Can Canadian VCs Embrace More Risk?

startupsCanadian venture capitalists have a problem: they’re cautious, conservative and have a low tolerance to risk. It’s an easy thesis to accept because, in part, it’s true.

It explains why the Globe & Mail published an extensive feature on the challenges facing Canada’s venture capital and startup sectors. The focus of the Globe’s story is how the federal government is trying to change the landscape by, in part, injecting $400-million into the venture capital ecosystem.

It raises a few questions:

1. Does it make sense for the federal government to play a pro-active role that includes financial support?

2. Will the federal government’s show-you-the-money approach encourage institutional and corporate investors to allocate money to venture capital after sitting on the sidelines for far too long?

2. If the federal government can flow money to Canadian VCs, will the VCs let it aggressively flow to startups?

3. As important, can the federal government change the ingrained culture in which risk seen as a bad thing?

While you ponder these questions, it is important to remember the VC and startup landscape has been changing in the past couple of years.

There are an increasing number of experienced startup entrepreneurs with good ideas and aggressive plans. At the same time, more money trickling into the venture capital sector, highlighted by OMERS Ventures raising $180-million. And then you’ve got a growing number of incubators and accelerators nurturing entrepreneurs and their ideas.

That’s the good news, and reason for optimism.

The bad news is there is still a long way to go.

Far too many startups need to demonstrate traction before they can attract seed capital. This not only means having a product but enough customers to have a viable business. If you’re an entrepreneur with an exciting concept or idea – no matter how unique or innovative – your chances of getting  capital are as good as winning the 6/49 lottery.

What makes this risk-adverse so puzzling is how it contrasts with Canada’s mining industry. In talking with an investment banker recently, he talked about investors have no problem pumping money into mining companies that think there is enough gold, silver, etc. in the ground to warrant spending millions of dollars digging holes in the ground.

The biggest challenge Canada’s venture capital and startup sectors is changing the appetite for risk. As much as more money is important, it won’t make much of a difference if investors don’t change their approach to startups, which are fraught with risk but, at the same time, plenty of opportunities.

So, what do you think? What, if anything, will change the tolerance to risk?

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  • Mark MacLeod

    There are definitely some VCs here that don’t take enough risk but most of the data out there on this is very old. Performance numbers are hugely lagging indicators.

    At Real Ventures we definitely take risk. We invest early and often. And almost always invest pre validation. We backed Beyond The Rack (out of our 1st fund – Montreal Startup – when it was two guys and an idea. That turned out ok.

    In fact, if everyone agrees that an opportunity makes sense we actually have an internal red flag to re-look at it. If there isn’t some element of crazy in the story, it’s probably not worth funding in our view.

    • Mark Evans

      I wish there were more Real Ventures. Hopefully, Real is a sign of a new breed of VC.

  • William Mougayar

    It’s not clear how the $400 million will be used, and how it will trickle down. In typical government fashion, there is cloudiness and a bit of PR hoopla. That said, don’t look for the Government to take the risks. They are the least risk averse.

    The ones taking the real risks are the entrepreneurs.

    As for Canadian VC’s, yes I’d like to see more risk-taking, more boldness. That means doing more in leading and finding new investments rather than following.

  • Mark Skapinker

    Good questions. I think the problem isn’t that VCs don’t take enough risk; the problem is that the well is dry and there are not enough early stage VCs. It is AMAZING that the federal government has recognized that the VC industry is in crisis and needs stimulus. We need more early stage funds, which means we need more “fund of funds” to be active in Canada.
    Your infographic is excellent (thanks for that), and its too bad there aren’t many more early stage investors.
    Yes, at Brightspark our best returns have been from some of our highest risk investments. Early stage VC is all about risk.

    • Mark Evans

      Let’s hope the federal government’s interest and activity trickles its way to institutional investors. Thanks for the comment!

  • Jeremy O’Krafka

    Great comparison to mining! It’s a key piece of the conversation that doesn’t get included enough. There is high-risk institutional investing taking place in Canada–it’s just more comfortable betting on what comes out of the ground, instead of what comes out of our brains.

  • Jeff Thompson

    We need more early stage VCs like Real Ventures. While it is encouraging to see existing later-stage firms getting in earlier, more cant hurt.

    I am not a fan of Gov lead funds as they tend (not all) move far too slow and I hope they follow same model the Isrealis have. Put the money up as an LP, and let private industry VCs manage the returns.

    Love the mining comparison!

  • davidcrow

    I think @markrmcqueen provides an accurate interesting view of Canadian VC performance

    It’s the early stage game that role that SR&ED IRAP and other programs play that will be interesting.

    I’m also curious with the focus in Ontario of the Ministry of Research and Innovation with the investment choices

  • Randall

    I’m an Idea-Stage startup, and I’m worried I have to incubate the idea on my own until it’s a money-making-business… kind of defeats the purpose of seed funding. Have a look: