Billions of dollars in venture capital transactions are going unmeasured in Canadian venture capital transactions.
The transactions -which were screened by the Euro Pacific Capital Investment Banking Group using traditional venture capital criteria– are not (or only partially) included in many measurements of venture capital activity apparently because it was transacted via the public rather than the private equity markets. During the four year period ended 2012 this ‘unmeasured venture capital’ represented 43% of all venture capital activity in Canada. We believe that this omission serves to lower the apparent level of venture capital activity in Canada.
With a relatively low cost ‘venture exchange’, abundance of capital pool companies, accessibility of institutional capital, smaller independent brokerage firms and a lower regulatory and financial burden, many Canadian venture stage companies choose to raise Series B, C and D funding via the public markets rather than through traditional private equity venture capital sources measured by the CVCA. Many of the top public technology companies in Canada –including BlackBerry, Constellation Software, Catamaran, Wi-LAN, Descartes, Avigilon (and most others) – moved to the public markets during what would be considered traditional private equity venture rounds in the US. Excluding these financings from Canadian statistics serves to understate the true economic level of venture capital activity in Canada relative to the US. It may further be that the Canadian policy success of offering liberal Canadian public markets for venture stage companies has exacerbated this effect.
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The Canadian Venture Capital Association (“CVCA”) provides an annual breakdown of venture capital activity. In 2012 they reported $1.5 billion in venture capital activity in Canadian businesses. The definition of venture capital that the CVCA uses (for the sake of full disclosure, I was in part responsible for measuring and calculating this data for the CVCA in the 1990’s) is similar to the the US definition used by the National Association of Small Business Investment Companies (NASBIC). US and Canadian venture capital markets are different however with a relatively smaller private equity component in Canada tied to more robust public market activity. As a result, using the US definition in Canada has understated venture capital activity in Canada relative to the US market.
Using the screening tools of S&P Capital IQ we found that for the period between 2009 – 2012 there was $2.2 billion of public market venture capital transacted via the public markets in Canada vs. the $2.8 billion reported by the CVCA in their private equity survey. The uncovered billions represent 43% of all venture activity in Canada during this period. Further, we compared the top five transactions in 2012 (by size) reported in the CVCA study with the top five uncovered in our study and listed them in Table 1: Can you tell which is which?
A proper policy review must begin by comparing apples to apples which means taking into account the structural differences between the US and Canadian venture capital economies. A more fulsome study is beyond the scope of this report however we call on the CVCA and other industry associations to review our findings and the potential impact of these unmeasured billions on the Canadian venture capital landscape.
Click here for the full report (PDF).