Great read. Got me thinking big time about where we're headed and how we can tap into our full potential, like in the BNR days.
A couple of thoughts bouncing around after reading your article:
1. Incentives are key, right?
How do we get to a point where throwing support behind Canadian R&D and startups is a no-brainer for both the big money players and the government? We need to make it irresistibly attractive to invest in our homegrown tech and talent.
2. Talent attracts talent.
We've got some brilliant minds here, but how do we turn Canada into a magnet for the world’s best and brightest in tech? A healthy system that makes Canada the obvious choice to live, work, and innovate.
🍿 thinking about whats going to happen this next decade.
There is lots of work to be done on all those points you raise. I feel like whatever momentum on making change happen in the space is at a standstill— I just don't see movement from our elected leaders - I'm hoping posts like this or others might move some of those with their hand on the levers to move them.
Great read. As a former historian, I really appreciate the work that you did to explain context and consequence.
I've been wondering for a while how VC success rate has impacted the pension funds' willingness to invest. Take this article for example: https://www.bdc.ca/en/articles-tools/blog/vc-canada-how-do-we-stack-up-against-rest-of-world -- only 0.5% of Canadian VC-backed companies achieved a $250M USD valuation, as opposed to 2.9% for VC-backed US companies since 2000. I know this isn't a super recent article, nor are large valuations the only indicator of success, but I was wondering what your take was on this.
If Canada is culturally more risk averse than its nieghbour to the South (which I believe), then maybe a new kind of VC system in Canada, one that could somewhat derisk investments (think operating partners or other approaches to help startups succeed) might be the answer.
- Yeah, the BDC article is interesting, but I'd hazard it is a lagging indicator. If the market has less money, fewer companies stay in Canada or get founded. If they need more money - they move to where the money is. So that number shows us what the effect is on Canadian startup companies of the loss of investment money, which is also perhaps then the reason the LPs are not here it becomes a chicken or egg problem. One interesting number is the missing 100K Entrepreneurs in Canada. I'd chalk up the missing number to a higher cost of capital to get companies started... which is also killing our startups before they're even born.. This has never been view in the availble literature as a cost of capital discussion - i think it should be: https://www.bdc.ca/en/about/mediaroom/news-releases/nearly-half-as-many-people-are-launching-businesses-as-20-years-ago
But the question might be, what led the LPs to leave? What was the VC sector like when the pensions decided to exit the market? Suppose you look at vintage average return rates between 1995 and 2005. In that case, between 95/2000 the numbers show a roughly equal return rate vector - meaning the Canadian fund vintages were approximately equal to their US peers - which is not the narrative we often tell. The numbers started changing dramatically in 2002 - when the return data showed Canada's VC losses worse than their US peers. After the pensions left the market, the collapse became a rout, and Canadian vintages did not equal their peers within the decade. But the sample size also was cut by 3/4 so the numbers were on a much smaller base. All in all, the dotcom bust was more pronounced in Canada, but when the market started to recover, the Canadian LPs had already shut down their focus here. Canada's VC numbers never recovered until the 2013/4 VCAP program was launched. Those post-2012 VC return numbers are still not fully commiserate with their U.S. peers, mostly due to the lack of a healthy sub 500M exit market domestically and the reliance on fewer deals per fund - as most funds are smaller.
Really enjoyed the read... was never fully aware of the political components to CPPIB's asset allocation shift.
Part of the issue that isn't said is with the Canadian VC community at large. There are so few investors in Canada focusing on early stage seed/series A level. Worse than that, the VC's with the most assets/risk capacity seem to focus solely on profitable businesses and piggy back each other into the same deals. A lot of great ideas are left on the cutting room floor because they cant find funding, or, worse, find funding through a TSXV/CSE shell (which is terrible) and are now disqualified from VC funding as a public company.
The Canadian VC community needs to develop beyond incubating companies for banks. Mandates needs to be broadened and more chances need to be taken. Doing so would hopefully create more of those opportunities for pensions.
Great post, so interesting. It mentions that ' Of the current CEOs of the country’s six largest banks, National Bank of Canada’s Laurent Ferreira was the only one to add his name to the letter' - why are the other big Canadian banks not on-board for investing more in Canada?
While you cogently outlined a case for the source of the demise of Canadian VC, why do we need protectionist policy to succeed in the first place?
From the entrepreneur's perspective, I see a parallel with SR&ED. Most early-stage Canadian companies leverage SR&ED to keep their development costs down. It leads startups to over-index on the subsidized resources - development - and under-index in the unsubsidized ones - sales and marketing. It's not a coincidence that Canadian companies are known for being great in product and poor in sales and marketing: we don't invest as much in building the sales engine as we do the product or, even more so, the development engine.
