Canada needs more VCs

I checked out an interesting video this weekend from the founder of Pandora. The music service has raised $ 56M in capital and has over 32M users. By any measure it is on its way to being a big success. But as you will see in the video, to get to where it is today the company was turned down by over 300 VCs.

First of all, kudos to the founders for having the thick skin needed to handle so many rejections.  Skype similarly got rejected a lot (about 40 times) before getting its first round. It went on to generate over $2B in shareholder value and is now one of the most hotly anticipated IPOs.

The point of these examples is that they would never happen in Canada. I do think there are still too many VCs in the US. And this data point from PEHub certainly confirms that:

“…well over 50% of all industry returns come from about 30 fund managers”, Diana H. Frazier, FLAG Capital Management

So when 30 out of 1,000 VC funds are delivering 1/2 the industry returns, you know that a good chunk of the remaining 970 funds are not. So, good old Darwinian capitalism says they have to go.

Here in Canada we definitely have funds that have not delivered returns. And yes, they should go. But, we still need more funds in order to have a vibrant tech sector.

The Canadian economy is about 1/10th the size of the US. So, just on the basis of this crude metric we would need somewhere between 30 and 100 funds.

I gave a workshop at Mesh this Spring on getting your startup investor-ready. In it, I listed every single fund that had cash and was doing deals in information technology now. If you have a new startup and are looking for seed funding you can pitch angels or you can pitch 6 funds. If you need series A, by my calculation, you can pitch 11 funds. You have about 3 more to choose from at the series B level.

That’s not a lot of choice. The odds of a 1st time entrepreneur getting seed funding when he or she has 6 funds to choose from (fewer when you consider geography -i.e. a Montreal seed investor is not likely to lead a deal in Vancouver) are low.

So, at a time when everyone in the US says the industry needs to downsize, I applaud the efforts and vision of folks like Jacques Bernier at Teralys, Northleaf, BDC and Alberta Enterprise who are putting new capital into the ecosystem and backing new fund and new fund managers. This is exactly what we need so that entrepreneurs have more choice and so that all the best ideas get funded.