A New Path for Venture Capital in Canada?

Written by Kevin on July 27th, 2010

Jevon MacDonald wrote a great post about the venture capital industry in Canada. In it, he highlighted how we tried to follow our “big brother” to the south and raised some large funds just like the big boys on Sandhill Road, but failed. Jevon proposes that it is now time to forge ahead with our own path in Canada and bring together entrepreneurs, venture investors and governments to work towards some mega-exits in the future.

First off, I love Jevon’s passion and completely agree with the direction he is proposing – building great entrepreneurial communities (thanks for the shout out to Edmonton!) and seeing a new breed of venture investors. But, I can’t help but think this is not really a new path, rather the same one that our “big brother” started on after the dot-com crash.

Previously, the massive VC funds raised in the US were justified with the boom of computing and the internet. The Silicon Valley saw major technology platforms arise, first on the PC and then on the web, and they required huge amounts of funding to bring them to fruition. In the East, Boston was a hotbed during the minicomputer boom in the 70′s and then become a force in enterprise software and corporate technology fueled by MIT. In hindsight, it was foolish for Canada to try and follow this path as we have nothing close to the ecosystems of the Silicon Valley and Boston / Cambridge areas.

However, it was working with huge companies being built, large returns from VC funds and people from Wall Street jumping on board and raising some ridiculous size funds. It was not uncommon for a VC managing partner to be pulling in $6 million a year just on management fees due to the size of the fund. Pretty good business model in my opinion – the larger the fund you raise the more you make no matter the performance of the investments.

But then came the dot-com crash and everything changed. A bloated VC industry produced dismal returns. Many top fund managers jumped back to Wall Street. The venture industry collapsed and many were left behind. Entrepreneurs became more educated about the VC industry. The cost to build many technology companies dropped significantly. And, most importantly, a new breed of venture investor began to emerge.

Over the past few years we have seen the emergence of seed funds like SofttechVC, First Round Capital, Founder Collective, SV Angel and LowerCase Capital. Jevon did a great job pointing out some similar funds in Canada that have recently hit the venture industry.

In addition to these new seed funds there has also been a number of “super angels” that have taken the venture industry by storm. I won’t even begin to list any of these as the number has been staggering. It seems like everyday there is a new funding announcement with dozen of these investors involved.

So what does this all mean? I have followed Paul Kedorsky’s work for quite a while now and was fortunate to see him speak in Calgary last week at an AVAC event. Paul recently made headlines speculating on a coming Super-Seed Crash as a result of the increasing amount of activity in this space. The great thing with Paul is that he does not just make off-the-cuff remarks, he backs it up with data. Ironically, the recent shift in increasing dollars and deals in the seed space and declining dollars and deals in the VC fund space is really just bringing the industry back to pre dot-com days. In fact the data is remarkable in showing this (I tried to find the graph Paul had, but so far have been unsuccessful).

The thing that probably shocked me the most from Paul’s presentation was nothing he said, but rather that most in the crowd seemed a little shocked by all of this. I felt like I went back in time and people were still approaching VC like it was the late 90s. I had a similar experience at an investor dinner recently were people at the table were unaware of this new class of smaller venture funds and super angels. Canada needs a big infusion of new blood into the venture community, preferably people with entrepreneurial mindsets who are not afraid to get their hands dirty.

So what does this mean for Canada? Well, in many ways I feel that the venture funding industry is once again following its big brother to the south. However, this time the model and direction is much more suitable for us. As Jevon summarized, it will be important to build up the entire ecosystem – strong entrepreneurial tech communities, talented serial entrepreneurs, sophisticated angel and seed investors and venture capital funds that are not lead by investment bankers and “money” people, but rather people with entrepreneurship in their blood who can jump in earlier than their past counterparts and help build great tech companies. I love the post Brad Feld had this morning defending VCs. Recently VCs have gotten the short end of the stick and are commonly seen as the enemy of a startup. This can not be the case. Venture capital funds are going to be the backbone to producing great exits for Canada and they need to be part of the ecosystem, even at the seed stage.

So often we are blinded by the allure of the Silicon Valley, Boston or, more recently, New York. Canada needs to take what can work for it from those centers, but also look at the Boulder’s, Austin’s and Chicago’s who are currently in the early stages of building some great tech ecosystems.

I am confident where we are heading in this country, but it is going to take time and a lot of effort. I am a big fan of the new model for the venture industry as it seems much more organically grown from the bottom up. This is what Canada needs. Compare this with the past efforts of a top-down approach by raising huge funds and then trying to find a place to deploy them.

I am encouraged by the new breed of VCs emerging in Canada. I am excited to see the startup organizations popping up in many cities. I enjoy seeing the new energy within the tech community as the barriers to entry for a young entrepreneur have never been so low. Lets just hope that the government and LPs realize what is going on and jump on board in the proper fashion – by adding fuel to the direction things are already heading and behind those that are making it happen.