The Challenge for Canadian VC’s

VC funds go through challenging times world-wide but the situation in Canada is probably worse than in many other places. Most VC’s in this country have been focused on the domestic market, both for raising funds as well as investing their money.

Turns out that this created returns that were about 10% below the returns of their US counterparts which is not surprising given the size of the country and the fact that no technology sector in Canada plays a worldwide leading role (which is very different to the world of mining where Canada has created some of the most successful investors and entrepreneurs worldwide).

Those sub-par returns have lead to a reduction of the already small number of Canadian LP’s that have the resources and the interest to put significant amount of money into venture capital funds. While raising money from outside the country has been relatively challenging because of Section 116 (which makes tax treatment for US investors a time-consuming and painful affair), we have seen at least the provinces step up in recent years creating pools of money to invest in venture funds (e.g. the BC Renaissance Capital Fund).

While this has helped stabilize the Canadian VC industry in the short-term, it might worsen the situation in the long-term as most of these government-sponsored funds require the VC’s to invest a significant amount of the commitment back into companies from that province. What hasn’t created superior returns for the whole country, will create even less returns when scaled back to the geography of a province.

So what needs to happen is a change in mindset for all players in this market: We are competing for capital and talent internationally, not on a regional level. We need to get rid of all administrative hurdles like Section 116 and give Canadian VC’s the opportunity to build world-class firms that raise money from around the world and and invest in opportunities around the world. History has shown that most VC’s still invest their money above-proportionally in their home region so the net effect of such a strategy should be positive for everybody involved, including the entrepreneurs at home.