Personally, I would prefer to see policy that is not protectionist in nature but rather incentivizes risk-taking behaviour. As Anthony wrote below, there is a risk aversion to Canadian investors that we want to overcome. For example, what if 1) we could use RRSP or TFSA funds to invest in companies; and 2) get a tax incentive to doing so? The BC government provides a tax incentive for BC investors to invest in BC companies and it effectively lowers their cost of capital and encourages their investment in homegrown companies over those from other provinces.
Thanks Matt, as a fellow GenX'er that has worked on both sides of the LP/GP fence in the pension fund industry and now VC, your chronicling revealed a few perspectives I hadn't considered before but make absolute sense.
Not a simple issue for sure, and you've given me a lot to think about with respect to my own stance on the issue of where pension funds should invest. I think the concept of externalities that create prosperity beyond just headline bps and alpha needs to be accepted and incorporated at the policy level to incentivize LPs, but that runs the risk of politicizing things to a level that we're seeing play out south of the border. Show me the incentive and I'll show you the result, right? It comes down to what we collectively want as a society, and good luck getting everyone to agree on that!
Sometimes I wish I would have picked a simpler career path, like neurosurgery lol.
This is great work Matt. As a Gen Z entrant into Canadian venture, I've always wondered why the space isn't as vibrant as that of our neighbours down south. Thanks for sharing this history and restarting a conversation that needs to reach way further.
Great article. Thanks for taking the time to put “pen to paper” on this subject. Curious if this is a topic that individuals can press their MLAs on. Seems like a fix to require some minimum percentage investment back to Canadian companies will require a political mandate. I guess I am looking for some actionable items besides handwringing. Suggestions? Thoughts?
Thanks for sharing this, especially the timeline. I started my most recent startup in my late 30s and didn't know about the historical context for Canadian VCs. Will need to deep dive into your reference materials but I'm curious how policies and sentiment has changed in so-called comparable countries such as Australia over the same period of time
Great post. The Canada VC scene is lucky to have you as a historian.
Thanks Ben!
Hey Matt,
Great read. Got me thinking big time about where we're headed and how we can tap into our full potential, like in the BNR days.
A couple of thoughts bouncing around after reading your article:
1. Incentives are key, right?
How do we get to a point where throwing support behind Canadian R&D and startups is a no-brainer for both the big money players and the government? We need to make it irresistibly attractive to invest in our homegrown tech and talent.
2. Talent attracts talent.
We've got some brilliant minds here, but how do we turn Canada into a magnet for the world’s best and brightest in tech? A healthy system that makes Canada the obvious choice to live, work, and innovate.
🍿 thinking about whats going to happen this next decade.
There is lots of work to be done on all those points you raise. I feel like whatever momentum on making change happen in the space is at a standstill— I just don't see movement from our elected leaders - I'm hoping posts like this or others might move some of those with their hand on the levers to move them.
Great job Matt. Super interesting take.
Great read Matt!
Lots here for policy makers to chew on
Great read. As a former historian, I really appreciate the work that you did to explain context and consequence.
I've been wondering for a while how VC success rate has impacted the pension funds' willingness to invest. Take this article for example: https://www.bdc.ca/en/articles-tools/blog/vc-canada-how-do-we-stack-up-against-rest-of-world -- only 0.5% of Canadian VC-backed companies achieved a $250M USD valuation, as opposed to 2.9% for VC-backed US companies since 2000. I know this isn't a super recent article, nor are large valuations the only indicator of success, but I was wondering what your take was on this.
If Canada is culturally more risk averse than its nieghbour to the South (which I believe), then maybe a new kind of VC system in Canada, one that could somewhat derisk investments (think operating partners or other approaches to help startups succeed) might be the answer.
Hey You!
