Monday, May 20, 2024

What you need to know about the state of venture capital funding in U.S. and Canada

by Kay Mathews 

Fuelling economic growth through investment in startup companies is a priority in Canada and the United States. Leaders of both nations have taken steps to reinvigorate venture capital industries in their respective countries, but the means to that end are distinctive.

According to a May 6 National Venture Capital Association press release, findings in the 2014 NVCA Yearbook indicate that venture capitalists raised $16.8 billion in new commitments and invested $29.6 billion in U.S. companies in 2013. And, importantly for startups, “56 percent of the financing rounds went to seed and early stage companies, compared with a more typical range of 33 percent, reflecting increased investor confidence in growth trajectory of emerging companies.” CB Insights reported, also in early May, that venture capital investments in Canadian startups totaled over $1B in the last four quarters (Q2’13 to Q1’14).

A new report found that SMBs in many countries suffer from declining profits and less access to funding within their country largely due to “subdued growth and demand,” as the National Post reports.

In recent years, however, the venture capital industry declined from its 2000-era peak.

The amount of money for venture capital investments in Canada decreased by 71 per cent in the second quarter of 2014 compared with a year ago, Canada’s Venture Capital and Private Equity Association reported.

The slump was predicted in 2011, when the Expert Review Panel on Research and Development indicated that Canada’s venture capital industry was plagued by poor returns, which led to low fundraising and decreased amounts of capital to fuel the growth of Canadian start-up businesses. In response to those findings, the Canadian government stepped in. In order to support the venture capital industry, $400 million in new funds are being deployed through the Venture Capital Action Plan announced by Prime Minister Stephen Harper in 2013.

To help small businesses succeed, the Economic Action Plan 2013 complements the Venture Capital Action Plan in an effort to “strengthen venture capital” and “promote the broader venture capital system” in Canada.

In the United States, President Obama launched the Startup America initiative in 2011. One focus of Startup America is “unlocking access to capital to fuel startup growth” in which the U.S. Small Business Administration (SBA) is the lead organization.

The Office of Investment and Innovation, within the SBA, administers the Small Business Investment Company (SBIC) program, which is “a portfolio of public-private partnerships comprised of about 300 principal investment funds with over $19 billion in growth capital.” In this case, the SBA emphasizes that it does not provide financing directly to small businesses and that the SBIC program “operates at a zero-subsidy cost to the American taxpayer.” Instead, SBA partners with private investors to capitalize professionally-managed investment funds (known as “SBICs”) that finance small companies.

In addition, Congress passed the Jumpstart Our Business Startups (JOBS) Act and it was signed into law on April 5, 2012. One provision of the law, crowdfunding (Title III), allows businesses seeking less than $1 million to be able to raise capital online from small investors. However, Title III has not taken effect because the Securities and Exchange Commission has yet to approve it. The good news is that StartupValley reports, “The SEC will likely implement all provisions of the JOBS Act by the end of the year [2014]. Startups should begin preparing for a huge flood of new investors.”

Canadian and American policies toward the creation of venture capital funds for startups stress the importance of private sector involvement and leadership. However, the distinction between the approaches of the two countries is highlighted by Ethan Song, CEO of men’s fashion retailer Frank & Oak. Government incentives have helped Canadian startups, like Frank & Oak, get launched. “You can get pretty substantial subsidies from the government,” said Song. The assistance makes building a startup “more cost efficient in Canada.”

As has long been the stereotype, Canadian trends often copycat what works south of the border. Colleen McMorrow, partner at Ernst & Young who leads entrepreneurial services, noted that venture capital funds in Canada would join projects after they are backed by similar funds from the United States.

“Maybe this is partly validation… in Canada, the VC may be slower to lead but faster to follow,” she said.

Flickr photo via user 401K 2013


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