Thursday, May 22, 2008

Canadian Entrepreneurs and Canadian VC's

This is a good topic that is getting much airplay lately with the crux of the debate centred (notice the Canadian spelling eh!) around where, how and why Canadian entrepreneurs who are looking to raise money are getting less of it from Canadian VC's. If you use the recent PWC Report on Emerging Software Companies as a data element it is suggesting that the amount of funds raised by VC's and available for investment has shrunk from $2.2B in 2005 to $1.6B in 2006 and further to $1.2B during 2007, a 45% decline in 3 years which is quite significant. When you overlay that against the actual performance of the VC funds (a 1% return over the past 3 years) it is not hard to understand why the number have dropped so significantly. This decline will have more of a longer term effect on the market than a short term effect as the money from 2005 through 2007 is not all spent with some VC's still having open, active funds. These open funds have facilitated the actual Canadian VC investment (money out to Entrepreneurs) to increase in 2007 to $2.0B out up from $1.7B in 2006. I think it is safe to say with money coming in to Canadian VC's going down coupled with performance in the single digits it is only a matter of time before the $1.0B drop in fund raising will hit the street. The Entrepreneurs have already started to either intuitively plan for this or coincidentally align themselves with other sources of capital. This gets us to the heart of the debate. There are two great blogs (both are among my favorite bloggers) out there with positions on this. Suzie Dingwall Williams made The Case for Canadian Venture Capital and believes that the reputation of the Canadian VC has been sullied and the relationship between Canadian VC's and Canadian Entrepreneurs needs to be repaired and collectively we need to partner to help each other and better understand each other. Gary Will has a great piece (somewhat of a rebuttal to Suzie) where Gary takes the position that Canadian Entrepreneurs should get money from where ever best suits them and not feel compelled to partner or align themselves with the Canadian VC community unless that meets their business needs. I think that both make good points and are actually not far each others opinions. I would, in a somewhat mediatory fashion, bring their points together and my position would be as follows. Entrepreneurs will and must (for the viability of their businesses) get funds from the place that makes the most sense for their business and where the economics make the most sense. The more interaction and sharing that occurs between Canadian VC's and Canadian Entrepreneurs the better positioned our homegrown VC's are to be able to meet the rapidly evolving needs of the growing and robust entrepreneurial community in Canada thereby making them one of the best places for Canadian Entrepreneurs to get funded. [btw...the legendary blogger Rick Segal as most of you have read has done a great job starting to bridge this gap through his recent roadshow across Canada to better understand entrepreneur needs and wants from a VC and what the opinion is today]. With the drop in new funds coming into the Canadian VC coffers Entrepreneurs, in the short term, will need to get access to funds through Angels and US VC's to bridge the gap between funds required and funds available. As Entrepreneurs the onus is then on us to perform. When you look at the low return of VC funds in Canada over the last ten years if we as Entrepreneurs cannot drive business performance and get beyond 1%-3% rates of return the drop in new funds we see on the VC side will rapidly leak into Angels and the US VC's and money will dry up. Are the low VC returns because they picked the wrong investments?? We all know the rule of 1 or 2 in 10 for the VC's but my call to action is to all of us Entrepreneurs. Better business performance will drive increased fundraising within VCs (Canadian or US), Angels and others and more access to capital to grow our businesses and to fund new entrepreneurs expanding the base of Canadian innovation.

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