Letter from the editor: A prominent VC speaks out about Canadian tech’s ‘exposed bottleneck’

If you’ve spent any time on LinkedIn, you’ll know it’s a place for intense self-promotion, where every CEO’s company is enjoying hyper-growth, and where every entrepreneur is living the get-rich-quick dream. I’m embellishing—a little—but I’ve spent many hours scrolling and rolling my eyes at the narcissistic evangelism the platform brings out in its users. 

Which is why a series of LinkedIn posts this month by Anthony Mouchantaf, director of venture capital at RBCx, the bank’s platform for tech entrepreneurs, caught my attention. 

In them, the former entrepreneur turned investor laid bare some truths about the venture capital ecosystem in Canada. Most notably, his team’s analysis estimated that 35 cents out of every dollar Canadian venture capital firms invest in Canadian technology companies have a direct link back to government programs. And if you were to extract public capital from the ecosystem, much of the remaining 65 cents would also vanish because of the government’s frequent role as anchor or lead investor, whether directly or indirectly through a fund-of-funds.

That has Mouchantaf concerned. As he wrote, “Canada’s venture capital ecosystem remains disproportionately reliant on public-sector financing. With an over-concentration of government capital, Canadian tech has a single exposed bottleneck, and this is a continued risk to scaling a resilient ecosystem.”

Mouchantaf’s piece goes on to recommend reducing some of the regulatory hurdles to allow individual investors to invest in non-listed assets. But it was the government funding breakdown—and his raw analysis of it—that I found most surprising.

There is no debate that a startup ecosystem needs government funding as a spark to ignite. Silicon Valley was infamously bankrolled by the U.S. Defense Department. Israel got its startup-nation moniker by drawing from the Israel Defense Forces’ financial and human capital. But at what point should public funding recede and private funding catalyze future growth? And has Canada reached that stage? This is not just a theoretical question. As our reporter Catherine McIntyre wrote in a feature last year, the Business Development Bank of Canada—which pumps more money into the country’s VC sector than any other investor—is slated for its first mandate review in a decade, and answering this question will be of paramount importance.  

A 2016 working paper from three academics who study entrepreneurship framed this question perfectly: 

Clearly the presence of government funding affects the market equilibrium. The debate is whether these programs have a large effect on total investment quantities with limited effect on valuations (the intended market-expansion effect), versus a limited effect on total investment quantities with large effects on valuations (the unintended crowding out effect). 

Is government funding of venture capital at the stage where it is crowding out private markets? Has the Canadian venture ecosystem matured to the point where government funding is inflating valuations and favouring investors with unique access to deal flow and information rights?

On this latter point, Mouchantaf takes direct aim, writing, “The venture capital space remains relationship-driven. It’s a small, insular community, and the ability to invest in venture capital funds and high-growth startups will primarily depend on whether investors happen to know fund managers or startup CEOs. It’s arbitrary, local and inefficient.”

On the former point, however, Mouchantaf took a stance that surprised me. He argued that despite the ecosystem’s reliance on government capital (and the privileged relationships it creates), we actually need more of it. He called for the federal government to increase its funding for the Venture Capital Catalyst Initiative, a program through which it provides money for VCs to invest, from $450 million to upwards of $1 billion.

In a telephone conversation Wednesday, I asked him how he reconciled the two positions. 

“It seems like a paradox, right?” Mouchantaf told me. “I was very conscious of that as I was writing it. In one line, I said, ‘There’s a lot of government money.’ In the second, I said, ‘Let’s increase government money.’”

RBCx’s Anthony Mouchantaf: “You’re starting to see the telltale signs of a maturing ecosystem.”

Mouchantaf argued that Canadian fund-of-funds managers have repeatedly demonstrated an ability to match public funds with private contributions, and to invest at scale into venture capital funds and startups, thus creating jobs and IP within our borders and generating superior returns for investors. 

“You’re starting to see the kind of telltale signs of a maturing ecosystem. You have repeat entrepreneurs who have been there, done that, who are now playing the role of angels and mentoring the next generation of founders. You have a good crop of venture capital investors across stages. And you’re starting to see sector expertise develop as well. We’re in a very different place from where we were in 2017, so why dedicate the same amount of capital in 2022?” 

It may be that government support is still necessary for an ecosystem that, despite its growing size, is still nascent. For example, take a random snapshot of two North American firms: Real Ventures, a Canadian firm launched in 2007, is on only its fifth fund. Greycroft, a firm of similar vintage based in New York City, is on its 14th fund, according to PitchBook. 

My own recommendation is that any fund-of-funds that takes government money should be required to publicly disclose its returns on those investments, giving more people access to the same data that now privileges a few select investors and family offices. After all, we are all limited partners in those funds. 

I would also encourage more investors to speak out more honestly about the state of the sector, like Mouchantaf has. As he told me, “Let’s all have a serious conversation about what’s happening. That’s really good. But let’s also be honest about what the risks are, and how we can address them.”

Perhaps the most positive sign of a maturing ecosystem is that venture capitalists of Mouchantaf’s stature are willing to speak publicly about the industry’s reliance on government funding. You never want to bite the hand that feeds you—unless you’re confident that in the long run, you’ll be able to fend for yourself.

Correction: Real Ventures has raised five solo funds. This story has been updated.

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