Is Canada's tech sector "vanishing"?

Not the most novel of questions, but always timely, that one.

There was plenty of teeth-knashing over the weekend, as some Canadian VCs and Angel Investors reacted to a piece in The Globe & Mail titled: “Canada’s vanishing tech sector“. A couple of members of our modest blog following have demanded action, in response to this “poorly researched crap.”

Well, the first action/reaction is to observe that I actually agree with a bunch of what the Globe published. Our small and mid cap publicly traded tech names are being acquired on a continual basis (see prior representative post “Another day, another Canadian tech M&A deal” June 6-12). Many Canadian portfolio managers aren’t trying very hard to understand how to value tech names appropriately (see prior post “$1.1B Q9 Networks deal another reminder that Canadian markets don’t get tech” June 4-12). The Ottawa tech region is particularly glum, so much so that OCRI was disbanded in favour of the new InvestOttawa.

In the areas where the DTM rehashed stuff you’ve already read here over the past few months and years, it is hard to argue with the piece. But then the Globe piece takes a turn into a dark place, where context is lost amid an apparent lack of facts and historical perspective.

The first crime was the proposition that “there was almost no risk capital to support the growth of the tech industry [in Ottawa].” It seemed to be referring to the post-NASDAQ bubble window. The DTM were right to point out that Nortel burned many retail investors, but that didn’t turn professional VCs off Ottawa, or Canada as a whole. Five years ago, Canada attracted $2.1 billion of venture capital; that’s far more than in any given year during the early 90s, for example.

For much of the last decade, Ottawa was home to local and HQ offices of many VCs, including BDC Venture Capital, EDC’s direct venture arm, McLean Watson, VenGrowth, Ventures West and Wesley Clover to name a few. Does the name Terry Matthews ring a bell? Wesley’s his shop, post the Celtic House spinout.

A U.S. VC firm (Newbury) even put a man on the ground for years. And U.S.-based venture debt lenders, such as Orix, were often trying to compete with our firm and the now defunct MMV Financial for the best Ottawa-area deals.

All of this deal action drew a critical mass, and the ecosystem was strongly supported by locally-based, highly knowledge lawyers, from such firms as Labarge Weinstein and Gowlings. Pan-regional organizations mentored the early-stage folks. Conferences chose the site as the perfect backdrop for a tech meeting. All was good.

And there was no end of non-Ottawa VC firms and investment banks hustling to make sure firms got funded. Think Accelio, Belair, Bitflash, Bridgewater, BTI, Chrysalis-ITS, Cognos, Corel, Core Migration, Coventry Connections, Databeacon, Dragonwave, Enablence, Espial, Freebalance, Galazar Networks, Kyberpass, InBusiness Solutions, JDS, Meriton, n-able, Nakina, Solace, Telepin, VoIPshield…. Some found capital domestically, while others attracted it from places like Boston, Palo Alto, Europe and Asia.

The Belair story is definitely a case study, but I’m still not sure of what. It is a challenge when the IPO market is either closed, or so risk adverse that valuations need to be bare-boned before i-banks think they should try to float an offering. That definitely contributed to the sale of our Fund III portfolio co. Belair to Ericsson, as I’ve written about previously (see prior post “Belair / Ericsson deal a wake-up call for every Institutional Sales Desk” Feb 22-12). As disclosed in the Globe, the $250 million sale valuation was a very happy exit; what we’ll never know is how big the company could have become if it had tapped the IPO market 18 months ago for $40 million and driven on independently.

The central takeaway is from Adam Chowaniec, who correctly observed that the Federal government’s $400 million budget allocation isn’t enough to solve the nation’s problems in this sector. While Canada’s VC universe is consolidating, things are no different in the U.S.; but more capital is definitely needed, since Canada punches about 1/18 of the U.S. VC weight on relative terms, despite having ~1/11th the GDP.

Indeed, the government itself has observed during its recent consultations that the point of the special $400 million allocation is to lever that figure into a far larger sum of money — what it is trying to determine this summer is what mechanism will make that possible (see prior post “Feds on right path with Innovation ecosystem consultations” July 2-12).

For those of you in the know, the last 12 months turned out to be a far better period in the Innovation ecosystem than might be apparent to everyone.

Domestic VC firms are doing deals, here and afar, such as Extreme, Georgian, iNovia, Rho, Tandem, and Vanedge. Others have raised their new funds, including BlackBerry Partners, Celtic House, Lumira and TVM (not to mention iNovia and Rho), largely thanks to Jacques Bernier and his Teralys backers (see prior post “Quebec’s VC world is rolling” Jan 28-10). At Wellington, we’ll raise our fourth fund at some point this year, too, targeting more than our Fund III’s $150 million of recirculating capital. All is not lost for many of us.

My advice: rather than worry about what the DTM thinks is going on out there in Innovation-land, or the impact of a diminished RIM on the tech landscape, let’s just focus on putting the puck in the net.

Investors will eventually come around, once they hear more about the wins in the space, and less about the circular handwringing that gets most of the ink.

MRM