The creative destruction of Canada's VC industry

Trees are falling in the forest.

The sound you didn’t hear the other day was the fracturing of one of Canada’s best known venture capital firms. One of the teams that had the experience and track record to be a survivor in the ever-shrinking Canadian VC industry. One of the firms that had been tagged to likely make it through the Star Chamber.

One of the firms that, like so many others, was once backed by some of the biggest LP names in the land. One of the firms that has had to replace those very same big LP names as folks increasingly pulled their horns in — one after another — on direct fund allocations over the past five years.

What happened?

It wasn’t that the fund and the current team hadn’t made investors money, so that old saw won’t work.

And it wasn’t that they didn’t have the sobriety to winnow weak portfolio companies when the facts made that decision necessary. A generic charge often leveled against the universe of Canadian GPs by some of the important LPs who still have a hand in the game.

And it wasn’t that they couldn’t attract domestic and U.S. venture capital funds to join them on their deals.

So, what happened?

It may well be that we are witnessing the “creative destruction” of the lion’s share of Canada’s VC industry. Creative destruction being the economic theory of “innovation and progress”, introduced by German sociologist Werner Sombart.

In Capitalism, Socialism and Democracy, by Austrian economist Joseph Schumpeter, the phrase was used to describe “the process of transformation that accompanies radical innovation”.

If some invisible hand is at work here, this may in fact be the creative destruction of the Canada’s VC industry. If so, it doesn’t appear to be following Mr. Schumpeter’s vision.

To him, capitalism was enhanced by the entry of a new class of entrepreneurs, even if it meant the evisceration of the existing power structure. And that’s just the problem.

There’s no robust “new class” of VC firms coming in behind the current oligarchy, with a similar amount of capital to deploy as those they are planning to replace. We are witnessing the destruction piece of the equation, for sure, but not the rebirth that is the essence of “creative destruction” if it is to succeed.

Does someone with the levers of power have a script, and this is all just part of the screenplay? If not, Canada’s entrepreneurs had better buy their plane tickets in bulk. Should the trend not turn around, there will be barely a handful of VC funds North of 49 left to raise capital from.

MRM