, but the VCs did have a few good years. Those years were supposed to set them up for a long run at the top. But bad decisions at the management level and poor performance by the players have left the VCs (and the Leafs) in the doldrums since 2001. Now, after years of mediocrity, are the VCs ready for a comeback?

Across Canada investment in risky startup companies (predominantly of the technology variety) has diminished in the past six months. VC investment levels in Canada dropped 36 per cent year over year to the lowest level since 1997. In B.C. the venture investment levels dropped 18 per cent in 2008, with $259 million invested. The U.S. saw a much more modest eight per cent decline year over year nationally. The American VCs seem to be shopping more at home: their investment in Canada dropped a whopping 56 per cent from 2007 to 2008.

Is this normal behaviour? Investment does move in cycles, and after the last dramatic downturn in 2000, VC investment showed sharp declines only to grow back in the next couple of years. The Canadian picture is a little disconcerting, though. VC investment levels have been declining for a few years due to a lack of new funds. Investors in venture funds have lost faith in many of the managers of Canadian funds, as evidenced by the money raised by VCs to invest; that amount is down 50 per cent since 2005 to $1.2 billion in 2008.

Locally, Yaletown Venture Partners is the lone bright spot, raising a new $65-million fund in 2008. Few other funds have new dollars to invest in new deals; most are only shoring up existing investments. They are waiting for the “exit” market to reappear with healthy acquisitions or any type of initial public offerings (IPOs). The latter is suffering through its worst drought in history, with only one venture-backed IPO in North America in a year. Without these exits, VCs can’t return money to their investors, worsening their chances of raising more money.

Some local companies are bucking the trend. Teradici Corp., a semiconductor startup, raised $17 million in early April. NxtGen Emission Controls Inc. of Burnaby raised $19 million in late 2008. I am helping local technology companies raise larger rounds like these in this current market, and it is very, very tough to get new investors to part with their money. Any round of financing completed in the first half of 2009 is bound to be a small miracle.

Where do we go from here? Is all the burden of financing B.C. technology companies to be heaped on the shoulders of angel investors? Should the government step in to help? Do we lose more and more promising companies to U.S. acquisitions? Or will they simply close their doors when they can’t make payroll? We clearly need risk capital to move the new economy forward and support innovation. What can be done to initiate more risk-capital inflows in the near term?

Like the Leafs, VCs have to build slowly with a clear plan. They can’t panic or give up. They need to draft good prospects and hope for outperformance from their talent. As the economy improves and a few wins appear in B.C. in the form of successful exits, the money will return. It always follows good opportunities, whether it is in the form of Canadian VCs or foreign investors. There is a long road between now and a Stanley Cup parade, but I think we have hit bottom and there will be a return to glory – whether you’re a fan or not.

Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.

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Brent, Just a quick comment

Submitted by Anonymous on Mon, 2009-06-08 20:41.

Brent, Just a quick comment if I may on your post and reply's , especially the post "money is what fuels innovation and commercialization". While this true overall as a "covering all basis" statement, it may not be the issue overall here in BC. It is definitely true for the commercialization stage in my opinion (see below) but it is frustration that leads to entrepreneurship which leads to innovation which in itself may not be an issue of money available from VC's or other in the province. Innovating difficult things should lead to the biggest rewards in my opinion. You rarely get financially rewarded unless you do difficult and truly innovative and risky things. (YouTube and a few others every decade are rare exceptions and no one should count on that for a long time) Where true innovation is present and has progressed but where BC Start Ups are held hostage are at the stage when the reality of hard costs sinks in; where entrepreneurial spirit and technical innovation wont pay the bills. Only real money will solve the commercialization side. Oh yes and paying bandwidth, communications, legal, rent, travel, marketing, patent filing, support, administration, accounting, etc etc are all very real and very expensive. Basically, the non-innovative engineering expenses is what chokes the life out of most innovative Start-Ups here in BC. That is the fundamental issue in my opinion. After your hard working, underpaid, innovative technical team and founders work their asses off to bring your start up to the next level, then the reality of the other costs set in and then you stop sleeping at night. Access to any affordable capital is tough for every series A (B) company. In fact I believe there has not been one official series A semiconductor deal in SV in over 1.5 years and maybe only 5-10 in digital media. However if you get through that stage without it, then access for commercialization capital and paying for simple operation costs is what is needed most often. That is the issue facing young start ups. I think it can easily be solved by putting provincial dollars directly to work into the hands responsible risk taking entrepreneurs that have already risked enough, They also rarely get paid a salary let alone 2% management fees !!! You can easily qualify these people if we wanted to and you can rarely question their resolve and honesty (rarely but not always as I found out). Traditional VC's are not in abundance in BC and are really not active here or in SV lately. No one can be faulted for that, they are equally worried about their past investment performance and careers as they about future ones plus travel is always a factor. Good companies often do not get funded in these times which is sad , however if BC Government was to act like Taiwan in the 90's and empower the technologists directly to succeed after they invent then we will have a great chance to be better than other states and provinces because all things considered it is very inexpensive to have your start up in BC as opposed to SF or PA. Ron Stevens (Mingleverse Labs Inc. and a few others)

Brent, Please note that

Submitted by Wal van Lierop (not verified) on Wed, 2009-06-03 22:04.

Brent, Please note that Chrysalix Energy Venture Capital raised >$75M for its new fund CELP III in 2008, so there are more bright spots. Wal van Lierop - CEO Chrysalix Energy

Brent: your remark:

Submitted by Anonymous on Wed, 2009-06-03 21:55.

Brent: your remark: "Locally, Yaletown Venture Partners is the lone bright spot, raising a new $65-million fund in 2008" ignores that Chrysalix Energy raised >$75M for its new fund CELP III in 2008. It would be great if you could correct that in an upcoming column. Kind regards, Wal van Lierop, Chrysalix Energy VC

Truer words were rarely

Submitted by Anonymous on Wed, 2009-06-03 16:48.

Truer words were rarely written, Brent. As we both know - from being long-time soldiers in the BC tech sector trenches - money is what fuels innovation and commercialization. We also know that money has no country (or province) and will go where it works best. *sigh* Thanks for laying this topic out so clearly, and entertainingly !