Despite their high profile in business plans and the press, VCs play a small though key role in the business universe. Fewer than one firm in a thousand wins venture capital support. In 2005, just 591 did so in Canada, raising $1.83 billion, according to Thomson Macdonald.
To win VC backing, which could be worth $500,000 to $25 million, your firm must have outstanding growth prospects. VCs try to at least quintuple the value of their investments over five to seven years-which makes up for the 60% to 80% that sink or tread water. They’re primarily interested in tech companies, mainly in IT and biotech/life sciences, that harbour the greatest global opportunities and upside. Non-tech companies landed 18% of all venture financing in 2004, mainly from labour-sponsored investment funds (LSIFs) with a mandate to invest broadly in small businesses and economic development. Winnipeg-based Ensis Growth Fund, for instance, has invested in such local firms as Jazz Golf Equipment ($3.6 million); Krave’s Candy Co. ($536,000), which produces Clodhoppers confections; and Tell Us About Us Inc. ($400,000), a provider of market research and customer-satisfaction programs.
In general, though, VCs exist to fund the best and brightest. Any non-tech investee firm will normally need to have a strong brand or some other tangible intellectual property that will make it a long-term winner, not just in Canada, but in the U.S. and beyond.
The good news is that VC disbursements have rebounded since the tech crash. Total investment is up 10% since 2003, though still far off its 2000 peak of $5.8 billion. And, unlike some funding types, VC investing isn’t largely limited to Ontario. In 2004, the province attracted 41% of VC dollars, but Quebec’s share was 39%, B.C.’s 12% and Alberta’s 4%.
Still, Ontario’s government hung a big question over the VC world last September when it announced it will phase out its 15% tax credit for investing in LSIFs. In 2004, they accounted for 71% of investment funds raised by Canadian VCs. Experts say any reduction in that source would disproportionately affect new investments (as funds focused on follow-on investments with existing clients), as well as the early-stage and non-tech companies that rely on LSIFs.
Still, Robin Louis, chairman of Ventures West Management Inc. in Vancouver and president of the Canadian Venture Capital and Private Equity Association, sees a silver lining. He says foreign VCs feel at a disadvantage in Canada, given LSIFs’ legislated edge. Should the latter disappear, Louis expects foreign-based investors will fill the gap.
In the end, the supply of venture capital depends on how successfully VCs can get out of older investments. So Wise positively beams over the recent spate of auspicious exits, such as Computer Associates’ January purchase for an undisclosed amount of Control-F1 Corp., a Calgary-based maker of automated technology-management software; last summer’s $90-million sale of Montreal-based Airborne Entertainment Inc. to a Japanese mobile-media giant; and last April’s $69-million IPO of Terry Matthews’ March Networks Corp., the first IPO of an Ottawa-area tech company in six years: “These sorts of exits mean the money can be put back into the funds where it came from, and it will attract new investment.”