An entrepreneur with an idea and an investor with cash does not a successful venture make.
Many entrepreneurs these days are talking about how the venture capital model is [broken](http://www.themarknews.com/articles/1142-vc-market-failure). This is the wrong way to approach the lack of capital Canadian entrepreneurs face. The venture capital model can’t be broken because it never really worked in the first place!
Top tier venture capital expected returns in the +30% IRR. With the exception of the 1980′s and the last few years of the internet bubble, the model has only been successful for a small handful of venture capital fund managers and entrepreneurs. And when it comes down to Canadian numbers, we have to account for additional level of difficulty; not only does Canada have a less mature IT and Biotech industry compared to the U.S., it also has a [small](http://www.themarknews.com/articles/1144-a-necessary-contraction) and nascent private equity and venture capital industry, has a limited number of recurring entrepreneurs and still only has a handful of privately managed venture capital funds today.
Stories about highly successful technology entrepreneurs and rock star venture capitalists (note: over 80 per cent of venture capital returns were generated by less than a quarter of the funds in the market) created the impression that the formula to build a successful startup only needed two basic elements: 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 truth is that entrepreneurs operate in a living “ecosystem” that feeds itself by growing and building new connections. 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 startup 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.