The evolution of the Canadian emerging technology market

So, word is out that the Canadian VC industry is in crisis. Investments in funds and consequently portfolio companies is down dramatically, particularly in Ontario. 

For those of us who have been at this for a while, this is no surprise. We have watched the industry shrink around us, particularly in Ontario. Today, Brightspark is about the only seed/early stage private VC fund remaining in Toronto. We have watched the Labour sponsored funds being decimated, other funds unable to raise monies or fleeing the market, the fund investor market shrink progressively over a number of years. As I have spoken about in other posts, the Quebec market is holding its own because of the positive moves made to encourage outside funds to move there and establish a strong base. Meantime the Ontario effort has been to keep spending lots of dollars on Mars (great building by the way, but the absolute wrong way to create an industry) and we still hear talk of the $90 million coming for the VC industry – soon to be too little too late. 

The reality is that this is not just an Ontario or a Canadian issue. The VC industry is evolving and rationalizing itself on a global level. The only (relatively) healthy VC markets are Silicon Valley and Israel, each for their own reason. In Silicon Valley, you have an entire industry with an infrastructure, critical mass, momentum and a “working system”. With repeat entrepreneurs, startup culture, sophisticated investors and an industry round it, other areas have not been able to replicate this success. In Israel, you have the support of an economy and government along with great training, which is underpinned by entrepreneurs who understand that startups are the hugest growth area of its economy. This too cannot be repeated anywhere else. 

Other markets have tried to replicate the Silicon Valley/ traditional VC cookie cutter model, including the Canadian market. The US market has always been our curse and blessing in Canada – on the one hand, we have access to this huge marketplace; on the other hand we don’t have the underlying infrastructure to compete. 

And even in the US marketplace, we see many attempts at evolving the model, in particular the early stage/seed model of starting up companies and seed investing in companies. Good examples are Y-combinator, Hitforge, and Charles River’s “Quick start program”. 

The market needs to evolve. We need to find the models that are right for the Canadian market. Because, we have great opportunities to startup technology companies, software companies, Internet companies. We have incredible talent coming from our universities, and we have a population that understand and embrace technology. The angel market is active and the buyout market is active. And there are many players in the VC industry who want to see a successful Canadian investment market and Canadian technology market. While our economy is so buoyant, and while real estate and natural resources are driving the market – now is the time to invest in technology, now is the time to invest in the emerging opportunities that will create the balance that we need. Just as any private investor needs a balanced investment portfolio, our economy needs the same balance.

In my next posts, I will focus on the strengths and weakness of the Canadian market and ways that we can fix it by adopting some new models. 

At Brightspark, we know we are very fortunate to be able to keep raising traditional funds because our portfolio companies are thriving. But, just as we tell our portfolio companies, don’t choose a direction because it the easiest road, don’t just follow traditional business rules – develop your business to maximize your ability to create high value for investors and founders. Lets see if the local market, particular the Ontario market, adapts to the opportunity or if it withers.

Comments

[Lucie Lalumière]

The other key advantage Canada has -- especially Ontario -- is its multicultural work force. It makes us particularly well positioned to create and offer appealing products and services internationally. In addition, I believe the Canadian mix of cultural influences will trigger original ideas and give us a unique creative edge.

I agree that natural resources and real estate are not enough. While we seem to rely on the recipes of the past, other countries including developing economies, are taking concrete actions to establish themselves as key international players in the future. We have to move quickly to stimulate more creation of intellectual capital in Canada and support it with the proper framework to actuate it at an international level. We may be small but our ideas can go far if we think of the world as our market.

I will be looking forward to your next posts discussing solutions and models.

Lucie Lalumiere

[Trudy]

Keep up the good work.