Is Canada's venture capital industry still struggling, or showing signs of coming back to life?
It is difficult to reach a definitive conclusion one way or the other based on a recent report by the CVCA, Canada's Venture Capital and Private Equity Association.
According to the CVCA, the amount of venture capital invested last year was $1.5-billion, a 34-per-cent increase from 2010.
It may be cause for celebration but it is still a far cry from the record $2.1-billion invested in 2007.
Another positive development last year was that 444 domestic companies received venture capital, a 24-per-cent increase from a year earlier.
The disappointing news was that new funding commitments to Canadian venture capital firms climbed just 2 per cent to $1-billion. This compared with a 32-per-cent jump by U.S. venture capitalists.
Greg Smith, CVCA's president, delicately balanced himself between being positive and negative.
"Canada has an historic opportunity to become an innovation leader by making major investments that enable our best technology businesses to realize optimal growth and compete on a global stage," he said in a statement. "However, in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs."
What Mr.Smith implied and what the numbers failed to really reflect is the growing demand among startup entrepreneurs for venture capital.
In many respects, Canada is going through an entrepreneurial renaissance ,but there simply isn't enough fuel – money – to drive the engine – startups. This means that many aspiring entrepreneurs with good ideas can't get the money they need to validate, let alone nurture, their ideas.
While there are encouraging signs, Canada is still suffering from a chronic shortage of venture capital. As much as the country aspires to a world-class New Economy, the lack of money means that the growth engine is sputtering, rather than running on all cylinders.
So what can be done to improve the situation?
While government can help by creating incentives and tax breaks for investors, the most powerful change agent could be a vibrant acquisition market.
In 2010, the M&A market for high-tech companies was estimated at more than $2-billion, highlighted by Salesforce.com's $326-million purchase of Fredericton-based Radian6.
If more startups are purchased, there are several positive dividends: Entrepreneurs are rewarded, which encourages them to create more startups; employees gain valuable experience and, hopefully, a generous payout, which could embolden them to work for another startup or create their own; and investors get a financial return and a huge shot of confidence to make more investments.
In some respects, however, it is a bit of a vicious circle because startups need capital so they can grow their businesses enough to attract a suitor, while investors need acquisitions so they have the confidence and power to invest.
As an optimist, I'm encouraged by the gains made last year, but I'm also enough of a realist to recognize that patient may be recuperating but is far from healthy.
Special to The Globe and Mail
Mark Evans is the principal with ME Consulting, a communications and marketing strategic consultancy that works with startups and fast-growing companies to create compelling and effective messaging to drive their sales and marketing activities. Mark has worked with four startups – Blanketware, b5Media, PlanetEye and Sysomos. He was a technology reporter for more than a decade with The Globe and Mail, Bloomberg News and the Financial Post. Mark is also one of the co-organizers of the mesh, meshmarketing and meshwest conferences.
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