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You are here: Home / Science and Tech / Not so risky business

Not so risky business

10/09/2012 by backofthebook.ca Leave a Comment

startups

By Mark Evans

Canadian venture capitalists have a problem: they’re cautious, conservative and have a low tolerance to risk. It’s an easy thesis to accept because, in part, it’s true.

It explains why The Globe & Mail published an extensive feature on the challenges facing Canada’s venture capital and startup sectors. The focus of The Globe’s story is how the federal government is trying to change the landscape by, in part, injecting $400-million into the venture capital ecosystem.

It raises a few questions:

1. Does it make sense for the federal government to play a pro-active role that includes financial support?

2. Will the federal government’s show-you-the-money approach encourage institutional and corporate investors to allocate money to venture capital after sitting on the sidelines for far too long?

2. If the federal government can flow money to Canadian VCs, will the VCs let it aggressively flow to startups?

3. As important, can the federal government change the ingrained culture in which risk is seen as a bad thing?

While you ponder these questions, it is important to remember the VC and startup landscape has been changing in the past couple of years.

There are an increasing number of experienced startup entrepreneurs with good ideas and aggressive plans. At the same time, there’s more money trickling into the venture capital sector, highlighted by OMERS Ventures raising $180-million. And then you’ve got a growing number of incubators and accelerators nurturing entrepreneurs and their ideas.

That’s the good news, and reason for optimism.

The bad news is there is still a long way to go.

Far too many startups need to demonstrate traction before they can attract seed capital. This not only means having a product but enough customers to have a viable business. If you’re an entrepreneur with an exciting concept or idea – no matter how unique or innovative – your chances of getting capital are as good as winning the 6/49 lottery.

What makes this aversion to risk so puzzling is the way it contrasts with Canada’s mining industry. I spoke with an investment banker recently who said investors have no problem pumping money into mining companies that think there is enough gold, silver, etc. in the ground to warrant spending millions of dollars digging holes.

The biggest challenge facing Canada’s venture capital and startup sectors is changing the appetite for risk. As much as more money is important, it won’t make much of a difference if investors don’t change their approach to startups, which are fraught with risk but, at the same time, plenty of opportunities.

Filed Under: Science and Tech Tagged With: business, Canada, money, startups, venture capital

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