Government Venture Capital

by | Aug 26, 2017 | Entrepreneurship

We thought it was time to look at the success of government venture capital. The Business Development Bank of Canada’s venture capital arm (BDC) and MaRS Investment Accelerator Fund (IAF) were each established at a time when Canadian venture and seed capital were in short supply. Funding mechanisms such as these are considered critical to growing small technology firms, particularly in economies with restricted access to venture capital funding. However, since Canada’s innovation ecosystem has been criticized for its inability to create world-class companies, this Impact Brief has been published to look at these mechanisms more closely. In this Brief we set out to examine these two entities’ ability to pick and nurture world-class companies. To that end, we looked at 77 firms on IAF’s investment portfolio and 51 that had received BDC investments. These are our key findings.

  • Both entities are effective at picking companies with world-class potential. Together they have nine firms on Impact Centre’s current Narwhal List, and 14 of their other investee businesses have growth rates that make them close contenders for Unicorn status.
  • The IAF is more successful when investing in companies that are under three years old. Companies that receive seed stage capital three or more years after inception in life do not perform as well as those that received funding earlier.
  • BDC is statistically better equipped to pick winners because it can invest significantly later, either when companies are more established or even as late as Series C and D rounds. Thus, their investees tend to have higher average total investments as a result of other fundraising efforts prior to BDC.
  • With an average seed stage investment of $1.59 million compared to over $3 million for BDC, the IAF does not appear to provide enough capital to maximize a firm’s growth. As a result, IAF investee companies boast lower seed-stage investments, are slower to raise larger rounds of capital and are potentially slower to develop world-class potential. Governments would be well advised to support more significant financing at this stage.
  • Both groups have investees with strong employment growth rates. However, as a result of the lower seed-stage rounds, IAF investees are, on average, half the size of BDC investees.
  • The IAF may not be maximizing its potential for impact. With inadequate funds invested early on and without a co-ordinated strategy with Ontario Growth Capital (OGC), the IAF may be producing suboptimal results.
  • If BDC were to adopt the creation of world-class companies as its objective, it would need to re-examine its current approach to investing. The current strategy is well suited to risk minimization and earning a fair return for the government. However, BDC does not have enough available capital to make the large bets necessary at both early and late stages to propel investees to world-class status more rapidly.

This study had two key objectives:(1) to review the IAF and BDC’s respective contributions to creating world-class companies, and (2), to highlight a critical issue.

If we as a country want to improve our ability to create world-class companies, then we need to take a different approach. We cannot think that we are Silicon Valley North and merely attempt to copy what works in California. The federal and many provincial governments are devoting considerable resources to developing Canada’s technology sector. What they are not doing is effectively using the data that come from their investments to do better.

Through investments in the IAF and BDC’s venture arm, the Ontario and Canadian governments have a marvellous opportunity to approach technology sector development with an in-depth understanding of best practices using a data-driven approach.

We could have at our disposal data that come from hundreds of investments to determine best practices, publish the results, and train entrepreneurs and investors on what does and does not work to improve our chances of success.

If the purpose of government venture capital is to invest hundreds of millions of taxpayer dollars in companies to boost the technology sector, then investing to develop knowledge may yield significant return in terms of improvements in the system.

Click here to read the study.

Getting Good at Getting Better

by | Aug 23, 2017 | Entrepreneurship

I just finished an Impact Brief on Public Sector Venture Capital and there were a number of thoughts I had while preparing it that I didn’t think belonged in a report so I figured I would include them here.

The report looked at the ability of BDC’s venture capital arm and MaRS’ Investment Accelerator fund to pick and nurture world class companies. These are two organizations that have invested in over $1 billion of government money in 500 Canadian tech companies.

As I was doing the research I talked with a number of other VC firms to get their perspectives as well. What I found in these conversations stunned me. It appear that very few VCs are looking back at the history of their investments to discover best practices either at investing or at growing world-class tech companies.

Several major venture capital funders have done absolutely no research on best practices and don’t intend to do so. One VC is planning to do some research. One even told me that he didn’t think it would be worthwhile to do this type of research as his companies were all different.

And then I thought about Google and perhaps the whole ethos of Silicon Valley. Google has initiated numerous projects to determine best practices within Google. An HBR article reports that Google initiated “Project Oxygen, a multiyear research initiative. It has since grown into a comprehensive program that measures key management behaviors and cultivates them through communication and training.” Project Aristotle was another study that looked at team effectiveness.

VCs like Openview regularly do research to help their portfolio companies and they share best practices publicly. CB Insights did research on why companies fail. All sorts of VCs blog regularly about the industries they are investing in and how to get better. Just check out websites for Bessemer or Andreessen Horowitz.

What the US VCs get is that research is essential to improve business practices. They are actively trying to get better.

In Canada there is virtually no practitioner based research on technology company best practices. There is virtually no research on investing practices. Governments across the country are investing over $5 billion annually to improve the performance of the technology sector and the application of technology but there is very little research to determine how we can improve these practices. If we’re spending so much money to get better, wouldn’t it make a little sense to spend some money to figure out how best to do that?

Shouldn’t we be trying to get good at getting better?