Sam Duboc made his name on Bay Street with successful private equity investments in unfashionable companies such as Hair Club for Men. Then he himself fell out of fashion, after the sale of his firm Edgestone Capital Partners to brokerage GMP Capital turned into a disaster for the buyer.
Now Mr. Duboc is working on an ambitious turnaround project: Fixing Canada’s woeful venture capital industry.
The Canadian government has earmarked $400-million to kick-start the country’s withered venture capital scene, which has suffered from years of underfunding, a shortage of investors with expertise and a systemic aversion to risk-taking.
The effort is a key part of the government’s plans to bring the economy back to life. And when federal Finance Minister Jim Flaherty set out to decide who could help make it happen, he asked Mr. Duboc to lead the charge.
“The minister has known for a very long time that I have this strong view that the whole innovation cycle and venture capital is broken in Canada,” Mr. Duboc says in his Ottawa office. “This is about reinvigorating an industry that has problems.”
The revitalization of the venture capital sector is crucial if Canada is to ensure it’s planting the seeds for a new generation of promising startups that can grow into top-flight players in industries from technology and telecommunications to medicine and biotech. Without a vibrant venture scene to nurture small firms with big ideas, Canada’s brightest players and companies will be lured to other countries at a time when Canada already faces a sharply depleted tech sector and a barrage of foreign suitors for its corporate heavyweights.
“We really need to concentrate on the startups,” Mr. Flaherty said in an interview. “There’s a direct return to Canadian society, economy, and future growth by making these kinds of funds available.”
The startup sector has attracted and perplexed governments for decades. Politicians have long recognized that startup firms contribute a disproportionate share of job creation and economic growth, and can become the corporate giants of tomorrow. Government backing helped create two of the hottest venture capital zones in the world – Silicon Valley and Israel. But such successes are the exceptions, not the norm.
Startups are risky, fast-paced, unstable, and driven by market forces. Governments are the opposite, and driven by politics. “Many of these programs were designed with all sorts of good intentions [but] were not really useful,” said Josh Lerner, author of Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do About It.
In Canada, governments helped to spur on the venture capital industry 15 years ago – but it performed so poorly, most of the smart money went away. “The last 10 years have been just a wasteland from a return point of view” in Canadian venture capital, said Leo de Bever, chief executive of Alberta Investment Management Corp., one of Canada’s largest fund managers. “We’d like to do more and we’re being pressured to do so” by governments. “But us stepping into that is a bit tricky because the failure rate is so high.”
That’s what makes Mr. Duboc’s job so tricky. As special adviser for the $400-million project, he must figure out how government can deploy the money to launch successful private sector initiatives to revitalize venture capital without repeating any of the mistakes of the past.
“We worry every day about the adverse effects,” said Mr. Duboc, who plans to present his recommendations to the minister by December. “At the end of the day, venture capitalists are going to have to perform.”
The lure of U.S. VC firms
Ottawa entrepreneur Paul Lem has developed a bedside DNA testing kit that can tell within an hour if a heart attack or stroke victim will respond to blood thinner Plavix or its generic version, or whether a more expensive alternative treatment is needed. His firm, Spartan Bioscience, doesn’t yet have regulatory approval, market validation, or enough financing, so he’s been meeting venture capitalists in the U.S. and Canada. The difference between the two, he said, is striking.