VENTURE CAPITAL: LEADERSHIP CALL TO ACTION IN CANADA

CALL FOR CANADIAN VENTURE INCREASED LEADERSHIP

7 years ago I was a partner in a Tier one private venture capital firm, called XDLI, led by serial entrepreneurial Toronto leaders like Michael Bregman, and Dennis Bennie. Prior to joining XDLI, I was a partner with Accenture and all the excitement in the dot com space drove me to jump ship and in some respects jumped on the band wagon of the excitement to find the next holy grail. This was in 2001 - 2003 when the market was exciting as valuations were competitive and felt like the wild wild west. As we know the market came to a crashing wake-up call in 2003, and the venture capital industry in NA started to implode, and has been course correcting ever since.

However the trend continues to decline which has me personally very worried about Canada's long term economic smarts in innovation and commercialization.

Unfortunately in Canada, there is still too much retraction of VC investment activity. According to a recent Deloitte Survey released in TORONTO on September 7, 2010 — Venture capitalists (VCs)Canada expects their industry to contract further while those in emerging markets, including China, India and Brazil, expect to see theirs expand over the next five years, according to the 2010 Global Venture Capital Survey by Deloitte, Canada's Venture Capital & Private Equity Association (CVCA) and several other international industry associations.

According to the survey results, two thirds (66 per cent) of Canadian survey respondents expect the number of venture firms to decrease between now and 2015, while a great majority of venture capitalists in China, India and Brazil anticipate adding more venture firms in their country during the same time frame. Venture capitalists in the U.S. and the European continent also expect an industry tightening in their respective countries, but the Canadian industry is much more vulnerable to such a trend given its much smaller size.

The outlook for the dollar amount of venture capital available for investment in the next five years followed similar trends, with half of Canadian respondents seeing a decline or no change. In fact, 11 per cent of respondents predict a decline of more than 30 per cent, the second worst outlook of any country surveyed. Comparatively, respondents in Brazil, China and India see healthy increases. The institutional source of funds is also expected to be weak by Canadian VCs: Only 25 per cent of Canadian respondents believe limited partners are likely to invest in the country’s venture capital funds in the next five years, compared to 92 per cent for Brazil, 91 per cent for China and 76 per cent for India.

The 2010 Global Venture Capital survey, which measured the opinions of more than 500 venture capitalists worldwide, also examined the factors contributing to each country’s outlook and identified sectors of future growth.

Government policies to increase the size of the domestic VC industry seen as key to maintaining a capital venture industry in Canada

ADDITIONAL PERSPECTIVES

As opposed to past years, and following recent Deloitte-led changes to Section 116, Canadian respondents did not say that tax policy or regulations were creating an unfavorable climate for venture capital. Only 28 per cent cited tax rules as a major barrier. And they are positive on government support of R&D, with 67 per cent naming it as a favorable factor, second only to Israel.

Despite those advantages, when asked about the dangers of a lack of an established VC industry, Canadian VCs were by far the most critical in the world, with 61 per cent suggesting our lack of critical mass is creating a poor climate for investment and innovation. In contrast, VCs in other developed nations saw this as a non-factor, with only seven per cent on average mentioning it.

“Clearly, Canadian venture capital firms are up against serious competition from emerging markets, as are their counterparts in the U.S and Europe. But with the small size of the Canadian industry, the impact of this decline is even more devastating for Canada,” said John Ruffolo, National Leader, Technology, Media & Telecommunications Industry Group, Deloitte.

“This is an urgent situation and policy makers need to move quickly with measures that improve the odds of this vital sector here at home” Ruffolo added. “We need to get more dollars into the hands of existing Canadian VCs, and encourage the creation of more domestic VCs. A reinvigorated Retail Venture Capital program (particularly in Ontario), angel and VC investing tax credits, and the expansion of government-sponsored fund of funds programs are the three main priorities. Some of these measures have been adopted in Quebec, and that province’s venture industry has seen growth in both the number of firms and the amount of capital available for innovation.”

Clean tech and new media/social networking: Opportunities to seize now for the future
Despite numerous challenges, survey respondents across the globe show interest in new investment opportunities on the horizon. In looking ahead, respondents singled out clean technologies, healthcare services and new media/social networking as areas of great interest over the next five years.

Clean tech is the leader overall, with 67 per cent of Canadian survey respondents expecting increased investments. It is also ranked number one by China (95 per cent), Brazil (92 per cent), India (90 per cent), U.K. (85 per cent), U.S. (72 per cent) and Germany (71 per cent).

New media/social networking is seen as the second key sector of the future by 50 per cent of Canadian venture capitalists as well as 58 per cent of respondents in the U.S. and 64 per cent in Germany. Healthcare services were ranked second by survey respondents in China (92 percent), India (89 per cent), France (69 per cent) and the U.K. (62 per cent).

“With characteristic optimism, venture capitalists are already looking ahead to new growth industries and opportunities. In order for Canada to participate fully in this new economy, we need to have a larger and better-financed VC community to help incubate and grow these industries of Canada’s future,” concludes Ruffolo.

NOTES:

This blog has been sourced from major extracts from the Deloitte and CVCA Global Trends in Venture Capital: Outlook for the Future The Global Trends in Venture Capital: Outlook for the Future Survey was sponsored by Deloitte in cooperation with the Canadian Venture Capital Association and numerous other VC associations around the world. It surveyed venture capitalists in the Americas, Europe and the Middle East, and Asia Pacific. Deloitte received 516 responses from general partners with assets under management ranging from less than US$100 million to greater than US$1 billion. The survey was conducted during March and April 2010. Of the total number of respondents, 61 per cent were based in the Americas (of which 7% or 36 firms were Canadian,) 16 per cent in Europe, 23 per cent in Asia Pacific.