- Yeah, the BDC article is interesting, but I'd hazard it is a lagging indicator. If the market has less money, fewer companies stay in Canada or get founded. If they need more money - they move to where the money is. So that number shows us what the effect is on Canadian startup companies of the loss of investment money, which is also perhaps then the reason the LPs are not here it becomes a chicken or egg problem. One interesting number is the missing 100K Entrepreneurs in Canada. I'd chalk up the missing number to a higher cost of capital to get companies started... which is also killing our startups before they're even born.. This has never been view in the availble literature as a cost of capital discussion - i think it should be: https://www.bdc.ca/en/about/mediaroom/news-releases/nearly-half-as-many-people-are-launching-businesses-as-20-years-ago
But the question might be, what led the LPs to leave? What was the VC sector like when the pensions decided to exit the market? Suppose you look at vintage average return rates between 1995 and 2005. In that case, between 95/2000 the numbers show a roughly equal return rate vector - meaning the Canadian fund vintages were approximately equal to their US peers - which is not the narrative we often tell. The numbers started changing dramatically in 2002 - when the return data showed Canada's VC losses worse than their US peers. After the pensions left the market, the collapse became a rout, and Canadian vintages did not equal their peers within the decade. But the sample size also was cut by 3/4 so the numbers were on a much smaller base. All in all, the dotcom bust was more pronounced in Canada, but when the market started to recover, the Canadian LPs had already shut down their focus here. Canada's VC numbers never recovered until the 2013/4 VCAP program was launched. Those post-2012 VC return numbers are still not fully commiserate with their U.S. peers, mostly due to the lack of a healthy sub 500M exit market domestically and the reliance on fewer deals per fund - as most funds are smaller.
Great read, so much context here on how we ended up here.
Well laid out view of the sad state of investment into Canadian business.
Really enjoyed the read... was never fully aware of the political components to CPPIB's asset allocation shift.
Part of the issue that isn't said is with the Canadian VC community at large. There are so few investors in Canada focusing on early stage seed/series A level. Worse than that, the VC's with the most assets/risk capacity seem to focus solely on profitable businesses and piggy back each other into the same deals. A lot of great ideas are left on the cutting room floor because they cant find funding, or, worse, find funding through a TSXV/CSE shell (which is terrible) and are now disqualified from VC funding as a public company.
The Canadian VC community needs to develop beyond incubating companies for banks. Mandates needs to be broadened and more chances need to be taken. Doing so would hopefully create more of those opportunities for pensions.
What a sobering read. Thanks for taking the time to write this up.
Great post, so interesting. It mentions that ' Of the current CEOs of the country’s six largest banks, National Bank of Canada’s Laurent Ferreira was the only one to add his name to the letter' - why are the other big Canadian banks not on-board for investing more in Canada?
Great history lesson, Matt!
While you cogently outlined a case for the source of the demise of Canadian VC, why do we need protectionist policy to succeed in the first place?
From the entrepreneur's perspective, I see a parallel with SR&ED. Most early-stage Canadian companies leverage SR&ED to keep their development costs down. It leads startups to over-index on the subsidized resources - development - and under-index in the unsubsidized ones - sales and marketing. It's not a coincidence that Canadian companies are known for being great in product and poor in sales and marketing: we don't invest as much in building the sales engine as we do the product or, even more so, the development engine.
Personally, I would prefer to see policy that is not protectionist in nature but rather incentivizes risk-taking behaviour. As Anthony wrote below, there is a risk aversion to Canadian investors that we want to overcome. For example, what if 1) we could use RRSP or TFSA funds to invest in companies; and 2) get a tax incentive to doing so? The BC government provides a tax incentive for BC investors to invest in BC companies and it effectively lowers their cost of capital and encourages their investment in homegrown companies over those from other provinces.
Thanks Matt, as a fellow GenX'er that has worked on both sides of the LP/GP fence in the pension fund industry and now VC, your chronicling revealed a few perspectives I hadn't considered before but make absolute sense.
Not a simple issue for sure, and you've given me a lot to think about with respect to my own stance on the issue of where pension funds should invest. I think the concept of externalities that create prosperity beyond just headline bps and alpha needs to be accepted and incorporated at the policy level to incentivize LPs, but that runs the risk of politicizing things to a level that we're seeing play out south of the border. Show me the incentive and I'll show you the result, right? It comes down to what we collectively want as a society, and good luck getting everyone to agree on that!
Sometimes I wish I would have picked a simpler career path, like neurosurgery lol.
This is great work Matt. As a Gen Z entrant into Canadian venture, I've always wondered why the space isn't as vibrant as that of our neighbours down south. Thanks for sharing this history and restarting a conversation that needs to reach way further.
Great article. Thanks for taking the time to put “pen to paper” on this subject. Curious if this is a topic that individuals can press their MLAs on. Seems like a fix to require some minimum percentage investment back to Canadian companies will require a political mandate. I guess I am looking for some actionable items besides handwringing. Suggestions? Thoughts?
Thanks for sharing this, especially the timeline. I started my most recent startup in my late 30s and didn't know about the historical context for Canadian VCs. Will need to deep dive into your reference materials but I'm curious how policies and sentiment has changed in so-called comparable countries such as Australia over the same period of time