It may be years before interest in venture-capital funds regains its fevered pitch of the dot-com days, when everyone and their online dog wanted to entrust VCs with their investment dollars. From 1999 to 2001, Canada’s VC funds raised $11.3 billion — and they couldn’t spend it fast enough. In 2000 alone, they invested nearly $6 billion. It sure was great to be an entrepreneur!
You know the rest of the story. But now venture capital is making a mini-comeback. Last year, VC funds attracted $2.2 billion, up 32% from 2004. Hopefully, the numbers will continue to grow.
Here’s another wish: that a few more VCs do a better job of picking winners this time around. Not by avoiding another wave of irrational exuberance, but by seizing more of the excellent opportunities that are right before their eyes.
If you’re familiar with this magazine, then you know about its annual ranking of Canada’s Fastest-Growing Companies, the PROFIT 100. Last year’s winners averaged five-year revenue growth of 1,609%-a shocking figure, even before you consider their average annual revenue ($58 million) and profitability (79% were in the black). Then there’s the PROFIT HOT 50 ranking of Canada’s Emerging Growth Companies (for which you’ll find a nomination form here). All less than five years old, last year’s HOT 50 averaged two-year growth of 1,075% and revenue of $8.7 million, with 84% of them turning a profit.
Seeing a track record like that, no one could blame you for presuming these companies have been awash in venture capital. But you’d be dead wrong. Only 20 companies of the 2005 PROFIT 100 have ever seen a dollar of venture capital, which is hard to believe when you consider that all of them were around in the heady days of the VC-fuelled tech boom. Run through last year’s HOT 50 firms, and you’ll see that only three of these fast-growing startups have had any VC backing. In fact, more have successfully gone public than attracted venture capital. The ultimate irony: taking a company public is Exit Strategy No. 1 among VCs.
It’s not known how many of these firms actively sought venture investment or turned down a VC’s advances. But they remain emblematic of high-potential businesses across Canada that have a real need for growth capital, are worthy of venture investments, but will never get a look from VCs. Why? Because they are not in high tech or life sciences.
A good rule in business is to stick to what you know, which helps explain why VCs tend to have deep but sector-specific expertise. That expertise is clustered around tech and biotech, meaning your average fast-growing mutual-funds dealer, book publisher, newspaper publisher, baby-shoe manufacturer or junk-removal service is absent from the venture-capital radar. (Why did I list this motley crew of companies? Because all five were in the top 10 of last year’s PROFIT 100.)
Can the problem be fixed? One solution could be for tech, life-science and non-tech VCs to work together in syndicates that provide broader reach and knowledge. But until someone comes up with a solution, a lot of high-potential companies will go without much-needed cash. And that’s bad for VCs.