Canada’s venture capital industry is a damsel in distress so we should be thankful the federal and provincial governments are coming to the rescue.
With not enough money being sprinkled by VCs on money-hungry startups, the federal and provincial governments has been stepping into the breach. Earlier this week, FedDev (a federal government agency with $190-million to invest) injected $4.85-million in eight Ontario startups, while VCs and angels coughed up an additional $15.2-million.
“Ideas and innovation are what the creative economy is all about,” Gary Goodyear, Canada’s Minister of State for Science and Technology, said in a statement. “This will create highly skilled jobs in southern Ontario, and have the potential to make a lasting impression on the economy of our region and beyond.”
Translation: We need to create some New Economy jobs so if we gotta invest in startups, we gotta invest in startups.
So why is government playing a key role within the venture capital landscape?
The big issue is the lack of institutional support for venture capital from players such as pension funds, insurance companies, bank and businesses. According to the CVCA’s annual report, fund-raising stalled at $1-billion in 2011.
In an interview that will appear in my Globe & Mail “Start” column tomorrow, iNovia Capital managing partner Chris Arsenault said institutional investors are still risk-adverse about venture capital, while businesses are ignoring the benefits of making even small investments (and we’re talking single-digit millions of dollars).
The fact that government needs to play a pro-active role is, diplomatically speaking, disappointing, particularly when you consider how many governments are in belt-tightening mode. But the reality is if government isn’t involved, there could be a financing void that will hamper the venture capital and startup marketplaces.
In an ideal world, the investments supported by government will be successful, not only in creating jobs but creating wealth that can be reinvested by successful entrepreneurs. At the same time, success could – and this is a big “could” – embolden institutional investors to get into the game after sitting on the sidelines for far too long.