Mike Woollatt is the CEO of the Canadian Venture Capital and Private Equity Association.
This spring's Shopify IPO thrust the role of venture capital into the spotlight, and there's good reason to be bullish on its role in growing business in Canada. But that wasn't always the case. As a relatively nascent industry, it's had its growing pains. And the financial collapse of 2008 didn't help matters for anyone – let alone the venture capital ecosystem.
This is what some detractors have pointed to when they've criticized our industry and the government's role in it. These negative comments come from a complete lack of understanding of the current state of venture capital in Canada and from a reliance on old data – and even older thinking – about our industry.
Today, there exists a pipeline of maturing companies that have excelled because of venture investment from both public and private sources, stoking economic growth and generating returns for investors. This hasn't happened by accident. Key stakeholders have significantly tuned the model in Canada over recent years, and the ecosystem is now vibrant and growing. This is a result of thoughtful and comprehensive dialogue among all stakeholders, including government, whose role isn't as widely understood as it should be.
Recently, federal and provincial governments, as they do in many jurisdictions, have played an increasingly significant and welcome role in creating the conditions and framework for VC investing to succeed by acting as "pump primers." Private VC funds leverage initial government investments, which have returns in and of themselves, to attract more capital, which in turn is invested in emerging companies.
The key transition these critics appear to have missed is how much of this government involvement is truly market-driven. Indeed, initiatives such as the Venture Capital Action Plan are already yielding tremendous successes and investments in this regard. Governments are finally tuning in to the fact that they can and should play a key role in VC – something U.S. governments figured out long ago. Governments are also recognizing that VC is a terrific investment. Beyond the simple returns these funds have, they help create high-paying jobs and drive innovation at a time when Canada desperately needs it.
To highlight the impact and successes these funds can have, we need to look no further than a couple of very recent examples.
Ottawa-based Shopify, a success by any measure, was backed by Georgian Partners – a growing Canadian VC firm that received initial funding from the Ontario government's Venture Capital Growth Fund. But Shopify is just one example. Recently, the Canadian Venture Capital and Private Equity Association recognized Avrio Capital for its annual VC Deal of the Year. Avrio Capital generated a stunning 15-times return on capital invested in Winnipeg-based Wolf Trax Inc. Avrio Capital is backed in part by various government funds, including BDC Capital.
What's more, BDC Capital, which is invested in more than 50 per cent of private-sector Canadian venture-capital funds, posted a profit in 2015. Its direct investment portfolio is also now at par and, in some cases, above market performance.
There are numerous reasons government involvement in VC is needed here and around the world. Pointing blindly to the pure returns of government funds and measuring the merits based on that alone is overly simplistic. It ignores the mandates these organizations have been given, which include building thriving ecosystems for new venture creation.
In some ways, it has been easier to change and shape our ecosystem than it has been to alter outdated perceptions of VC in Canada. The reality is that we've moved on, but many outside our industry remain uninitiated in its progress and growth. The bottom line is that now is not the time to retreat to an old model that clearly didn't work. We are just beginning – it's exciting for Canada and an exciting time for our industry. We're on the right track.