Yesterday and today I’ve been trying to make sense of two different data points that came out on the Canadian business scene.
One data point confirms that we are having a banner year across Canada. Check out the numbers:
* Q2 private equity deals worth C$5.7 bln in Q2
* Total deal value more than in all of 2010
* Deal volumes up 40 percent over Q2 2010
(Side nostalgic note, I love that Berkshire bought Husky, it was actually my first co-op job and I have always had huge respect for Robert Schad – a giant amongst Canadian entrepreneurs)
As you know from several of my posts on exits, this and this, the startup high tech scene are big contributors here.
So, this means that we are returning capital on investments made into companies in Canada, right? Which means, since there is a healthy market for exits, folks should be willing to supply funds to VCs to start companies…. right?
Well, according to CVCA, it looks like VC fundraising fell flat on its face.
Smith said slow fundraising by venture capital funds was undermining deal-making, with new commitments sliding to C$132 million in the quarter, from C$308 million last year.
“VC investment, which has historically been the catalyst for knowledge-based economic growth, cannot effectively do this job until we take determined steps to ensure more stability,” Smith said.
Falling fundraising is part of a continuing trend.
In 2010, new commitments fell 24 percent from the previous year to their lowest level in 16 years. They fell further in the first three months of 2011 against the first quarter last year.
WTF!?!?! Did VCs forget to cut cheques to their LPs? Are the companies getting bought out not VC funded? Something feels out of whack here. Are there simply not enough fund-makers ala Radian6 to make a reliable return on investment? We are doing some digging to get to the bottom of this. It does resonate that entrepreneurs should focus less on VCs for funding and need to be looking towards angels & incu-ellerators for their early stage funding needs.
UPDATE: This article from the Globe really outlines how VC funds have been in long decline.
Year VC invested/Companies Financed
1998 $1,511,000/807
1999 $2,617,000/810
2000 $5,876,000/1,007
2001 $3,747,000/720
2002 $2,583,000/663
2003 $1,613,000/615
2004 $1,677,000/545
2005 $1,699,000/558
2006 $1,701,000/406
2007 $2,051,000/402
2008 $1,406,000/388
2009 $1,039,000/337
2010 $1,129,000/357
These numbers tell something interesting – apparently in Canada its gotten more expensive to start companies??? In 1998 $1.5mm resulted in 807 companies getting financed, while in 2008 $1.4mm results in 388 companies getting invested. What gives?
I think you need to break out PE exits vs. VC exits…
in the “this and this” links. startup exits is something in $600-$700mm range to date using some acquisition rumours/guess-timating. But still, a company like Husky was a PE deal, but even it was a startup at some point… just not VC. The point is that Canadian companies are making massive great returns for investors, this should be good proof point to start more Canadian companies.
David WRT 807 companies in 1998 and 388 in 2008 … IMHO the key difference is the stage of the round being funded. In 1998 the payloads (Series A) were smaller and the companies younger. In 2008 the funding is for follow on rounds say Series C or later.
Ian, thanks for the comment. The terrible part is that this article is written by @twitter-21611030:disqus so I can’t take the credit or the blame.
I think the structural issue is that a healthy ecosystem looks like a funnel, with more early stage deals than late ones. So there is still strong concern about the decrease in investments from 1998 – 2008.
I need to read the fine print more carefully regarding post attribution.
The investment funnel is upside down in Ontario for sure. Later stage funding significantly exceed early stage. Quebec and BC seem to be doing some positive work in the area of early stage funding. Ontario could learn from their example. Take some notes at GROW to share on your return.
Government policy can encourage or discourage the start-up funding pipeline. Cancelling instead of re-working the LSIF program in the province was perhaps a contributing factor to the Ontario early stage funding malaise.
Interesting to note here that the 2010 Angel study showed 90% of investments made by Angels were new, not follow-on. Think that is inversed in the above numbers. This isn’t good as it leaves a big gap in funding companies. Thankfully there are good co-investors like BDC, Growthworks, etc. that co-invest with angels. We just need more!
Angel is a key part of the ecosystem. It is nice to see an increase in this funding, but it is only part of a healthy ecosystem.
There are gaps in the ecosystem that are becoming evident. Just like the what is happening in Quebec was set in motion almost 10 years ago, the same is true with the LSIF in Ontario. We need to start planning a healthy ecosystem on the timeline of government, a decade, and look at what is happening to the asset class driven by the lack of LP confidence. This will play out in the support of companies in 7-10 years.
Hard to assess the health of the funding ecosystem with IRR (Internal Rate of Return) data. LPs invest in VC funds to get above average returns that are not correlated with the stock market. The Canadian industry has not consistently delivered those returns. Some new funds (like ours, Mantella, Golden VP) are popping up. Check back in 5 – 10 years to see if we delivered the goods…
There are challenges with venture funding because the risks are very high. And investment portfolio returns are too low. Having been an active Angel for over 10 years and making 25 + investments in technology firms across North America with millions of my own money (plus many millions more by other investors), one of the lessons learned was Founders and Investors need to elevate their business acumen and look ahead skills as well as execute better. This will go a long way to reducing risk and make supporting entrepreneurship more rewarding for all stakeholders.
agreed it’s the timeframe required to determine fund performance.
As an asset class I think Dan’s argument is that fundraising also moves on the same glacial pace, and we might not have 5-10 years to ensure the viability of the asset class in Canada. Foreign capital and LPs do not look at Canada as a viable source for tech talent. And this shows through the fundraising efforts at an LP level. It provides policy and structural concerns going forward that wil also be measured in a governmental timeframe similar to fund returns of 10+ years.
We may not get the opportunity to correct this one…