Mass confusion in ventureland

Is the venture model “broken”? Do venture returns really “suck”? Is there a “new way” to grow innovation companies? Can public servants do a better job of picking winners vs. losers than private sector money managers?

These are the very questions being pondered right now at various levels of government. The Canadian VC industry has been in crisis for several years, and folks have started to notice, even if the market has only gotten worse, as this week’s sale of VenGrowth demonstrates.

That’s not to say that goverment-led recovery strategies haven’t been tried: British Columbia launched their Renaissance fund. Alberta did their own $100 million fund, and commitments may begin soon. Ontario tried two angles, with the sleepy OCVF and the hit-the-pavement-running ETF. Quebec went all-in with the creation of the $750 million Teralys fund, while enhancing the capabilities of FTQ for traditional businesses. Some of the Atlantic provinces enhanced their labour-sponsored tax credits. The classic fabric of Confederation.

In Ottawa, Minister Tony Clement accepted the advice of his officials, and took two steps. The first, announced in the 2008 budget, was to solve some undocumented “late stage” hole in the domestic funding marketplace. The $75 million contribution led to the Business Development Bank of Canada’s creation of what is now the Tandem Expansion Fund (see prior post “A bicycle built for two” Oct 26-10). The second step gave meaningful amounts of money to the BDC’s VC group in the summer of 2009 (see prior post “Clement moves to fund BDC’s existing venture portfolio” June 15-09), little of which has actually gone into the jeans of tech and biotech entrepreneurs (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010
” Sept 21-10). That lack of post-recession traction, the BDC says, has nothing to do with them: no other domestic VCs are investing, either, according to an article in La Presse (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept 27-10).

If you’re an entrepreneur, there are definitely fewer doors to knock on for new capital than 10 years ago, despite the ~100% growth in our country’s GDP.

RIP for new VC deals: Blackboard, Brightspark, BMO Technology Investment Program, CastleHill Ventures Inc., CDP Capital Technology Ventures, CMDF, Crocus Investment Fund , Edgestone, eLab, First Ontario, Garage Canada, Greenstone, GTI Capital, Hydro-Québec CapiTech Inc., Jefferson Partners, Lattitude, Launchworks, McLean Watson, Mosaic Venture Partners, MWI Partners, New Generation Biotech Fund, NRG Group, Primaxis, Propulsion, RBC Advanced Technology Fund , RBC Technology Ventures, RBC Capital Partners, RBC Life Sciences Fund, RBC Telecommunications Fund, Rising Tide Canada, RoyNat, Skypoint, Springbank, TechnoCap, Tera Capital, VC Advantage Fund, Ventures West, VentureCoaches, XDL, etc., etc.

And the list is about to get longer.

Esteemed firms such as VenGrowth have now decided to call it quits. They can’t wait another day for our political and bureaucratic leadership to fix the macro problem — identified some time ago (see prior posts “Brutal venture capital stats for H1 2007 part 3” Sept 12-07, “Deloitte’s study on Canadian VC Crisis is well-timed“, Dec 6-07”Venture Capital Crisis in Canada?” March 12-08). Between 1999 and 2009, VenGrowth financed 220 different rounds in Ontario-based growth companies, according to 3rd party stats. They co-invested with firms such as 3i, Battery Ventures, Goldman Sachs, Greylock, Freescale Semi, Harbourvest, JK&B, Insight Venture Partners, Intel, Menlo Ventures, Morgan Stanley Ventures, Samsung, Sequoia, Sierra, Summit, US Venture Partners, Vantagepoint and VIMAC. Some of the best investors in the world.

You read that right: the much-maligned LSIF investment community brought firms such as Sequoia to Ontario. Why is the investment prowess of the best investors in the world beyond reproach, and yet VenGrowth was cut off by Ontario in 2005, and they couldn’t get traction with OVCF on a new institutionally-backed tech fund over the past 24 months.

From a public policy standpoint, it was a tremendous success, Vengrowth invested in Ontario-based entrepreneurs 220 times in 10 years. Almost every other week, for a decade. They were part of syndicates, usually as lead, that saw $2.59 billion go into new companies. Tens of thousands of jobs. And the tap has been turned off at the government and institutional level, largely in favour of venture firms that were founded in the past 18 months. By teams that, for the most part, have never worked together before. Out with the old, in with the new. I get it.

According to an Oct. 2010 Prequin study, “venture capital remains a vital asset class capable of driving growth, innovation and the overall economy.” And, as I’ve pointed out many times, the returns don’t suck — especially on a relative basis vs. Private Equity or the public markets (see prior post “VC returns trump all” June 2-09).

But as government’s consider what to do “next”, entrepreneurs are suffering from the mayhem. What’s needed is simple: the same kind of quick, effective and coordinated approach that was applied to the auto industry two years ago.

There were 150,000 Canadians employed in venture-backed companies by 2008, almost twice as many as those who work in the domestic autoparts industry.

It’s time to end the mishmash of patchwork fixes (however well-intentioned), the confusion, mixed messages, and the daily missed opportunities.

MRM
(updated: apologies to the Working Opportunity Fund, which was incorrectly added to the “RIP to New Deals” list)