The availability of venture capital in Canada was all the fuss a month ago, with an array of opinionated blog posts generating a large amount of reader comments. It started with a now infamous tweet from David Crow of Omers Ventures, igniting response from the likes of Mark Evans, Mark MacLeod and Techvibes.
Techvibes recently spoke with the iNovia Capital entrepreneur-in-residence. David Nault. He shed light on everything from why startups may feel underfunded to what the future of venture capital looks like in Canada.
"WE'VE NEVER HAD SO MUCH MONEY"
Many articles on this subject seem to attract the inevitable chorus of naysayers. Most commonly heard is that there’s not enough capital going around in Canada. “That’s completely false,” said Nault. “We’ve never had so much money for early stage companies in Quebec and the rest of Canada.”
The money requirements for both early stage startups and angels are now lower. Anyone who knows how to code can bootstrap a decent platform. Anybody with $50,000 in the bank can make micro investments.
This has created a funnel where not everyone can be accommodated. It’s a huge influx of early stage startups vying for cash. “It’s like going to a party where there’s 200 guys and three women. All of a sudden you’ve got major competition,” said Nault.
“Every company has their idea of what a great business is,” he said. “Well maybe so but you’re always trying to compare it to the next one and the more deal flow that you have the more that you’re going to be able to compare.”
According to Nault, the moment a company wants to raise follow-on funding it has to have delivered on certain metrics. This is something that the Montrealer says not every startup fully realizes at times.
MacLeod’s piece on an imaginary $100 million VC fund promted Nault to talk about venture capital availability at last month’s GROWtalks event in Montreal.
In his talk he explained how the intent is to triple the size of the fund in 10 years in order to make a 20 per cent annual return. And if a fund owns an average of 15 per cent of the companies it invests in, it needs to pull in $2 billion in exit proceeds in order to hit $300 million for itself. And this is not easy.
If that imaginary VC fund makes an average investment of $5 million over a company’s lifetime, “you can’t just invest in 500 different companies,” according to Nault.
“So some of them aren’t going to make it and you’ve got to think about doubling up on your out performers,” he said. “The second notion is that if you invest in so many companies it takes up so much of your time that you cant put effort into the companies that need helping.”
WHERE DO WE GO FROM HERE?
Nault see’s the next five to ten years as a period where Canada generates more large companies.
“I think there’s going to be some good exits and that’s going to create even more talent and even more early stage money,” he said.
As well we’re going to see more diversely contributed funds. Ideally this should lead to improved access to longer term funding so that great Canadian companies can reach an exit stage. But Nault wants these companies to continue building in Canada, resisting the urge to sell.
“Its very tempting for the entrepreneur to take that exit and make a couple million bucks (and that’s required in the whole ecosystem),” said Nault. “These people need to know that there’s follow-on funding to keep them here to build huge companies.”
We should see more experienced management teams coming back and restarting companies. We’re also going to see more corporate organizations assisting seed-stage companies. Finally, Nault sees more strategic US money coming north for more deals.
For now the optimistic entrepreneur, who says he's proud to call Quebec home, feels that the stars are well aligned. “We’ve never been in better times or better opportunities, we’ve never been in a more stimulated tech entrepreneurial ecosystem and we’ve never had more support.”
Photo: QMI Agency