The biggest year in venture capital investing since 2001
What can Canada learn from U.S. VCs?
Recently, PricewaterhouseCoopers, NVCA, Thomson Financial Money Tree and the Dow Jones Ernst & Young’s VentureSource reported that the amount of venture capital (VC) invested in the U.S. during 2007 increased to US$29.5B and the amount of VC raised by U.S. VC funds increased to $34.7B in 2007. This represents the strongest year in VC investing since 2000 and the largest amount raised by VCs since 2001. The good times are back! Let the good times roll!
Meanwhile, although full-year data is not yet compiled, based upon three quarters of data (see Q3 2007 VC Industry Overview from Thomson Financial), the amount of money raised by Canadian VC firms declined in 2007 from 2006, and the amounts invested in Canadian companies by Canadian VCs was essentially flat during 2007 relative to 2006, and not rebounding like in the U.S.
So, what can Canada learn from U.S. VCs?
I recently attended a conference hosted by Harvard Business School to which their VC industry graduates were invited to gather for a day of panel discussions and the overwhelming theme was “globalization.� Many large U.S. VC funds are investing in Europe, India and China. A lot of the capital currently being raised by U.S. VCs is going to other countries, including Canada which ranks fourth amongst foreign countries. During the first three quarters of 2007, 41 per cent of the VC investment in Canada came from U.S. VCs. A friend of mine raised $6M in startup financing from a Boston-based VC and didn’t consider any Canadian VCs.
The evolving strategy for U.S. VC funds is either to be large and global, or small and local. But if you’re small and local, VCs have to have contacts and access to global VCs for raising capital, establishing distribution relationships and making customer contacts. A second key observation was that funds with specialized sector “practice groupsâ€? with a mix of both financial partners and those who have operating experience are outperforming “generalistâ€? funds with partners with primarily financial or consulting experience.
If Canadian VC funds want to ride the wave and raise additional capital, they would be well advised to consider the implications of these trends, as the best entrepreneurs in Canada will increasingly have direct access to U.S. VCs.
Peter Tolnai is a special advisor to MaRS on the formation of capital pools and works with the MaRS Venture Group on attracting investment capital to MaRS-sponsored businesses.
Peter….Great post. The points you make beg the question about how we organize venture capital firms to go “deeper” in key microsegments. In light of the way funds are organizing globally for specialized talent and market reach, perhaps it’s time to change our approach. Perhaps the CVCA could do a session covering this topic. I’d buy a ticket…
I’d invite some comments from the VC community on this post. One area I’d like to see some discussion on is the role of Entrepreneurs-In-Residence and how they (as industry sector experts and proven business operators) assist Venture Capital firms in building bench strength. Is the EIR model working? How many firms are doing EIR programs? And how (if at all) is the role changing?
One observation: Given the talent that is emigrating to Canada from tech hotbeds such as Israel, India and Russia, we have some key advantages to engage these people in helping VC firms forge links to global technologies and markets. My guess is that we need to do a lot more with the multicultural composition of Bay Street talent to meet this global challenge.
Posted by: Peter Evans on January 31st, 2008 at 10:16 am
Last month, the CVCA released the 2007 numbers: “Canada’s Venture Capital Industry in 2007 - 19 Page Data Deck” (PDF)
Press Release: “VENTURE CAPITAL INVESTMENT UP 21% ACROSS CANADA IN 2007 (PDF)
February 12, 2008
Venture capital investment across Canada in 2007 amounted to $2.1 billion, an increase of 21% from the $1.7 billion invested in 2006 according to the industry’s statistical report…”
Posted by: Cathy @ MaRS on March 18th, 2008 at 1:29 pm
[...] Peter T’s observation (“The biggest year in venture capital investing since 2001″) that VC funds with specialized sector “practice groupsâ€? are outperforming “generalistâ€? funds seems intuitively obvious. When venturing into the blue ocean of a new market opportunity, it is good to have the resources to buy a boat. Even better to have by your side people who can steer or row, as well as recognize impending danger from the subtlest change in weather patterns. [...]
Posted by: MaRS Blog - Innovation and Commercialization in Canada » Blog Archive » Building teams: Tribes rule! on March 19th, 2008 at 9:23 am