in Startups, Venture Capital

What do Canada's VCs really think?

If you were to ask Canadian VCs, which Deloitte did this past April, what they think about Canadian entrepreneurs and startups, and the VC business in Canada in general, you might not get the warm and positive response that you expected.

Based on these responses, Canadian Venture Capitalists think less of their entrepreneurial countrymen than their counterparts in Brazil, China, France, Germany, India, Israel, the UK and the United States. There is, based on this survey, a larger divide between entrepreneurs and VCs in Canada than there is anywhere else in the world.

  • Only 36% of Canadian VCs believe that an “improving entrepreneurial environment” is one of the factors that make Canada  a good place for Venture Capital. That is in contrast to 60-88% of VCs in countries such as Brazil (59%) , China (82%), France (67%), Germany (72%), India (88%) and the UK (59%).
  • When asked which factors contributed to creating a “non-favourable climate for venture capital”, Canadian VCs were again quick to blame entrepreneurs. 47% of VCs said that they believe a “lack of entrepreneurial talent to build a new company” is one of the problems with their industry. Only German VCs were more contrite – 72% of them said lack of talent was a problem. Other countries had far more benevolent VCs: Brazil (5%), China (42%), France (22%), India (15%), Israel (0%), UK (33%), US (6%).
  • Another answer to the question “factors contributed to creating a “non-favourable climate for venture capital”” that generated a big response from Canadian VCs was the idea that “reduced entrepreneurial activity” was a big factor. 28% of Canadian VCs said that they believe there is a lack of activity in Canada, that is in contrast to Brazil (3%), China (10%), France (11%) , Germany (39%), India (0%), Israel (10%), UK 14% and USA (5%).

Is it possible that Canada is an exception to the rule in the rest of the world? How can it be that Venture Capital class investors in every other type of economy (emerging through to advanced) have a more positive opinion of entrepreneurs in their home countries?

I decided to put the question to some of the VCs I respect the most in Canada. The folks who I believe are doing good things and who really get it. In these conversations there were a few major themes. Overall, the outlook seems pretty positive, while remaining realistic about our past performance. Nobody would agree with the consensus from the Deloitte report. Some of the responses:

  1. “It’s bullshit”. Nobody was ready to argue that the current attitude toward Canadian Entrepreneurs is justified.  The consensus was that it is the result of a lot of fund managers who got a rough ride and they don’t want to take responsibility for it.
  2. “It’s still early in Canada”. With a few exceptions, Venture Capital in Canada didn’t start until as late as 1995, and when it started it went off with a boom. A lot of money was raised by GPs who were not necessarily experienced operators (an old complaint). There are two common conclusions from this: We need new GPs who are experienced operators and We need to back the old GPs because they have finally learned their lesson
  3. “We are finally seeing a crop of 2nd-timers”. “Reward failure” is a popular refrain. The idea that entrepreneurs need to learn from doing is well established, but we haven’t seen the cycle of entrepreneurs here in Canada that we could really use. This was something that practically everyone expressed no matter how positive they were. This is a fundamental change in the entrepreneurial landscape in Canada.
  4. “The talent is here”. Canada has good product related talent. We need to focus on keeping that talent here and to build our capabilities in international marketing and channel development. “It really needs some work” is hard to argue with, but is it an industry breaker? No.
    The recent growth of seed funds in Canada is also helping to address many of these concerns. These funds are accelerating the pace of learning for new entrepreneurs so quickly that many are becoming high-quality second-timers within a few years and a very small amount of capital. This brings them back to the table with their hunger and some talent.

Let’s move on

This “blame the entrepreneur” attitude is now worn out. Whatever truth there is to it is in the past. Canadians are as, or more, connected to the internet than any other country and Canadian entrepreneurs no longer sit around learning from other Canadians, they are learning from a global A-list.

In the end this is all to say: It isn’t as simple as pointing a finger and laying blame. Nobody is squarely blaming the VCs of the last 10 years for our problems, and it is similarly wrong to throw dirt back at Canada’s entrepreneurs.

The lifetime of Venture Capital in Canada has been short and it could be argued that practically every economy must go through a “churn” phase where the asset class underperforms before a handful of factors come together in order to create a healthy industry. With some new funds starting to close and a mix of new and old blood actively trying to do the right thing, we might just have a shot at this.

I leave you with some thoughts from Howard Gwin that I think show a fair balance of both blame and optimism for everyone involved and it contains some antidote for what’s going on. Read it in its entirety here.

Where do we start?

I am a “double down” kind of person.  Anybody who has worked with me has heard me yap about 80/20/80.  I think we need an 80/20/80 attitude in the Canadian tech marketplace.  We need to focus 80% of our energy on the 20% of companies that have an 80% chance of succeeding.  Set much higher bars across all of our ecosystem from mentors, to angels, to incubators, to VCs, to board members, to anyone providing advice to our community.  A few more thoughts:

* Mentors must bring value or stay out of the game.  If founders are not coachable, move on to the next opportunity.  If VCs do not bring value beyond money, do not engage with them.  If incubators are coaching, set much higher bars for the outputs your companies produce or shut down.

* Funding “good companies” does not work.  We need more $ in potentially great companies. Whether we are funding pre-revenue companies with seed $ or growth equity, the bar must be higher.  At a minimum, here are some high-level standards to measure potential of success independent of stage:

  • Big frigging market – no debate.
  • Massively differentiated value proposition that’s not  we are smarter, nicer, cheaper, faster etc.
  • Significant competitive barriers to entry.
  • Tailwind versus headwind – the market is out looking for a solution.  “Market makers” make good road kill.
  • Excellent team that’s open to coaching.

If there is ambiguity over the above, the ecosystem needs to either address it or move on.

* Post-seed VCs must spend more on less.  Work the models so companies can get through the troughs — or don’t fund them.  Available capital in Canada for venture is not enough, so we must spend our capital on the best and brightest or nothing will change.

Founders, do not fall in love with your product or your people.  Before you talk to anyone about funding get experienced people to rip your strategy and pitch apart.   You only get a few chances to get it done so make sure they count. Network like there’s no tomorrow.  Gather people around you who have proven “big league” execution skills.  Talk to everybody who can spread the message and bring value.  Get yourself down to the Valley. Cold-call and get connected to anyone who can make your business move faster and smarter.  If you don’t your competitor will.

  1. I get prospecting calls from at least 3-4 US VC firms every month at Toronto-based Firmex over the last 2 years. I have yet to get a call from a Canadian VC firm – ever. I am curious could it be:

    1. Canadian VCs are under funded?
    2. There are so few of them?
    3. They think “cold calling” is rude?
    4. All of the above?

  2. I get prospecting calls from at least 3-4 US VC firms every month at Toronto-based Firmex over the last 2 years. I have yet to get a call from a Canadian VC firm – ever. I am curious could it be:

    1. Canadian VCs are under funded?
    2. There are so few of them?
    3. They think “cold calling” is rude?
    4. All of the above?

  3. Hi Jevon, I don’t understand the numbers. At the time of this report, there were less than 10 VCs with money to invest in Canada: Rho Canada, Inovia Capital, Blackberry Fund (JL Albright+RBC), Chrysalys, Yaletown, Celtic House, Extreme VP, and two government sponsored group GrowthWorks and BDC. Montreal Startup was still doing deals but we weren’t interviewed. Real Ventures didn’t exist yet. Sorry if I missed anyone. I seriously doubt that the group above blamed entrepreneurs for their misery. I have been in the entrepreneurial/VC business in Montreal since 2001, and I’ve never seen so much entrepreneurial activity. I and my partners at Real Ventures are long on Canadian entrepreneurs.

  4. I would like the names of those who said this “47% of VCs said that they believe a “lack of entrepreneurial talent to build a new company” is one of the problems with their industry”.

    I’m an entrepreneur, and I believe the reverse is closer to the truth, i.e. there’s a lack of Canadian VC talent to help the widely available Canadian entrepreneurial talent.

  5. Jevon, your post, along with Mark McQueen’s http://bit.ly/c5vMM0 and Howard Gwin’s in DigitalPuck http://bit.ly/a9g529 speaks to the growing chasm between the new breed and old guard of Canadian VCs. The good news is that a growing group of investors including Vanedge, Bridgescale, iNovia, Xtreme VP, and now Real Ventures, are bullish on Canadian entrepreneurs and are actively working with the startup community to build a healthy, vibrant venture ecosystem.

    The support and enthusiasm for startups in Canada has never been greater. From coast-to-coast there are events and meetups every day, and the access to resources and advice is enormous compared with just a few years ago.

    As one who operated through the old regime and is now readying for another successful startup launch, I am more encouraged than ever about the prospects for Canadian entrepreneurs. I guess finding good VCs is like finding good programmers – it’s not how long they’ve been at it, it’s what they’re doing now that counts.

