Ottawa has recognized that Canada’s venture capital scene is broken, and Finance Minister Jim Flaherty earmarked $400 million in the last federal budget to be deployed to breathe new life into Canada’s entrepreneurial sector.
The venture meltdown is a large problem that’s not unique to Canada. As the “Startup Nation,” Israel was flying high in 2008. It had the highest density of tech startups in the world, and these startups attracted more venture capital per person than any other country – 2.5 times more than the United States, 30 times Europe, 80 times India and 300 times China.
With only 7.1 million citizens, Israel raised nearly $2 billion in venture capital in 2008 ($270 per capita), eclipsing Canada’s $1.2 billion ($35 per capita) by a mile. In early 2009, more Israeli companies were listed on the Nasdaq than came from any other country outside of the U.S.
Then the financial crisis hit.
As the smaller pool of venture capital looked to reduce risk by moving to later-stage financing, the newest crop of startups in Israel was starved for funding. It started shrinking and is still shrinking. This is considered to be a serious problem in Israel, a country that relies heavily on building its economy right from its start up roots.
In 2012’s first half, according to the IVC-KPMG Quarterly Survey of venture financing, Israeli seed companies still attracted only 5% of venture capital raised (it was 3% during that period in 2011 and 5% in 2010). By comparison, mid-stage companies continued to lead investment with 42% of the total, compared with 46% and 48% in the first halves of 2011 and 2010, respectively.
Finance Minister Flaherty was quoted in the Globe & Mail recently saying that Canada really needed to concentrate on the startups, where Canada shares the same serious problem with Israel.
“There’s a direct return to Canadian society, economy and future growth by making these kinds of funds available.”
Bingo. He’s sure got that right.
Let’s hope that this $400 million is truly focused on funding a new surge of startups across the country, but especially here in B.C. A new tech startup surge in B.C. is needed to hedge Victoria’s current overwhelming obsession with large energy and resource projects in the north. These projects are geared to sell products to China and other Asian markets, and all it would take is an economic hit in these markets to derail many of these projects.
Anyone remember Tumbler Ridge and the plan to sell coal to Japan?
The political push behind our resource megaprojects is jobs, jobs, jobs – to quote every politician on the government side of the legislature.
However, if job creation is the number-one objective, let’s not forget where the majority of jobs have come from in B.C. in the past decade or two.
The KPMG Tech Report Card 2012 pointed out that B.C.’s tech industry is outpacing B.C.’s traditional resource-based industries in revenue and employment, both in size and growth rate. The sector employs more than 80,000 people – more than the forestry, mining and oil and gas sectors combined.
The B.C. technology industry contributes more to the provincial GDP than any of the traditional resource-based sectors and grew to $18.9 billion in 2009 from $12.1 billion in 2001, an average of 5.7% annually, more than double the rate of overall provincial GDP growth.
Yet according to KPMG, the B.C. technology industry is underperforming relative to its potential. The GDP associated with the technology sector compared with the province’s total GDP is significantly lower than the Canadian and U.S. averages, and tech employment, as a percentage of total B.C. employment, is behind that of the other provinces with significant technology industries.
So how can we get B.C.’s tech sector to realize its potential? A good place to start would be to create a huge new wave of tech startups in B.C., with the joint venture financing horsepower of the federal and provincial governments and the private venture capital community.
My bet is that a determined focus on tech startups would continue to create more jobs in B.C. than can be created from the forestry, mining and oil and gas sectors combined.
