It’s a head-scratch time for entrepreneurs raising venture capital in B.C. today, given the seismic shift that has occurred in the venture capital market.
Last year was a landmark year for “big deal” venture investment in Vancouver. Five of the deals were done in 2012 – any one of which could have been a “deal of the year” candidate during most of the past 20 years of venture investing on the West Coast.
D-Wave raised $35 million, Avigilon took in $26.5 million, Vision Critical and HootSuite each raised $20 million, while BuildDirect raised $16.5 million. That $118 million accounted for roughly half of the total venture investment in B.C. during the year.
To show just how narrowly skewed the investment activity was into this handful of big deals, BC Technology Industries Association statistics indicate that there were 8,555 startup stage or small tech companies here last year.
Let’s look at where the money came from.
There was a big new player in town last year – OMERS Ventures, the venture arm of OMERS (Ontario Municipal Employees Retirement System), one of Canada’s leading pension funds with over $60 billion in net assets.
OMERS Ventures funded Vision Critical, HootSuite and BuildDirect directly for $56.5 million. Where OMERS has invested in the venture capital asset class in the past as a limited partner in managed venture funds, OMERS now has an in-house management team and invests directly.
Avigilon raised its $26.5 million via a bought-deal private placement assembled from institutional investors by a syndicate of investment bankers. I somewhat cheekily include Avigilon on this big deal list, even though it’s a TMX-listed public company (AVO). Avigilon has fewer employees than Vision Critical, has raised less capital than D-Wave and is a newer company than either of them, but Thomson Reuters includes Vision and D-Wave in its official venture capital deal statistics for the year, but not Avigilon because it happens to be public.
D-Wave’s $35 million was led by new investor BC Discovery Fund and included other new investors Bezos Expeditions (Jeff Bezos’ personal investment company) and In-Q-Tel (strategic investor for the U.S. intelligence community) joining existing D-Wave investors, including the Business Development Bank of Canada, Draper Fisher Jurvetson, Goldman Sachs, Growthworks, Harris & Harris Group, International Investment and Underwriting and Kensington Partners.
Note the absence of local venture fund managers. (The only one of these financings that was led by a conventional Vancouver venture fund was D-Wave.)Fund syndication is the classic way to pull together a number of venture funds to make up a financing round. And in Vancouver, venture capital names such as Ventures West, Greenstone Venture Partners, Future Fund, Pender Growth Fund, NeuroDiscovery Fund and BC Advantage Fund were commonly found in such syndication deals over the past decade. Now they are gone, victims of the downturn in the venture industry.
The same thing has happened in the U.S.
Mark Cannice, professor of entrepreneurship and innovation at the University of San Francisco, recently completed his 37th survey of Silicon Valley venture capitalist confidence. He has found that VC confidence is up for each of the last three quarters, hitting 3.73 on a five-point scale, even while over the last few years overall returns on funds haven’t been great. So while there’s more money going into venture capital in the U.S. (as there is in Canada), it’s tending to concentrate in fewer, name-brand funds. But that requires some funds to make larger investments – which tends to squeeze out some of the earlier-stage, smaller investment rounds.
According to Cannice, the vanishing fund phenomenon, and the upsizing of remaining funds, has opened up an opportunity for smaller funds and accelerators to replace them – and angel groups are filling the hole in the U.S.
Angel investing is certainly the new reality for smaller deals in B.C., too. However, for angels, there are danger signals ahead.
First, angel rounds tend to be smaller, and it is hard to imagine how startups can grow sufficiently with just these rounds to hit the $50 million to $100 million level at which the landmark-type deals of 2012 get done. Angels may need to pony up a lot more money into another few rounds or find new capital sources to avoid having their investments fail.
Second, 395 ventures were funded in Canada last year but there were only 30 exits. This is a completely unsustainable model. If the exit ratio doesn’t improve, angels might need to continue funding their investments for much longer than they hope to.
Third, if the venture fund vacuum gets filled with new funds, angels will need to be mindful that they haven’t overpaid for their investments. The last time such a cycle occurred, angels were livid when follow-on investments by venture funds were priced lower than their investment cost, creating losses for angels.
The financing solution that would allow many more entrepreneurs to continue financing their growth after their angels have maxed out, and allow angels to get decent returns on their investments, is to repopulate the venture industry with new funds to fill the gaping hole between the angels and the big deal guys.
Let’s hope that Cannice’s survey findings are correct and that confidence continues to build. •
