Home Venture Capital The creative destruction of Canada’s VC industry

The creative destruction of Canada’s VC industry

Trees are falling in the forest.

The sound you didn’t hear the other day was the fracturing of one of Canada’s best known venture capital firms. One of the teams that had the experience and track record to be a survivor in the ever-shrinking Canadian VC industry. One of the firms that had been tagged to likely make it through the Star Chamber.

One of the firms that, like so many others, was once backed by some of the biggest LP names in the land. One of the firms that has had to replace those very same big LP names as folks increasingly pulled their horns in — one after another — on direct fund allocations over the past five years.

What happened?

It wasn’t that the fund and the current team hadn’t made investors money, so that old saw won’t work.

And it wasn’t that they didn’t have the sobriety to winnow weak portfolio companies when the facts made that decision necessary. A generic charge often leveled against the universe of Canadian GPs by some of the important LPs who still have a hand in the game.

And it wasn’t that they couldn’t attract domestic and U.S. venture capital funds to join them on their deals.

So, what happened?

It may well be that we are witnessing the “creative destruction” of the lion’s share of Canada’s VC industry. Creative destruction being the economic theory of “innovation and progress”, introduced by German sociologist Werner Sombart.

In Capitalism, Socialism and Democracy, by Austrian economist Joseph Schumpeter, the phrase was used to describe “the process of transformation that accompanies radical innovation”.

If some invisible hand is at work here, this may in fact be the creative destruction of the Canada’s VC industry. If so, it doesn’t appear to be following Mr. Schumpeter’s vision.

To him, capitalism was enhanced by the entry of a new class of entrepreneurs, even if it meant the evisceration of the existing power structure. And that’s just the problem.

There’s no robust “new class” of VC firms coming in behind the current oligarchy, with a similar amount of capital to deploy as those they are planning to replace. We are witnessing the destruction piece of the equation, for sure, but not the rebirth that is the essence of “creative destruction” if it is to succeed.

Does someone with the levers of power have a script, and this is all just part of the screenplay? If not, Canada’s entrepreneurs had better buy their plane tickets in bulk. Should the trend not turn around, there will be barely a handful of VC funds North of 49 left to raise capital from.

MRM

 
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7 Comments  comments 

7 Responses

  1. Rich

    The rumor is that this wasn’t driven by an event or person external to the firm. Internal infighting and greed was the problem here, apparently. No surprise given the firm in question.

  2. Brad J.

    Three years ago I was sitting in Teddy Rosenberg’s MBA VC course thinking (knowing?) that VC was the place for me. I’d go to a bank, get credit/banking training, then bust into the field when LSIFs were being supported again to find a home for all that capital.

    Well, the first half of the plan is complete. Second half is on indefinite (permanent?) hiatus.

    Mark, how effective do you feel the CVCA been in lobbying for support? What’s going wrong?

  3. Brad J.

    Actually, I see you’ve on the government relations group for the CVCA, so I can understand if you’re not able to comment.

    The Economist ran an article this week on VC in Ohio (link: http://www.economist.com/world/united-states/displaystory.cfm?story_id=16015351), highlighting that it’s a tough sell for a government to support a smaller group of educated tech workers, rather than auto workers, et al. I think that’s what we’re seeing in Ontario too.

    On a somewhat related note, I’ve always thought that Kitchener-Waterloo (blue and white collar towns, respectively) show the concept really well. A tale of two cities!

  4. Great article. The real reason we are seeing the decline of venture capital on both sides of the border is quite simply because the old venture capital model doesn’t work anymore: http://www.angelblog.net/The_VC_Model_is_Broken.html

    It’s simple economic Darwinism. And nothing we should be alarmed about.

    Contrary to popular perception, VC’s don’t finance our young companies and aren’t an important component of our economic future.

    Angel investors finance 27 times more start-ups than VCs: http://www.angelblog.net/Angels_Finance_27_Times_More_Start-ups_Than_VCs.html

  5. [...] that is happening, it might just not be happeing as fast as it could. Mark McQueen talks about the the creative destruction of the VC industry in Canada. “There’s no robust “new class” of VC firms coming in [...]

  6. Terrific post Mark. I believe the rebirth will come. It will take time, but the script is in the works…

  7. [...] that is happening, it might just not be happening as fast as it could. Mark McQueen talks about  the creative destruction of the VC industry in Canada. “There’s no robust “new class” of VC firms coming in behind [...]

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