The operation experience and seed money from venture capital (VC) firms makes a measurable difference to the growth of startup companies, new research commissioned by an industry group shows.
Canada's Venture Capital and Private Equity Association (CVCA), together with Industry Canada and Statistics Canada, found that firms which received VC help were more likely to survive, had stronger sales figures and created more value for stakeholders than comparable companies.
The CVCA has long said that venture capital can improve a small company's profitability and productivity, but they teamed up with Industry Canada and Statscan to look for hard numbers behind this claim. Many of the figures numbers came from research done up until 2009, but the results are unique in that this study collected data from Statscan and Thomson Reuters and National Research Council of Canada, rather than using a survey method.
According to Peter van der Velden, president of the CVCA, and managing general partner of health care fund Lumira Capital Corp., the study found that the presence of VC funding at the one-year measurement level led to higher research and development spending. Researchers perceive R&D spending levels as an indication that a company will gain competitive advantages through my creating better products and processes for the future.
"The fact that these venture companies do engage in a lot more R&D very earlier on … I think that will surprise people," Mr. van der Velden said.
The study also looked at how quickly companies added employees, and how sustainable that was. After five years of business, the control group had average employment growth of just 4 per cent, where the VC-backed firms posted 51-per-cent growth.
And employees were getting paid more. At both the one- and five-year checkpoints, the VC-backed firms had increased wages by a greater amount. "Hopefully that's because of the quality of jobs, not just venture capital guys overpaying," Mr. van der Velden said.
In 2012 the federal government announced a $400-million investment program aimed at increasing private-sector venture capital investments. Domestic venture capital in Canada has been historically underfunded, lacked experienced investors and been more risk averse than in competing jurisdictions, such as the U.S.
The program, called VCAP, aims to give money to funds with a market presence in Canada. It awarded its first $50-million to four firms, including Mr. van der Velden's Lumira, in September. At the time, the government said it would keep working on other elements of VCAP, "including establishing four private sector-led, large-scale national funds of funds" to invest in startups. Another announcement on this is expected soon.
But the industry is still facing investment challenges, Mr. van der Velden said. "A lot of the players that were involved in helping provide capital in 2012, including some of the big provincially-backed funds-of-funds, have actually become fully invested." About $1.5-billion was invested by venture capitalists in Canada last year. Roughly half of that went into information and communication technologies. Another quarter of the funds went into life sciences.
These funds will need to draw more capital to continue making investments. And while the federal money will help, it won't be enough, Mr. van der Velden said.
"Hopefully a study like this helps those provinces that have already done something positive think about phase two," he said. "You can't step back and hold your hands up."