Explaining the ‘lack of’ Venture Capital in Toronto

I figured it would be appropriate to write about the lack of a growing and robust venture capital community in Toronto since it cropped up in three places over the last 2 days  — once with several folks at Startup Drinks last night, today over coffee with Jeremy Laurin of OCE’s Investment Accelerator Fund and on Quora (the new social network launched by the ex-CTO of Facebook). On a side note, Quora is actually pretty snazzy with super-high-quality people.

Back to the main point of this thread — I’ve been talking about this situation for roughly 3.5 years now — first in the biotech/life science VC community in Toronto and now with the ICT community. I believe there is one problem at the root of both sectors — we need a kick-start in Canada.

What does that mean, a kick-start? Well, most people believe that there is a fundamental funding gap in Toronto’s venture community between pioneering research (in universities, by startups, etc…) and venture capital finance-able deals. That may be the case, but that is a different argument for a different day. I believe there is a more substantial funding gap that exists once a ‘successful Canadian company’ reaches the point of raising a round of capital greater than $15 million. The existing VCs in the community (generally) just can’t get those kinds of deals done. It’s not in our Canadian cards (given the average fund size, risk thresholds, etc…). Canadians need later-stage financing options (or Government money) to back those deals and to create a better later-stage ecosystem.

So, what happens instead? Great Canadian companies knock on the doors of VCs South of the border who are flushed with cash and willing to invest larger amounts in later rounds. For the record, I love US VCs. However, for the purpose of this discussion, or monologue rather, they have tended to bring companies close to home to minimize their geographical risk with the investment. Now, as companies continue to grow and are eventually sold, the successful founders and key employees of those companies often (not always) stay South of the border to further progress their careers — joining US companies, or launching other companies in those locales. Worse for Canada, those successful folks often reinvest in US VC funds or Angel invest in other local US companies rather than Canadian startups.

Envision that cycle reoccurring over and over for the last 30 years. The trend becomes large enough that a substantial amount of capital, and human capital for that matter, gets lost from the Canadian startup ecosystem.

Some say that there is a lack of venture capital in Toronto because there just aren’t great deals. I disagree. I think that there is a lot of talent in Toronto and in the surrounding areas, like Waterloo for example.

Now, the scenario I’ve described may not be the only reason for the lack of capital in Toronto (or Canada), but I feel that it is a significant part of the problem. What are your thoughts?

One thought on “Explaining the ‘lack of’ Venture Capital in Toronto

  1. In the perspective of someone who is just beginning a tech/health-related startup I believe it could have to do with the image and experience associated with US VC's vs Canadian VCs that draws many of these companies away from Canada to the south. For example, at the early stages if one were to do a startup they would most likely primarily have a heavy focus within the company's regionally established area as in the GTA. Thus, for an early stage fund it would make sense to make use of Canadian VC's who have greater knowledge/expertise of the Canadian market. However, at the later stages when looking to expand to larger markets, especially the US, I personally would prefer to choose a VC firm that has been established in those markets such as NYC VC firms or Silicon Valley based VCs. This is also given the fact that the US currently makes it difficult for startups to establish themselves in the states without proper funding. If the startup visa that some are proposing comes through, I believe Canada will have even fewer startups looking for their initial early funds in Canada. As such, it becomes a demand and supply problem. I believe given that these companies eventually will look to go to the south if they aim for larger exits, Canadian VC funds will be smaller to represent that shift in demand from startups. Instead I would argue Canada should look to establish themselves as a place where smaller exits are available rather than the 9-figure+ exits with larger funds associated with the south because once the US makes it easier for international startups to begin in the US, Canada will have even further problems with demand. Well that's just my take as a recent grad and startup entrepreneur. Btw great blog Josh its helping me out a lot!

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