Despite a few Wattpad sized deals, with government (or quasi-government) backed funds filling a void of private investors, all the evidence suggests that venture markets in Canada are not working as they should. Investors in Canada fled the class long ago and have yet to return, trading activity is quiet and domestic capital-raising stalled. But change is on the horizon, according to Jos Schmitt, CEO of Aequitas Innovations. "Competitive and innovative forces are starting to have an impact on the marketplace and the winners, at the end of the day, will be the small and mid-sized companies who will be given choice. This will be a great win for them," says Schmitt.
Recent moves by exchanges and regulators reveal a new momentum is in the works, aiming to provide Canadian start-ups and entrepreneurs with new solutions for raising capital and trading their stock.
But what's not working?
In 2011, the Innovation Canada: A Call to Action Expert Panel Report indicated that Canadian companies are not as well financed as their U.S. counterparts, and foreign funds are present in a disproportionate share of Canadian assets. The report found Canadian firms are often forced to, or choose to, go public too early and the relatively low listing requirements for venture companies could be counterproductive. It concluded that the weakness of the venture capital sector makes it difficult for young firms to grow.
Calls were made to improve access to seed capital. In 2012, The Advantage Ontario, Jobs and Prosperity Council ranked Ontario 18th out of 20 North American jurisdictions on a per capita basis for venture capital investment. And in 2013, the Prime Minister of Canada's Venture Capital Action Plan acknowledged challenges on a number of fronts: persistent low returns for venture capital investors leading to a lack of confidence; reluctance of institutional investors to invest in innovative early-stage firms; the relatively small size of venture funds in Canada; and a shortage of experienced venture capital fund managers.
My company, Cdling Capital Services Inc., submitted during sector consultations leading up to the PM's plan, that any government led reboot of venture capital in Canada should avoid getting in the business of picking winners, and focus on spurring the creation of many small funds, improving liquidity at the earliest stages and generating competition.
It comes as no surprise that our small and mid-sized companies are focused on attracting foreign investors, selling too early to strategic buyers or list too early on public markets. They have been unable to access the capital they need.
Why is this set to change?
Marketplaces, such as Aequitas Innovations, and regulators across the country are finally finding solutions for our private markets and encouraging venture communities to speak up and support initiatives. Regulators, including the OSC, are continuously seeking industry comment on initiatives to encourage capital raising, as they better align themselves with the realities of capital raising in the 21st century and investors calls for choice.
The backers behind Aequitas, which include the likes of OMERS Capital Markets, Investors Group, CI Financial, BCE and Royal Bank of Canada, identified challenges in the Canadian private markets, as well as other issues in the capital markets. To tackle the venture capital issues head-on, Aequitas revealed in 2013 it would build a custom private markets platform that will unleash a new way of funding and help transform today's small and mid-sized companies into the large, market leaders of tomorrow. Aequitas' Schmitt has called on the start-up and entrepreneurial community to mobilize and engage in a call to action that will drive the Canadian economy forward.
Driven by the threat of competition in the market, the TMX Group revealed plans to launch its own private markets solution. After years of concentration and disinterest, the venture capital community has welcomed this move as it clearly demonstrates of how effective competitive forces can be. Our growth companies are the winners here, presented with choice as they raise capital and garner interest and activity.
Change is undoubtedly coming to the Canadian capital raising landscape. Now we just need Canada's start-up community to step up and support the cause. Looking for a place to start? Join Jos Schmitt and myself in a Startup Grind Toronto fireside chat on what private market solutions mean for start-ups on Monday, April 14, 2014 at Wildeboer Dellelce Place.
Note: In addition to being the Founder of Cdling, I am Director of the Toronto Chapter of Startup Grind, a global network designed to inspire, educate and connect Founders sponsored by Google for Entrepreneurs and now active in over 100 cities including Montreal, Ottawa, London, Calgary and Vancouver.