Saturday, May 31, 2008

VCs Need to Eat The Dog Food - Quoted in The Montreal Gazette

People often ask me:
"Paul, is it true that the VC Whisperer was quoted in Friday's Montreal Gazette, speaking out about the state of the venture capital industry in Canada? Is there anything that can be done to solve all of the problems the industry is facing?"

I have been attending the annual CVCA (Canadian Venture Capital Association) conference over the last couple of days. A great reporter from the Montreal Gazette, Roberto Rocha, wrote a very interesting article about some of the troubles facing the canadian venture capital industry at the moment. Here is an excerpt from the article:
While the outlook for private equity deals looks grim in the midst of a credit crunch and the still-fresh wounds of failed mega-deals, VCs see their future in a more positive light. Investors have built better management teams and made strong ties with powerful U.S. funds, said Gilles Duruflé, an independent consultant who advises VC and private equity funds.
However, returns in Canada remain far below U.S. averages, prompting some VCs to wonder if success necessarily means emulating the American way - taking bigger risks, investing in late-stage startups and holding companies longer before selling.
Paul Dawalibi of Garage Technology Ventures believes this is the way. To achieve this, Canada needs VC funds with the critical mass to attract top management talent and foreign investors.
"This will take some time," Dawalibi concedes. Some funds we have here are so new we don't know that track record."

The only way to solve many of these issues is for Canadian VCs to "eat the dog food" - that is, start putting into practice the same advice we give to entrepreneurs on a daily basis. On that note, I want to highlight a few thoughts that didn't make it into the final cut of this article, and emphasize the ones that did:
  • Be different. Like any other startup, it is important for Canadian VCs to stand out from the crowd. Some are doing this. In the case of my fund (Garage), we realize that we are too small to be effective on our own. Thus, we partner regularly with premiere VCs in the US to plug our companies into the resource rich environments of Silicon Valley, Boston, New York etc... The BlackBerry fund that's been created by JLA is another good example of differentiation that will pay dividends. 
  • Think big. It's not good enough to want to do business in Canada or build a Canadian company. The big money is made with big ideas that have global reach. 
  • Cash is king. Politics are rampant in the Canadian venture capital industry. Everyone seems to have lost track of what's actually important - not making friends, but making money. 
  • People matter most. I tell my companies this all the time. But Canadian funds don't always remember how important people really are. Small funds have difficulty attracting the best talent because they simply can't afford it. But a simple solution exists - change the rules. Give the best and brightest young talent more responsibility than they would get elsewhere (read: in the US). Pull them out of the best MBA programs and give them full reign to make things happen, and the proper incentives (carry) to do well. It's a riskier strategy in the short term, but will pay huge dividends in the long run. Failing on this front will spell the end of the Canadian venture capital industry, or at least banish it to an eternity of poor returns. 
If VCs in Canada start eating the dog food, there's no reason good returns shouldn't follow. But it will take lots of work, and a focus on attracting the most talented people to run the funds. To achieve that, old ways of thinking need to be thrown out, and replaced with drive, ambition and fresh perspectives.

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