We Would Be Scary With Some Capital!

Monday, February 26, 2007 | 5 comments

By Calvin McElroy, Guest Author

Entrepreneurship in Canada is hard. I have spent over a decade leveraging skills, knowledge and relationships developed from a successful corporate career – while trying to master the art of starting and developing early stage companies. Although the job is challenging and gratifying, it seems a day doesn’t go by without some kind of money challenge.

I have met and worked with some great people, and shared lots of coffee, wine and sushi. Canada is the world’s second largest country, with nearly 4 million square miles, inhabited by 33 million people. It seems like I have covered most of this ground chasing investors, customers and bankers for money. It will be nice to go back some day - in a more relaxed state of mind - and actually enjoy the mountains, lakes, historical landmarks, and local culture.

I have been told that our team is in an elite club – that only 1% of businesses secure venture capital and 80% don’t even survive. We have been fortunate to raise over $15 million, for four separate startup ventures, over ten years. One was sold, one was wound up gracefully, and two are still active businesses. We are still working hard and chasing the dream of a “home run” play – while constantly seeking capital.

Last summer I had pleasure of meeting Dominique Trempont and Sramana Mitra, and had a crash course in how venture financing works in Silicon Valley. I was amazed at the differences between the US and Canadian markets, in particular the pace of activity. I have committed to share some of these insights through a regular guest column, here on Sramana’s blog.

To start, we need some context: There are relatively few Canadian high-tech success stories. Sure, we invented the telephone in 1874 and created Nortel – which over 100 years spawned a vibrant telecom equipment industry in Canada (e.g. Mitel, Newbridge, JDS Uniphase). A hotbed of development west of Ottawa (popularly known as Silicon Valley North) is now home to 1500 companies. However, in 1995, there were no VCs in Ottawa. Today there are only about 10 active firms.

According to Thompson Financial, a leading source of information on the Canadian private equity industry, VC investments peeked in 2000 at CAN$ 6 billion, and have been flat for the past 4 years, at around $ 1.6 billion, with an average deal size of $4 million. Of this, 32% of the money was investment from US VC firms. We are clearly not keeping up to the steady growth in the VC industry seen in US, Isreal, India or China. Our annual national showcase of promising new startups – The Canadian Venture Forum - is scheduled for Mar 4 – 6 in Toronto. See more here. While this is a must attend event for the VC industry, and for any company involved in a financing road show, the number of deals that get done are few, and far between.

Canada offers a talented, well educated and loyal work force, government R&D tax incentives and significant cost advantage to the US market (more on this later). However, a lack of concentrated venture capital, engineering talent, and prior success stories (and heros) dampen the entrepreneurial spirit in all but a few isolated pockets within Ottawa, Toronto and Vancouver.

Only a handful of Canadian high-tech companies have successfully weathered the challenges of an underfunded, geographically fragmented, skill-constrained business environment (e.g. RIM, Cognos, Open Text / Hummingbird, Decartes, Rand, ATI). An interesting point to consider is that the average age of these firms is 25 years, and the youngest is 16. Entrepreneurship in Canada is hard work – and serial entrepreneurs are often old and gray.

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