John van Leeuwen found himself facing a country of skeptics when he first tried to raise venture capital funding for his Burlington, Ont.-based green technology company, EcoSynthetix Inc.
“All Canadians are from Missouri,” he said, invoking the slogan from the “Show Me” state, and that left him no choice but to look south of the border, where investors are willing to accept the higher risk that often comes with big ideas. In Mr. van Leeuwen’s case, the idea was a plant-based, latex product that was a cheaper, environmentally friendly alternative to the petroleum coating found on glossy paper and packaging.
Save for the money he secured from a venture capital fund he himself was involved in, not a cent of Canadian VC money was available to help him bring this idea to market.
That was 15 years ago, but not much has changed. Aside from a brief period of growth in the early 2000s, Canadian venture capital is still relatively small and risk averse – a reality that is likely stifling the growth of would-be innovative Canadian companies.
While new venture capital investors have recently entered the scene – notably funds such as Round 13 and Tandem Expansion, which aim to fill a traditional gap in funding for companies in the mid and late stages of growth – the VC market in Canada is still dwarfed by what goes on in the U.S.
As a percentage of GDP, the VC market in Canada is about one-third the size of that in the United States, according to data from the Organization for Economic Co-operation and Development, meaning that even when factoring in the size of the Canadian economy, companies here have less access to risk capital.
Canadian venture capital funds raised about $1-billion in 2011, roughly the same level as in the previous five years, according to data collected by Thomson Reuters. Comparatively, $18.6-billion was raised in the United States last year.
Mr. van Leeuwen said he tried multiple times to get Canadian VCs involved but found support from Canadians only when American funds took the lead.
“The VC market in Canada is very, very conservative,” Mr. van Leeuwen said. “We never had Canadian VCs lead a round [of financing].”
It’s hard to quantify risk aversion, but one survey of Canadian and U.S. executives commissioned by Deloitte in 2011 found that even though Americans were more pessimistic in their economic outlook they were more likely than their Canadian counterparts to invest in that environment.
This aggressive attitude of American investors results in more opportunities for entrepreneurs in that country.
“Americans have more access to money so they can place bigger bets,” said Niels Billou, an assistant professor who teaches a class on innovation at Western University’s Richard Ivey School of Business.
Strengthening the venture capital market is key to boosting innovation in Canada, said Alexandra Iwanchuk Bibbee, head of country studies for Canada at the OECD. Ms. Bibbee recently co-wrote the 2012 economic survey for Canada, which identified improvements to innovation as a necessary step in maintaining economic growth as the population ages.
Pension funds and other institutional investors have an important role to play in venture capital, Ms. Bibbee said. These large institutions used to be more active on the scene but have stayed away in recent years because of their experience with labour-sponsored venture capital (LSVC) funds. These funds were popular with Canadians in the early 2000s because substantial tax breaks encouraged investment in LSVCs even if the businesses of the underlying start-ups did not provide returns. When investors started suffering big losses, it made a bad name for all venture capital.
“The VC that is left is focusing on later stage investment, where there’s a little bit of track record and the risk is lower,” Ms. Bibbee said.
One way to appeal to Canadian investors is to have the government partner with them to reduce risk. The government could provide equal capital investment but accept a ceiling on its return, Ms. Bibbee said.
This year’s federal budget earmarked $400-million to support private venture capital and an additional $100-million for the Business Development Bank of Canada, an indication the government is willing to lend a hand.
While the VC market in Canada is already about 50 per cent publicly funded, compared with just 5 per cent in the United States, more government money may still be needed to jump start things.
“We are in a trough,” said Richard Rémillard, executive director of Canada’s Venture Capital & Private Equity Association and any additional funding is welcome.
Research and development tax credits and incubators are spawning fledgling businesses, Mr. Rémillard said, and the need for VC funding is becoming increasingly apparent. Now supply just has to catch up.
Got something to say? Follow Canada Competes on Twitter: @CanadaCompetes