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Growing the Businesses of Tomorrow: Challenges and Prospects of Early-Stage Venture Capital Investment in Canada

Foreword

This report, prepared by Macdonald & Associates Limited for the Business Development Bank of Canada (BDC), Industry Canada, and the Ontario Ministry of Economic Development and Trade (MEDT), considers some of the key issues involved in Canadian venture capital (VC) investment in seed, startup and early-stage firms, after almost a decade of industry activity.

To do this, research work concentrated on two areas. First, using the Macdonald & Associates database, a brief analysis of market trends in Canada and Ontario between 1996 and 2004 was undertaken, with an emphasis on early-stage activity.

Second, a series of interviews were conducted with senior VC professionals with experience in the field. The latter initiative was intended to obtain industry practitioner feedback on the progress of Canadian early-stage activity in recent years, about challenges that confront industry players at present, and about prospects ahead.

Research findings are summarized in the following sections of this report:

Section I provides a very brief introduction to the topic of early-stage investments in the context of venture activity as a whole.

Section II contains a brief statistical analysis of seed, startup and other early-stage activity in the Canadian VC industry since 1996, with particular attention paid to trends over market cycles, by sector, region, investor type, etc., and as compared to selected trends in the American industry. In some cases, feedback on specific data points was obtained from interviewees, some of which is noted in the text.

Section III contains the results of interviews with senior VC professionals in Canada and the United States, based on survey questionnaires developed by Macdonald & Associates. These results touch on a wide variety of issues, and include ratings by angels and VC fund managers of key challenges related to early-stage activity in a Canadian context. This section also includes a brief look at potential public policy recommendations arising from the feedback of professional managers.

Section IV provides a brief conclusion to this report.

A brief description of early-stage investment terms used in this report is contained in Appendix B. For definitions of other market terms, please consult the Glossary at the Macdonald & Associates website.

Macdonald & Associates would like to acknowledge with thanks the generous, expert participation of market participants and analysts in this project. Special thanks are offered to those involved in the project's consultation phase: Gilles Durufle, Andrew Harrison, Claude Haw, Doug Hewson, Stephen Hurwitz, Livia Mahler, Louis Marrett, Rick Norland, Kiera Torkko, Ilse Treurnicht and Sam Znaimer. We would also like to acknowledge the co-operative spirit of the project sponsors at the BDC, Industry Canada and Ontario MEDT.

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