The Canadian venture capital industry is in danger of disappearing. Does anyone care enough to save it?

As the technology marketplace has grown over the last 20 years, Canada’s venture capital industry has had a few sparks of potential. More recently though, it has dwindling to the point where it is danger of dropping below a level of critical mass. The question now is whether it has the potential to recover – and whether anyone cares enough to revive it.

In the 1980s, during the early years of the PC revolution, there were a number of Canadian success stories in technology, including Mitel, Corel, Delrina, ATI, and, of course, Nortel, to name just a few. As the VC industry started expanding from its Silicon Valley base, Canada looked like an ideal potential marketplace – close to the U.S., great universities, technologically driven, and a strong base of technology companies. As those companies continued to grow in the 1990s, the belief was that emerging managers would help create a strong VC industry. There was support from major institutions, mainly banks and pensions funds in Ontario and Quebec, and it looked like the market had potential.

Then, in 2001, the market saw the first internet bubble burst. This meant disappointing returns, leading to many of the institutions pulling their money out of the Canadian VC industry. That money never came back. In what became a mini perfect storm, the industry saw its potential drastically shrink as capital from labour sponsored-funds that funded many businesses dwindled, restrictions on institutions investing in top U.S. funds were removed, and the general allure of technology disappeared.

The Canadian VC industry has always lived in the shadow of the country’s natural resource industry. As the natural resource marketplace has continued its massive growth, technology has become an afterthought. And with Nortel’s demise, the only shining light was Rim.

Despite all of this, there are some positives.

1. Canada still produces a significant number of highly talented tech grads from its superb universities and the potential of this workforce remains highly attractive.
2. With its immigrant population, there remain a meaningful number of entrepreneurs and “wannabe” entrepreneurs that are capitalizing on the low cost of starting tech companies.
3. Quebec stands out as a province focused on creating a tech industry and maintaining any gains made.

So, we are left with the question of whether or not it can be fixed, and whether anyone cares enough to fix it. Clearly, it is not the responsibility of private industry or institutions to do this – especially when they are not convinced of superior results from emerging managers. It is the government that has to step up.

Provincial governments outside of Quebec are starting to push for a stronger industry. In the last year, Ontario seemed to be making some headway, although very slowly.

At the federal level, while there has been some talk about bolstering the tech industry, problems with other sectors, including the automobile and banking industries, has received all of the attention. Perhaps this will change if the VC engine runs so dry that it can only recover with some priming, but there is little political will in this economic climate to begin investing in technology or the VC industry.

Those of us who are optimists believe that we will see a ground swell of smaller companies emerging, some of which will grow into the new generation of tech powerhouses. Fortunately, these businesses need smaller amounts of capital than previously required, so we could potentially see a number of smaller funds emerge that will fuel the industry. An emerging group of entrepreneurs and repeat entrepreneurs remain internally focused and this could lead to evolutionary growth. Lets just hope that it isn’t too late.