U.S. Venture Capital Spreads the Wealth

Canadian venture capital investors could take a lesson from American VCs – in going big or going home.

In 2010 Americans invested two dollars for every dollar invested by Canadians in early-stage companies.

Canadian venture capital investors could take a lesson from American VCs – in going big or going home.

The Americans are down right now. Their economy is quantitatively easing its way to stable growth. The housing sector is still a mess and the loonie is kicking the pants off Uncle Sam’s greenback. But where is America’s engine of capitalism still firing on all cylinders? One area is private equity and venture capital. You have to hand it to the guys and gals sitting on roughly $500 billion of uninvested capital; they still believe in the highest risk areas of the economy.

Compared to Canada, the Americans are killing it when it comes to investing in the future. In venture capital (almost all of which is technology related), the “woe is me” Americans invested $21.8 billion in 2010, while the “riding high” Canadians invested only $1.1 billion. By population, Americans invested two dollars for every dollar invested by Canadians in early-stage companies. And the Americans are worried sick!

What’s even more impressive is that the U.S. venture funds keep raising money to the point that, even with hundreds of millions invested into Facebook, Groupon, Twitter, Gilt Groupe and Livingsocial, the amount of uninvested capital keeps rising. Are there really enough interesting deals to soak up all of this capital in the supposedly moribund U.S.?

There are a few of us in B.C. with our hands in the air, waving and yelling, “Over Here!” The provincial government, for instance, designed its Renaissance Capital Fund to lure out-of-province funds to invest in B.C. companies. It is the right approach, where the province co-invests in the fund and limits its own upside, making the possibility of outsized returns the incentive. (Tax credits, on the other hand, don’t work because pension funds and endowments don’t pay tax.)

To date, VantagePoint Partners from California (headed by a Canadian) and Tandem Expansion Fund (from Montreal and Toronto) have been the biggest successes. VantagePoint has invested in Ostara Nutrient Recovery Technologies Inc. and Light Based Technologies Inc. Tandem has invested in three companies.

Many of us with years of experience in dealing with U.S.-based investors see the incentive as nice, but the real reason U.S. investors come to B.C. is for good opportunities and great teams. Examples of U.S. VCs or private equity funds coming to B.C. without incentives over the past three years include Alloy Ventures Inc. and In-Q-Tel Inc. (invested in Teradici Corp.), Redpoint Ventures (Tantalus Systems Corp.), Blumberg Capital and Hearst New Media (Hootsuite Media Inc.), Madrona Venture Group LLC (Indochino Apparel Inc.), Granite Ventures LLC (Indicee Inc.), Warburg Pincus LLC (Protox Therapeutics Inc.), JMI Equity Fund LP (Gemcom Software International Inc.) and very recently, highly respected Accel Partners and Co. Inc. (Tiny Speck Consulting Services Canada Ltd., Context Media Technologies Inc. and 99 Designs Pty. Ltd.).

We have two relatively large funds investing here – Yaletown Venture Partners Inc. and VanEdge Capital Partners Inc. – and many of our current crop of growing middle-market technology companies are angel-backed, organic-growth success stories. Having institutional capital is not necessarily the road to success, but it sure helps when competing with Silicon Valley startups.

There is an oversupply of capital in the U.S. and investors there are looking beyond their own borders for places to put their money. In August, the Grow conference will attract many top investors here and C100, a recently formed organization of Canadian techies in California, is connecting companies to capital year-round. The local VCs and angels also have great connections to U.S. and foreign investors.

Success breeds success, so the most important incentive to U.S. investors is to simply have some big announcements: M&As, IPOs or large rounds raised. The Americans are happy to invest their way out of their funk. Let’s help them here in B.C. in 2011.