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.