Future of Venture Capital panel says gov’t pace could inhibit effectiveness of VCCI

vc panel

A frequent rallying cry of tech ecosystem across Canada, whether proclaimed by investors, founders, or politicians, is “it’s Canada’s time.” There are many reasons why it’s our time to shine as a global tech innovation hub, and the panelists at DMZ and Goodmans LLP’s The Future of Venture Capital panel in Toronto, hosted at DMZ partner Goodman’s law firm in downtown Toronto, were not shy of bringing up some comforting facts.

The reality remains, though, that the status of VC health in Canada – a core pillar of a strong tech ecosystem – is not as rosy as we’d like to believe.

Where we are crushing it

The panel, comprising of Janet Bannister, general partner of Real Ventures; Bruce Croxon, co-founder of Round 13 Capital and host of BNN’s The Disruptors; John Marshall, assistant deputy minister for scale-ups with the Province of Ontario; and Mike Woollatt, CEO of the Canadian Venture Capital and Private Equity Association (CVCA), discussed a number of reasons why Canada is poised to be the next global leader.

For one, our deal flow is growing, and Canadian VCs have seen, on average, a positive growth rate in the past seven years (where most global VCs had a net loss in the same time period). We’re also starting to see founders who have exited keeping their money in Canada to start their next ventures. Finally, perhaps through a bout of good luck for those north of the 49th parallel, an administration change in the United States has left many global entrepreneurs looking to Canada and put many American companies in the position of making their talent headquarters in Canada, even if their operations remain primarily in the States.

The net result of these changes means a ton more money and nuanced expertise knocking on Canada’s door for the first time (or asking politely to return home).

American money, American whims

The panel kicked off by happily noting that VC deals in Canada recently have surpassed the $2 billion mark. Almost immediately, though, Woollatt jumped in with some segmentation facts.

Nearly 40 percent of Canadian VC deals had an American VC at the table, he started. What’s worse is that 60 percent of the money coming into Canadian VC deals is American, he added.

Simply put, Americans – currently in love with Canada due to our technical talent quality and privileged market status (both because of advantageous exchange rates and government intervention in startups) – see us as a flavour of the month.

“We’re too obsessed with everything being cheap. [To support the Canadian tech ecosystem], the government should look more and more to buy Canadian.”

This is great for short-term growth, and our products are high quality enough to warrant huge American capital injections, but Woollatt warned the audience to not hold too much optimism for the health of the Canadian funding ecosystem. One wrong move from our government, a shift in the global capital markets weakening the US dollar against CAD, or a policy shift from the US government to become more friendly (hey, it could happen), and that US money could largely dry up.

Not to put off potential investors or founders from seeing Canada as a place to do business – there are many great things about Canada, and American money in Canada is still money – but a concerning fact is that Canadian VCs do not yet make up the majority of the money in the Canadian VC ecosystem, says Woollatt.

No sales, no market

Funding woes aside, it’s generally understood that there is money available for Canadian companies, whether through private or public means. However, another challenge looms: Canadian companies don’t develop their sales and marketing talent early enough, or with enough gusto to compete in global markets.

“When Uber and Airbnb started, there were many companies with near identical concepts that were getting funded and had great products,” said Marshall. “These two companies won because they scaled up their marketing and sales talent in order to bring their solutions to market faster and more effectively than their competition. This type of skill development is lacking in Canada.”

Bannister chimed in, noting that Ontario graduates more STEM students than the state of California, but we have a small fraction of sales and marketing talent compared to California and the US in general. It remains to be seen if this comes from the Canadian ethos of not wanting to be too in-your-face, but the situation remains that Canada lacks the same brilliance in bringing tech solutions to market that we have in the ability to create those solutions.

Current plans are focused on massive funds and funds-of-funds, not incentivizing individuals and big corporates to get more engaged.

Without investment in sales and marketing, companies often end up selling out early (a frequently-debated issue in the Canadian startup ecosystem). Companies will take a look at a low-ball acquisition offer and ask themselves if they have the finances or human support systems to grow quickly, Croxon noted. While the Canadian ecosystem is starting to see more money, we still lack American-level investment cheques. Add in a lack of senior, seasoned sales and marketing talent, and many Canadian companies feel forced to take the early buy-out offer.

Some companies are bucking this trend; for example, Kitchener-based Vidyard recently opened up a sales office in Vancouver. These stories, though, are the exception as of now, not the rule.

Image courtesy Communitech / Anthony Reinhart

Government dependence, government-level bureaucracy

Budget 2017 was a hot topic of conversation. The Venture Capitalist Catalyst Initiative (VCCI), was touted as a juiced up version of the previous Venture Capital Action Plan (VCAP), using government funding and influence to pump money and resources into the tech ecosystem in Canada. While generally met with optimism, the panel noted some deficiencies in the plan when it came to the realities of the government supporting the Canadian startup and tech ecosystem.

Bannister brought up responsiveness as a concern, both in terms of doing business with the government and receiving government investment.

With the Build in Canada Program, the government aims to be many startups’ first customers, but Bannister rightfully questioned the efficacy of a program like this if the government body is not able to move quickly and take massive risks, two things frequently needed when supporting emerging technologies.

canada flag

She also called on the private sector to do more to support the startup ecosystem with programs “that taxpayers don’t have to cover.” Not knocking government supported programs, Bannister instead extolled the virtues of having a healthier private sector side of the incubator and accelerator equation, as the public sector-side is well accommodated.

Croxon and Woollatt added to this, noting that current plans are focused on massive funds and funds-of-funds, not incentivizing individuals and big corporates to get more engaged. Marshall agreed to this point, and noted that VCCI is more likely to be “a hybrid” when compared to VCAP, supporting both large funds – which have produced steady returns and are the easiest distribution channel – and individuals or corporations with excess cash or strategic priorities.

Now what?

All the panelists agreed that on the talent side, Canada must now focus on sales and marketing talent as we have done with technical talent in the past. However, the conversation shifted to policy prescriptions for corporations and government.

Bannister brought up the delineation of startups between enablers — startups that help incumbents in the industry do better — and challengers — startups that look to unseat the dominant incumbents.

Collaboration has been called for in the FinTech world, but as banks invest more in the space, Bannister warns that there will be challengers coming that incumbent organizations may not want to support for fear of accidentally funding the technology that takes them down.

Supporting industry-changing emerging technologies is where the government comes in. –
Janet Bannister

Supporting industry-changing emerging technologies is where the government comes in. Bannister noted that supporting horizontal emerging technologies like AI (horizontal meaning they can impact multiple industries) is necessary; Marshall echoed this, saying the government should not influence a specific industry necessarily, instead that, “the government itself is a market. We can put out our problems and call on the private sector to help solve them.”

Woollatt ended with an interesting point that there are two primary schools of thought that drive government spending: buy cheap and buy local. Woollatt pointed out that “Buy American” as a policy in the US immensely helped build the US tech ecosystem, as big risks on technologies like space exploration could be taken knowing that they have direct and privileged access to massive government contracts.

He believes we need something similar in Canada, where the ethos right now is almost entirely focused on “buying cheap.”

“We’re too obsessed with everything being cheap. [If we want to support the Canadian tech ecosystem], the government should look more and more to buy Canadian.”

Stefan Palios

Stefan Palios

Stefan is a Nova Scotia-based entrepreneur and writer passionate about the people behind tech. He's interviewed over 200 entrepreneurs on topics like management, scaling, diversity and inclusion, and sharing their personal stories. Follow him on Twitter @stefanpalios.

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