The OMERS pension fund (Ontario Municipal Employees Retirement System) is unusual in its aggressive march into financing Canadian ventures. With its recently launched venture capital arm – open for business in October, 2011 – it now invests directly in businesses that need fuel to become competitive at the global level.
From his perch as chief executive officer of the pension fund’s venture capital division, OMERS Ventures, John Ruffolo is in a prime position to evaluate Canada’s competitiveness globally.
Why did you decide to create a direct venture capital arm?
OMERS, like other pension funds, had been in the venture capital funding business for a long time. And in 2008, OMERS decided that it would shift its strategy and no longer fund venture capital firms, but that it would rather go directly and build its own direct arm. It’s well known that the performance of investments in venture capital funds, particularly over the past 10 years, has been very, very poor. Secondly, while the investments have been losing money, the fund manager just continues to earn management fees from declining assets. And [because OMERS is a direct investor in all of its arms] we can share all our resources and be far more strategic and have a direct eye right on the marketplace, as opposed to an indirect eye through funds. We don’t invest in funds.
Why have Canadian companies had difficulties in the past becoming competitive on the global stage?
We have great engineering talent here and great ideas. These guys start a business and they start to bootstrap themselves. They really watch their dollars, which gives you a good discipline of not burning money. … But when it becomes a question of selling your product and service around global markets, a lot of these Canadian companies have been unable to get that capital because there have not been capital sources available in Canada. It requires a significant amount of capital.
If they bootstrap themselves, they don’t really bust out globally. They either turn into lifestyle businesses or they sell themselves to largely U.S.-based companies that have far greater access to capital. The U.S. companies lever the technology and distribute it around the world.
[A lifestyle company] enables one or two founders to earn a very nice living and they don’t have to take a massive bet and bring in new capital. They see that the company is on a good path for the next 10 or 20 years, they can pull out dollars, have their house, buy a cottage, take the family on trips.
There’s nothing wrong with lifestyle businesses. People are making millions of dollars from them, but they’re making it for themselves. They are not venture fundable businesses. Once you raise capital from a venture capitalist, there is an expectation that the business will go through a very high growth so that it can pay back the returns to the venture capitalist. The venture capitalist can’t make any money out of a lifestyle business.
Some might say that Canadian business owners are not risk-takers, like American ones are. Is this true?
I don’t agree. Are there more risk takers in the U.S. than in Canada? Yes, but from population differences.
When I talk to some of the top U.S. venture capital firms about risk-takers, you know who they think are the biggest risk-takers in the world? Calgary oil patch folks. They go: ‘Oh my god, these guys see a piece of ground, they look at it, they drill endless holes, raise millions of dollars and strike a lottery ticket.’ The risk associated with that is ridiculous. Our oil and gas sector people are probably the greatest risk-takers in the world.
It’s not a Canadian thing. I find that in the technology sector, I don’t compare Canada to the United States. I compare Canada to Silicon Valley. Silicon Valley is a unique country in itself. When I go to other places in the United States, I hear the same questions that there are not enough risk-takers there. They compare themselves to Silicon Valley, too.
The difference is that when I ask a CEO [in the United States] about his background, it is fascinating how they describe it. They’ll say, ‘I raised millions of dollars, and I lost everything. I learned from that and built another company, but all I did was get the capital back. It wasn’t a good outcome, but at least I saved some jobs.’ And then they’ll say, ‘Here is the third company, and I now learned from the first two failures, and this time, I’m going to not only go way faster, but I’m going to watch those sort of areas where I hit a wall.’ In Canada, you don’t hear that. They’re embarrassed to say they had one, two, three failures, where in the United States, they wear it as a badge of honour. If you’re a first-time CEO in the United States, and you haven’t failed yet, you haven’t joined the club. I don’t see that in the United States outside of Silicon Valley.