Suzie on the state of Canadian Venture Capital

While there’s been a VC famine here for several quarters, public discussion of the issue has been tepid at best. Thank goodness, some of our most prominent players are finally speaking out. In the last few weeks, Terry Matthews and Pat DiPietro have become the Bono and Angelina Jolie of the venture capital scene, using their celebrity to sound the alarm.

What’s the nature of the crisis? Here’s a sketch of what’s being said:

Venture capital is fed by the limited partners (“LPs”) who invest in VC funds. Historically, the pool of Canadian LPs who are attracted to high risk capital has been discrete. To bolster the industry(and the startup community), the Canadian government therefore has from time to time created vehicles such as labour sponsored funds to attract additional capital.

When there is an irrational market (1998-2000), the usual pool of LPs expands to include new players such as US LPs and institutional equity funds. The number of VCs and the amount of venture capital available to Canadian entrepreneurs skyrockets. When the market cools, those LPS retreat to later stage investing, leaving too many funds competing for fewer LPs. A consolidation of the numebr of venture capital investors results, until the next irrational market heats up the investing cycle all over again.