Venture Capital Made in Canada

The Canadian venture capital industry has been following the lead of others for too long. It's time we forged our own path.

It's funny when I think about it now, but growing up I always had an irrationally positive view of my older brother. Not only could he not do anything wrong, but I latched on to anything he said and internalized it. He once told me that “TV commercials are basically lies,” and to this day I can't watch TV without thinking I am having the wool pulled over my eyes. Pretty typical stuff for a kid growing up no doubt.

It’s the same story for the venture capital industry in Canada. I think that Canadian venture capitalists and entrepreneurs alike have developed an irrationally positive opinion of those outside their geography and asset class. Specifically of buyout managers and American venture capitalists. There is some fundamental desire to be just like them, to act like them, sound like them, and look like them.

Those smart, rich, and good-looking venture capitalists who were killing it on Sand Hill Road and elsewhere are obviously doing something right, no argument there, but as with everything, context is key.

We love to talk about how unhealthy the industry is here. We are told that the past managers have had terrible track records and the asset class has returns that are far below expectations. Limited Partners, or LPs – the pension funds and other sources who supply venture capitalists with money to invest – have been sent running. If you listen to the worst of the naysayers, the LPs are gone and are never coming back.

The other side of the story is that Canadian entrepreneurs aren't aggressive enough. They don't think globally, they are lazy, and they lack management talent and creativity. This is one of those lines you can blurt out at an after-conference cocktail reception and everyone will automatically nod their head.

The truth is, we raised big funds, just like the ones they had, and the story that went out to the LPs was that the returns were on their way. For a period of time the capital was there, ready to be used and the returns promised were plausible. But even though the capital was ready, the startups were not. Good deals just weren’t falling out of the sky the way they seemed to in Silicon Valley, Boston, and Israel. You can’t blame managers for having become disillusioned with Canadian entrepreneurs. They stepped up to the plate and were hung out to dry.

“The pipeline” as we call it, was dry. The formula that worked in so many other places seemed to be broken here. Something was missing, misaligned, or ill-conceived, and nobody could figure out how to slow the train and switch tracks. Venture capital in Canada was doomed before it had a chance to get started.

My older brother was a great guy. He taught me a lot of what I needed to know and helped me get a leg up in life, but I had to go and make a life for myself at some point and we took radically different paths. He has different friends than I do, his job and streams of income are different, he looks at the world in a different way that makes sense for him.

Similarly, the venture capital industry in Canada has to find its own identity. Whether we like it or not, things are different here. The regulatory environment is different, the availability of capital is different, and the form and function of the “entrepreneur” is different. All for better and all for worse.

We've made it through the early years and we've spent a lot of time looking up to some really smart and kind people. Puberty has been rough though, and it seems we’ve come out on the other end a bit confused and perhaps not looking our best, but it's time to go and make our own life. It’s time to get out from under the unfair set of expectations that we have set for ourselves and start to define our own goals and ideas of what a successful future looks like.

I am not advocating that we do something less, I am advocating the opposite: that we do not only more, but also something completely new.

In 15 years when the rest of the world is talking about the amazing turnaround story of Canadian startups and venture capital, we want them to tell a story about how we did something unique and special here, not about how we just copied someone else's model.

Here are some of the facts regarding what we have in Canada today:

First, the good:

• New communities are developing in cities like Montreal, Toronto, Vancouver, Edmonton, and Halifax. We have communities of entrepreneurs who are pooling resources, developing ideas, and attracting talent. The scale and sustainable nature of these self-organizing communities is new and critical to future growth. Conferences like GROW later in August help to gather the best and brightest from these communities in a single place.
• A superseed (or micro-fund) class of investor has emerged and they are quickly becoming the most successful investors in the country. Extreme Ventures, Montreal Start Up and FounderFuel, W Media Ventures, and the Growthworks Commercialization Fund have gained access to premium deal flow in Canada and they are generating better-than-usual returns because of it.

Now, the not so good:

• There is a lot of confusion about how follow-on financing can be sourced as the superseed funds start to turn out growth opportunities. Is there enough gunpowder in the system to accelerate a high-potential startup out of a seed round and through A and B rounds? The answer right now is “it depends.” We are seeing some positive changes in the landscape, but there is currently not a virtuous cycle of back-scratching to make sure these startups survive and start generating larger returns.
• Disconnected government policy-making is problematic. Outside of the impressive moves by the government of Quebec, there have been no signals from governments (provincial or federal) that they understand the changes taking place in the landscape or that they intend to proactively support them.

So what are we supposed to do?

Early stage opportunities are here, and we need to develop a virtuous cycle of angels, superseed funds, and follow-on capability that is able to benefit from the aggregate of activity taking place in cities across the country. We do not have a single place to look for opportunities, but a set of active mini-hubs that each need attention.

We need to start small and encourage the development of superseed funds that are able to source deals within their specific geographies and spheres of influence. Fundamentally, we have to believe this is all worth doing and that Canada is capable of developing a scalable and high-return environment for venture investment. Until we stop imitating the outside world, however, we will never figure out just what it takes to make things work right here at home.

Then, when we have something unique, we can tell the story of our successes as they happen. It is time to put our pride on the line and measure ourselves against the best in the world.

If it’s a choice between go big or go home, I know which I want to do. We need to take advantage of growth-stage opportunities as they come out of our unique network of cities and seed funds in order to develop the mega-exits we all see in our future. This will require coordination and focus from government, LPs, and a new breed of venture investors who are willing to connect more closely with the entrepreneurs who are creating the financing opportunities they need.

There are a lot of returns to be earned here and those who roll up their sleeves and get a little messy will be the ones to profit.