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Venture capital plays an important role in a region’s innovation ecosystem by providing emerging firms with early-stage financing—such as pre-seed, seed, start-up, and other early-stage funding—or later-stage financing—i.e., funding provided after commercial manufacturing but before an initial public offering.1 This risk capital provides firms with the financial resources they need to invest in further research and development, manufacturing, and marketing before they are able to generate solid revenue streams to do so on their own.
Venture capital is also an important source of managerial expertise—a key ingredient in successful innovation. Along with financing, venture capitalists bring entrepreneurial experience, industry knowledge, and networks of customers, suppliers, and other funders—all of which many new entrepreneurs lack. Given that Canada’s management capacity for innovation is weak relative to many international peers, this could be an important piece in solving Canada’s innovation puzzle.
Collecting comparable data on venture capital investment across countries is challenging, and some variability in performance may be a result of data issues rather than actual differences in performance. As the OECD notes, “there are no standard international definitions of venture capital nor of the breakdown of venture capital investments by stage of development. In addition, the methodology for data collection differs across countries. Data on venture capital are sourced from national or regional venture capital associations that produce them.” The data used here are drawn from a “harmonized” OECD data set, as well as from Industry Canada’s Venture Capital Monitor, whose national- and provincial-level data align with the OECD dataset.2
We use a two-year average for the international peers and a three-year average for the provinces to smooth out some of the year-to-year variability in venture capital investment, especially in smaller jurisdictions that see few deals. In smaller jurisdictions, one or two large venture capital deals in one year can make that jurisdiction look better than it really is on a long-term basis in terms of attracting venture capital.
Provincial performance varies widely. Very strong venture capital investment rates in B.C. (0.16 per cent of GDP) and Quebec (0.14 per cent) place those provinces second and third, respectively, among international jurisdictions—behind only the United States (0.17 per cent). All three jurisdictions earn “A” grades on the venture capital report card. With new investments in companies in the information and communications technology (ICT) and life sciences sectors, the venture capital investment rate in B.C. has more than doubled in just two years. Looking at the most recent data for 2014 (rather than the three-year average), B.C. has the highest venture capital investment rate of all comparator jurisdictions (0.21 per cent of GDP).
Although Ontario-based firms received more venture capital money than firms in other provinces ($906 million in 2014), Ontario’s venture capital invesment rate as a percentage of GDP (0.11 per cent) is lower than the three leading jurisdictions. Still, Ontario earns a “B” and ranks fourth overall. Relatively high investment rates in B.C., Quebec, and Ontario combine to place Canada fifth overall—second among peer countries—with a grade of “B.”
Among the remaining provinces, Newfoundland and Labrador ranks 7th and earns a “C,” while the others rank 10th or lower and earn grades of “D” or “D–” on this indicator. Analyzing the performance of the smaller provinces presents a challenge given the volatile nature of venture capital investment. For example, although Newfoundland and Labrador had an average venture capital investment rate of 0.06 per cent of GDP between 2012 and 2014, this was largely a result of only two venture capital deals totalling $60 million in 2014. Over the previous nine years, Newfoundland and Labrador averaged just $2.7 million in venture capital investment annually, which amounts to 0.01 per cent of GDP—second lowest of all comparator provinces and countries.
Venture capital investment in Canada overall has more than doubled in recent years—from nearly $1 billion (0.07 per cent of GDP) in 2009 to over $2.3 billion (0.12 per cent of GDP) in 2014. Canada’s three-year average venture capital investment rate sits at 0.11 per cent of GDP. Meanwhile, nearly all of Canada’s global peers have experienced massive declines in venture capital investment as a percentage of GDP. As a country, Canada has climbed from third-worst in 2009 to second-best in venture capital investment relative to 15 peer countries in 2014.
B.C. and Quebec are the highest-ranked provinces and the only two “A” performers on venture capital investment, while Manitoba and P.E.I. are the lowest-ranked provinces, scoring “D–”grades. Ontario earns a “B” for venture capital investment of 0.11 per cent of GDP, which is in line with the overall average for Canada. Although Newfoundland and Labrador scores a “C” for venture capital investment of 0.06 per cent of GDP during the 2012–14 measurement period, its venture capital performance is much more volatile when measured over 10 years. Nova Scotia and Alberta lagged Newfoundland and Labrador in 2012–14; however, their venture capital investment performance over the past decade has been better and more consistent than that of Newfoundland and Labrador.