  6. I read the same Deloitte report as you and I have to be honest that I don’t see where Canadian VCs are “blaming entrepreneurs”. You cite the responses to two survey questions to draw your conclusions.

    The first, dealing with factors that are favorable for VC (slide 18) simply shows that Canadian VCs are currently far more focused on the need for government policies and support to improve the VC environment than on improving entrepreneurial activity.

    The second, dealing with factors that are unfavorable for VC (slide 20) shows that the overwhelming concerns of Canadian VCs are the difficulty of achieving successful exits and the lack of an established VC community. Next on the list, as you point out, is the “lack of entrepreneurial talent to build a new company”, and then “reduced entrepreneurial activity”. On the first point, it is not unfair to say that the depth of experienced early-stage management in Canada is much lower than in the US market. On the second, it is both a relative point and one taken from the Canadian VCs perspective. Yes, there’s lots of exciting activity at the much earlier seed stages, but that’s not where the majority of Canadian VCs play. From the perspective of the Canadian VC, the supply of companies in the $2-10mm revenue range is much lower than it was 5 to 10 years ago. And that, unfortunately, is a fact.

    Remember, there are different kinds of VC firms out there, and each has different perspectives based on the markets they are serving. You’re looking at it from one perspective, but the majority of the current Canadian VC community is looking at it from their perspective. Early-stage/seed funds see significantly different things in the market than “series A” round VC firms or later-stage firms.

  7. Jevon, your post along with recent commentary by Mark McQueen http://bit.ly/c5vMM0 and Howard Gwin http://bit.ly/a9g529 speak to the growing chasm between the old guard and new breed of VCs.

    Newer investors such as Vanedge, Bridgescale, iNovia, Xtreme VP, and now Real Networks are out in the tech community working to strengthen the new venture ecosystem and build a vibrant, viable startup community. Every day events and meetups are taking place coast to coast in support of new venture creation and the access to resources and tools (such as the lean startup model) is huge compared to just a couple of years ago.

    As an entrepreneur who operated in the old regime and is readying for another startup launch, I am more enthusiastic than ever about the prospects for Canadian startups. I guess looking for good VCs is a lot like looking for good programmers – the question isn’t “What you’ve done in the past?”, it’s “What are you doing now?”

  8. What Canadian VCs? Any remaining with money or are they pretending?

    Canadian VCs have it in there DNA to believe that everything is better outside Canada. I have spent the good part of 20 years sitting across both Canadian and US VCs and have seen more than one US VC attempt to convince a Canadian VC that the talent exists and to get over there pre-disposition. Canadian VCs due little to mentor or nurture any kind of environment to expand skills, capability or environment. This is very counter to US Vcs, especially valley ones. Canadian entrepreneur sprit is high and vibrant, despite the perception. I am on the sales and marketing side of tech and have seen too many excellent leaders depart Canada for more fertile ground due to lack of opportunity and the desire not to fight the pre-conceived notions. As an example, one friend left for Seattle for a year for a lateral position. After a year, he got a job at a Canadian firm that was acknowledge by the Canadian VC dominated board he would not have gotten if it were not for his year stint (lateral remember) elsewhere.

  9. The problem I see about VC in Canada is they are Canadian. As a Canadian that has had the misfortune of trusting in Canadian VC rather then going south. I’d say they think small, they have a play book they don’t move from, that is ill thought out. They don’t understand the world market, and think that their little world of TO or KW is the be all of the world. After moving down south the world has opened up, and I can see the value that “real” VC can bring to the table.
    If you have something that is worth doing then take it down south, that is advise I wish I had heard before the first time. Also, knowing that by the time all is said and done you’ll be lucky to have 5% of your company (in software) in the first one. The last being play with other people’s money, your house is not, or should not be on the line.

  10. The problem I see about VC in Canada is they are Canadian. As a Canadian that has had the misfortune of trusting in Canadian VC rather then going south. I’d say they think small, they have a play book they don’t move from, that is ill thought out. They don’t understand the world market, and think that their little world of TO or KW is the be all of the world. After moving down south the world has opened up, and I can see the value that “real” VC can bring to the table.
    If you have something that is worth doing then take it down south, that is advise I wish I had heard before the first time. Also, knowing that by the time all is said and done you’ll be lucky to have 5% of your company (in software) in the first one. The last being play with other people’s money, your house is not, or should not be on the line.

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