Canada may be considered fortunate in having a growing and increasingly diverse institutional venture capital market when, by all accounts, this is not the case in many advanced industrialized countries outside of North America. Perhaps it is not surprising that the Canadian market has evolved, sometimes unsteadily, in the wake of the vibrant American market. Indeed, it can be said that the Canadian venture capital market has benefited substantially over time from the lessons learned in earlier experience south-of-the-border.
The origins of venture investing in this country can be traced to the early 1950s, but a fully-fledged market did not appear until three decades later. By the early 1980s, total venture capital resources had climbed to over $1 billion and investment activity and infrastructure seemed to moving in a direction parallel to that in the United States. In several seminal reports produced during this period, however, Mary Macdonald pointed out that venture capital supply flows were too unstable to assist market development over the long-term and that certain structural problems impeded optimal investment. Key among the latter problems was a limited number of qualified and experienced venture specialists to manage pools.Endnote 36
Despite the obstacles, the national venture capital market has progressed over the years. One of the reasons for this was the contribution of the federal and provincial governments to improving supply conditions, directly or though indirect vehicles such as labour-sponsored investment funds. Relatively constant capital flows permitted the market to evolve structurally to the extent that, today, venture investing is a much more dynamic activity than it was in the last decade.
At the beginning of 1998, total capital under management in the Canadian market had grown to $8.4 billion or a near doubling of available resources since the early 1990s. Augmented supply was, in turn, matched by unprecedented investment. In 1997, a total of $1.8 billion was disbursed to close to 800 companies, up 67 percent from the record high attained in 1996. Moreover, venture financing has reached a far broader range of SME demand in recent years. Due to a variety of factors, small dollar projects, start-ups and early stage transactions receive a bigger share of market disbursements than has historically been the case.
Perhaps one of the most meaningful trends in Canadian venture capital has been the heightened portion of investment activity directed towards growth-oriented firms in emerging technology-intensive industries. While they potentially represent new generations of employment for Canadians, new and developing high technology SMEs were the targets of less than half of total venture disbursements in the late 1980s. By the early 1990s, this level had declined to around one-quarter due to a perceived lack of quality in technology- related deals.Endnote 37
By 1997, the high technology investing of venture capitalists had climbed to over two-thirds of total disbursements, finally besting the support shown to more traditional industries. Biotechnology, communications, computer products, electronics, environmental goods, industrial automation and medical-related technology are among the most favoured of knowledge-based sectors. Perhaps the estimable investment flows reaching the spectrum of life science industries and industry segments is the most dramatic trend, currently. Macdonald argues that this and related developments are due a maturing relationship in supply and demand. There is, she says, positive mutual re-inforcement occurring between strong resources and increasingly capable specialty management on the supply side and, on the demand side, more and increasingly sophisticated entrepreneurs.Endnote 38
The rewards of venture investment to the national economy are out of proportion to the market's comparatively modest size. By undertaking financing of new business formations and high-growth SMEs not easily accommodated elsewhere, venture capital institutions facilitate gains to growth and jobs that replace the losses of economic restructuring. This is most apparent in the highly-skilled, highly-paid workforces of venture-backed technology firms, noted above. In the United States, such firms are credited with creating knowledge workers - engineers, management personnel, technicians, technologists and scientists - at four times the level of similar employment created by that country's top 500 publicly-listed corporations.Endnote 39