Overall, yes. The number of Canadian firms receiving venture capital—and thus management expertise and networks—climbed from 378 in 2009 to 454 in 2011, before settling back to 416 in 2014. As with investment itself, there is significant variation across provinces, with five provinces witnessing increases, four experiencing decreases, and one holding steady since 2009. New Brunswick in particular is on a steep growth trajectory in terms of companies receiving funding and management advice. Whether these specific companies succeed or fail, the increase in entrepreneurs receiving real-world management guidance bodes well for Canada’s innovation performance in the future.
In 2013—the most recent year for which international data are available—Canada’s mix of early-stage and late-stage venture capital funding was unique among international peers. Less than 20 per cent of venture capital investment in Canada took the form of early-stage financing—i.e., pre-seed, seed, and start-up funding—versus an average of more than 60 per cent among international peers. The other 80 per cent took the form of later-stage financing—i.e., funding provided after commercial manufacturing but before an initial public offering. This distribution departs from the Canadian pattern in 2009 when early and later-stage venture capital investments were roughly equal and more in line with the global norm.
The reasons for the uniquely Canadian shift toward later-stage funding are not clear. From an optimistic point of view, the shift suggests that some investors may be getting the message that firms in Canada face greater difficulties in growing than in initially launching. But it also raises questions about whether sufficient early-stage funding will be available for Canadian start-ups in the years ahead.
Canada’s larger provinces have performed very well since 2009, with substantial increases in venture capital investment in Ontario (117 per cent), B.C. (91 per cent), Alberta (81 per cent), and Quebec (61 per cent).3 Smaller provinces, however, have experienced declines since 2009, ranging from a decline of 19 per cent in Newfoundland and Labrador to a decline of 70 per cent in New Brunswick. However, the decline in New Brunswick is more a reflection of the fact that in 2009 the province was at a 10-year peak in terms of venture capital. Its 2014 rate of 0.04 per cent is much lower than the 2009 peak of 0.09 per cent, but more in line with its 10-year average rate of 0.05 per cent.
Between 2009 and 2013, venture capital investment rates declined in every peer country except Canada and the United States, where they increased by 61 per cent and 96 per cent, respectively. Canada and four key provinces have improved both their absolute venture capital investment rates and their performance relative to nearly all international peers. This appears to be a consequence of a few factors:4
In short, venture capital investment rates in B.C., Alberta, Ontario, and Quebec are benefitting from injections of funding from Canadian government sources and U.S.-based venture capital investors. Relative performance has also improved as a result of the post-recession decline in venture capital funding in some peer countries. Whether these trends will hold in the future is an open question. What is clear is that Canada’s venture capital investment performance relies heavily on foreign- and state-backed funds rather than domestic private funds, suggesting the venture capital market in Canada as a whole may be vulnerable.
At the moment, performance in three of Canada’s largest provinces is relatively strong, while in the other provinces it ranges from fair to poor. As European countries emerge from the lingering effects of the recession, Quebec, B.C., and Ontario could see their lead erode, while lagging provinces may find themselves even further behind. Moreover, as Canadian firms compete primarily in a North American market, the leading performance of the U.S.—and especially jurisdictions like California and Massachusetts—should be a concern. Performance has improved for some Canadian jurisdictions, but further improvements are needed.
For any jurisdiction to do well in venture capital investment—and, in turn, reap the innovation benefits of venture capital investment—it needs three things: people or organizations with money to invest, firms worth investing in, and mechanisms to link the two groups.
1 OECD, Entrepreneurship at a Glance 2014 (Paris: OECD, 2014), 22.
2 Ibid., 22, 102–4; Industry Canada, Venture Capital Monitor.
3 Provincial change has been calculated as the percentage difference in the 2012–14 three-year average venture capital investment rate versus the 2009 (one-year) venture capital investment rate.
4 Daniel Munro, Canada’s Venture Capital Opportunity (Ottawa: The Conference Board of Canada, 2015).
5 BDC Capital, About.
6 Michael Grant, Start Me Up: Funding Canada’s Emerging Innovators (Ottawa: The Conference Board of Canada, 2014), 72–3.
7 Ibid., 72.
8 Ibid., 74.
Venture capital investment as a share of GDP.
The data on this page are current as of September 2015.