On May 9, The Globe and Mail published "Canadians can innovate, but we're not equipped to win," by former Research In Motion co-CEO Jim Balsillie. This is part of a series responding to and expanding on that essay.
Richard Rémillard served as executive director of the Canadian Venture Capital and Private Equity Association from 2003 to 2014. He is president of Remillard Consulting Group.
There was at least one irrefutable argument in Mr. Balsillie's essay: "Raising capital for technology in Canada is difficult because so many investors are losing money. Venture capital in Canada is one of the worst-performing asset classes." There is a "staggering divergence" in returns between Canadian and U.S. venture capital.
What's going on? Why has Canada's venture capital industry been such a laggard?
The paltry returns have generated much debate. Some point to the industry's greater tolerance for backing "B-grade" management teams in portfolio companies, rather than the "A-grade" teams U.S. venture capital funds require. Similarly, Canadian venture capital has been seen as more willing to hang on to its losers. Then there's the relatively small size of Canadian funds – they have tended to dribble cash into their companies, whose executives then find themselves in perpetual fundraising mode. Others point to flaws with labour-sponsored venture capital corporations (LSVCCs), which are generally regarded as poorer financial performers.
Governments have sought to address these issues. They have eliminated tax credits for investors in LSVCCs, making it harder for these funds to raise capital and, ultimately, weakening their influence in the industry. The federal, Ontario and Quebec governments have established a Venture Capital Action Plan (VCAP), wherein four funds of funds have been chosen to invest a mix of private and public monies into "performing" venture capital funds, using the discipline of the market. Ottawa has itself invested heavily in venture capital funds, principally via the Business Development Bank of Canada (BDC) and Export Development Canada (EDC).
These initiatives raise their own issues. Both federal opposition parties have come out in favour of restoring the tax credits for LSVCCs. The Conservatives have not. But how can voters make an informed choice when some provinces continue to support the tax credits, while others don't?
Going by the publicly disclosed investments by the VCAP funds of funds to date, twice as many investments have been made in U.S. funds than in B.C. and Alberta ones. The bulk of VCAP investments so far have gone to Ontario venture capital funds. Are Ontario venture capital funds disproportionately better performers than their counterparts elsewhere?
Last, how long will Ottawa put up with the underperformance of its flagship venture capital operation, BDC Venture Capital, which hasn't been profitable for at least five years?
Going forward, one direction could be to write off venture capital. Monies could be expedited into companies via the well-known flow-through-share mechanism. Early-stage resource plays exhibit similar risk/return characteristics to those of early-stage high-tech investing, and this tax tool has played a not-inconsiderable role in Canadian stock exchanges developing world-class expertise in natural resources.
Another consideration might be to ask some fundamental questions about the state's role in venture capital.
For instance, what is the public policy rationale for maintaining such a large role in the industry? Wouldn't it be better to privatize those operations and then let them sink or swim in the competitive market for capital?
And in a similar vein, what is the rationale for parking federal venture capital operations in BDC, EDC and Farm Credit Canada – organizations with much larger lending and trade finance mandates?
At the very least, all of Ottawa's venture capital activities should be placed under one separate roof. Among other benefits, this would help cut expenses and increase profitability.
Finally, government should catalyze the development of a continuing education program for venture capitalists by working with the industry, with postsecondary institutions and even with specialist organizations, such as the Center for Venture Education in Palo Alto, Calif.
Perhaps venture capital funds that enjoy public support should be obliged to certify that they have completed the extra level of training that other parts of the financial industry have had (such as banking, with the Institute of Canadian Bankers).
Given the industry's record, why not?