US-based corporates are playing an increasing role in the Canadian venture capital sector, but their Canada-based counterparts have some ground to make up, Mike Woollatt, CEO of Canada’s Venture Capital & Private Equity Association, told Global Corporate Venturing.
“US corporate activity in Canada, whether it is Cisco, GE, Google, you name it, is playing an increasing role,” Woolatt said. “They are recognising that Canada has a ton of amazing startups coming out, [along with] innovation and groundbreaking technology.
“They are also noticing that it is a way to avoid [investing] your money in a higher tax jurisdiction, which the US is now. For instance, Cisco Canada can get a better return back than it would from a higher tax regime in the States. US corporates are beginning to play a very active role in Canada.”
Although he singled out telecommunications company Rogers Communications and enterprise software producer OpenText as corporates with active corporate venturing units, Woollatt said Canada-based companies can often be risk averse, particularly on the telecom side, and that there needs to be a greater realisation that venture capital is often a profitable investment.
“Part of the problem is that some of the banks used to have their own venture wings but they spun them out,” Woollatt explained. “For instance, TD Bank [had] Northleaf Capital Partners, and now Northleaf is one of the biggest VCs in Canada.
“You get triple bang for your buck. You get that great investment, you stay at the cutting edge of your industry and you get the intellectual property. I think corporate Canada has been late to realise that. They are more wary of VC investments than they need to be.
“They need to realise that alternative asset class is an attractive one, and that they should be part of it for shareholder value. For lack of a better word, I think they are quite Canadian in terms of being risk averse. Track records show that for the last seven or eight years now VC has been a great investment for them, and they should be making it.”
Venture capital investment in Canada is currently in a stagnant period, and Woollatt partly attributed this to the government being slow to implement its C$400m ($354m) Venture Capital Action Plan (VCAP).
VCAP, which was announced in early 2012, would potentially be matched by up to C$1.2bn in private and provincial investment in venture capital funds, but limited partners have been waiting for the VCAP cash to be invested before they commit their own.
“Part of the problem we have is geography,” Woolatt explained. “We are sitting right next to the largest VC [industry] in the world by something like a 4x margin. When you are right next to that, the heat is hot, and it is also easy for our Canadian companies to be down there so they often get to a certain stage and leave.
We have successes but they are down there, so what the Venture Capital Action Plan has to do is figure out how to keep them in Canada, and there are a couple of promising signs. Our job is to be a little less Canadian – brag a little more and be a little more out there.”
State-backed investment will likely also play a crucial role. There are several active state-backed funds in Canada, including the Canadian government-funded BDC, Ontario’s OCGC, Alberta Enterprise Corp, and the British Columbia-based Renaissance Fund, but they cannot match the level of support initially offered to grow US regions like Silicon Valley or Boston, and Woolatt suggested there is also a problem of perception.
“One thing we need to educate governments on in Canada is the mindset around it being an investment,” he said. “It is not a grant or a subsidy. It is an investment, an asset you are holding. It is a good investment and you need to make it in order to help your economy grow. Often, they think of it as charity or a grant to the venture capital community. That is not the way we see it and it is not the way they should see it – it has great returns.
“I think the problem is these funds are constantly under scrutiny because of the way they are interpreted government-wise. We need to think of it as government investing in an asset class, as opposed to throwing money down.
“With VCAP, government will see returns on its money. Taxpayers are not on the hook for anything, they will make money. They just need to talk about it that way and see it that way, and then we will turn a corner.”