The Canadian Venture Capital industry traces its roots back to the year of 1945 – with E.P Taylor forming a closed investment trust (essentially a VC enterprise) in order to acquire adequate shares to influence decisions in high growth companies. Now, more than 70 years later, the Canadian Venture Capital Scene has made a myriad of success garnering international interest and investments.
Being less volatile and relatively more stable than our US counterparts, the Canadian VC industry has also had its up and downs. This article will take a look at some of Canadian Venture’s highs, lows and our current state.
The Late Boomer
In the early 1990s, the Canadian VC industry was considered modest – at best. Institutional investors stopped backing private funds due to lower than expected returns while Corporate Canada (Canada) was still coping with the recession and had little interest in venture capital.
However, funding recovered mid 1990s with the growing popularity of labour sponsored venture capital corporations (LSVCCs) and re-commitment of banks in 1994. Together, LSVCCs and bank groups captured 80% ($1.5 billion) and 15% ($740 million) respectively. The growth in this sector was predominantly driven by LSVCC tax benefits, liberalization of rules for institutional and foreign investors and the introduction of government equity funds through the business development bank of Canada (BDC).
Through the late 1990s, the Canadian VC industry experienced tremendous growth. The number of funds grew by 117% and VC investments increased by 460% between 1996-2000. Canada became increasingly sophisticated in the new world of tech while venture investment became more innovation oriented. In 1999 specifically, 824 companies obtained 989 rounds of financing backed by 2.7 billion – the highest it’s ever been.
Post dot.com Bubble Burst and Recovery
When the technology bubble burst around the early 2000s, the initial blow did not hit the Canadian venture scene as hard as it did to the US (which experienced a decline of 70% in venture funding) – but the aftermath was felt gradually for over a decade.
In 2010, the venture funding scene experienced a historic low for the second time since the 2000 high at $819-million (government. Venture Capital Monitor). Evidently, the fallout of the technology sector in the 2000s had a lasting impact on the venture capital environment.
The lack of funding at the time was mainly attributed to two factors:
- Low levels of Canadian VC fund returns: Canadian VC incurred a 3.9% loss over the 10 years ended June 30, 2009 (CVCA) compared to the US VC index return of 8.4%.
- Low risk preference: A concentration of funds to a specific number of highly proficient companies with as much certainty as possible. In an article published by the Globe and Mail in 2010 quoted VCs to “wait for a market to be proven before making a bet on it” – an example being Facebook.
It’s also important to note the comparative youth of the Canadian venture capital industry compared to the US.”No comparable net to catch them”
When The Public Sector Stepped Up
In 2011, Canadian VC fundraising remained stable and virtually unchanged over the year as $1.03 billion was raised. With the prolonged void in the startup sector, the government gradually increased their injections into the industry through the late 2000s into 2012. With the goal of encouraging more institutional, corporate and retail investors to back VC funds, the government offered forms of tax credits for angel investments and forming Investing in Business Innovation (IBI).
2012-2013 Signaled the positive change in direction for the Canadian VC industry. 2012 was the decade high VC fundraising year at $1.75 billion while 2013 was the introduction of the Venture Capital Action Plan (VCAP) established by the federal, Ontario and Quebec governments. While the increase in fundraising activity signaled positive market sentiment, the VCAP signals the focus the government has to increase venture activity.
2016 & Onwards…
Where We Are Now
2016 marks the year of excitement as Canada puts itself on the worldwide destination for venture capital investment. With more and more founders STAYING in Canada, IRR returns for Canada increasing, strong engineering talent, and an increasingly proficient ecosystem around start-ups (i.e. accelerators, incubators) has attracted international attention.
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