It’s been a dreadful few years for the venture capital field, a situation made markedly worse by the recession and a growing aversion to risk. Can things be turned around? Or is a new funding model in order for B.C.’s startups?
The venture capital world, while not exactly dead, has clearly seen better days. Last year, according to analysis by Thomson Reuters and Canada’s Venture Capital & Private Equity Association, venture capital (VC) deal activity in Canada fell to its lowest level since the mid-’90s, down to $1 billion from $1.4 billion the year previous. In B.C. – where there are roughly 10 active VC funds with $1.8 billion in assets under management, accounting for 20 per cent of all VC deal flow in Canada – the experience mirrors national trends: in 2005 roughly $225 million of venture capital was invested by these funds; last year saw just $141 million.
A lack of market liquidity has resulted in a dearth of initial public offerings (IPOs) and mergers and acquisitions (M&A), leading to poor fund performance. Institutional investors with fiduciary responsibilities have fled VC for safer investments, and once-bedrock local VC funds are struggling. GrowthWorks, for example, is posting three-year returns in the negative seven-to-10 per cent range – what one Vancouver financier politely describes as “nothing to write home about.” In December 2009, the B.C. Discovery Fund ceased redemptions after paying out $5.2 million to investors, and in January managers of the $23-million Pender Growth Fund informed shareholders that they could only meet 55 per cent of share-redemption requests for the time being, blaming “reduced opportunities for near-term liquidity in the fund’s portfolio.” In early May, the B.C. Advantage Fund temporarily suspended redemptions of its two VC funds, also citing a lack of cash.
Venture capital belongs to a rather esoteric realm of finance not that well understood by the general public. It thrives on word-of-mouth tips rather than public financial statements, so getting fund managers to discuss strategy candidly is at times like trying to crack military code. (Then there’s the somewhat blurry line between venture capitalists and so-called angel investors, who, rather than entrust their investments to a VC fund manager, prefer to do the investing themselves or pool with other angels. Both offer a combination of equity and business experience to help entrepreneurs bring their prototypes to commercial stage or inject a boost of capital to early-stage companies enabling them to grow to the next level.) If they bet on a winner, venture capitalists can expect to realize a return on investment (in the form of an IPO or an acquisition) within a five-year horizon for IT or within 10 to 15 years for the more capital-intensive clean-tech sector. But, as indicated by the litany of stumbling VC funds, shareholders have had little to cheer about recently. And according to a June 2009 report from the U.S.-based Kauffman Foundation, things could soon get worse: it predicts a monumental rightsizing that could see annual VC investment contracting by 50 per cent in North America in the coming years. Which raises the question, Is venture capital in Vancouver a barely flickering, soon-to-be-extinguished flame of high-risk finance, or does it remain a going concern? BCBusiness talked with a handful of the province’s VC specialists to find out.