Report calls for data-driven approach to government investing to grow world-class Canadian firms

A report from the University of Toronto’s Impact Centre is calling for a data-driven approach to maximizing the government’s investments in Canadian firms and growing them to be world-class. The report — Government Venture Capital: Can the Public Sector Pick and Nurture World Class Companies? — says that the Canadian government's strategy for venture capital investments should not simply copy what venture capitalists in Silicon Valley are doing.

Instead, Canadian government-backed VCs need to look into data from their investee companies and gather best practices that can be shared with the innovation community to learn from.

The report covers the investments of Canada’s most active government VCs – the Business Development Bank of Canada’s venture capital arm BDC Capital (BDC) and MaRS Investment Accelerator Fund (IAF).

“There’s a lot of data available that come from the investments that the Ontario and federal government have made into VC firms,” says Charles Plant, report author and senior fellow at U of T’s the Impact Centre, a research organization focusing on innovation.  “I’m trying to exhort the federal and provincial governments to actually study what they’ve done in their portfolios to figure how we can do better in the economy.”

In an interview with RE$EARCH MONEY, Plant says that these government investors have access to primary data not generally available to the public because the investee companies are not public companies. Yet, using secondary data from publicly available sources, such as CB Insights and websites focused on the investor community, Plant was able to deduce the successes of government VC investments.

For example, he notes in the report that government VCs in Canada are good at picking winners, that is, identifying companies that can grow. However, they are not good at growing them into world-class companies. In contrast, VCs in the US and other countries are good at quickly finding promising Canadian firms and then acquiring them to turn them into global, world-class companies. In the process, Canada has been losing firms with world-class potential as headquarter, sales and marketing functions — and profits — leave the country.

Silicon Valley, of course, is a popular reference for success stories in VC investments and startups. They have the VC, angel and seed funds, experienced and mature entrepreneurs, mentors and executives, and the human resources pool to grow companies. The report notes that Canada cannot compete with all the investment attributes that have made Silicon Valley a global financing titan. Thus, a different strategy – something that can be deduced from data available from investee companies – is the way to go.

“Using data will help us determine what works for nurturing Canadian firms. It will assist us in picking potential winners so we can target our rather moderate resources towards companies with a greater chance of success. And these same data will help us mentor new entrepreneurs in what they must do to become successful,” states the report.

Some examples of company data that could be analyzed include factors that contribute to revenues. These may include market intelligence activities of the funded firms, the split between sales and marketing, and different types of marketing activities. Aside from studying what these investee companies are doing right or wrong, the report urges the government to make these data publicly available to benefit the investment community.

Plant says the government VCs are good at filling the gap where there’s a lack of VC funding in the country. But he adds VCs should also look into growing world-class companies and not just creating companies that will be acquired by companies in other countries.

If Canada can keep these companies in the country and grow them here, Plant says these large companies could solve three age-old problems that have been nagging the country for decades, namely: the lack of R&D activities, not enough patenting and lagging productivity compared to the US.

“All three of these problems can be solved by having larger companies in the country,” says Plant. “Because countries with large companies, instead of having small ones, do lots of R&D, do more patenting, and are more productive.”

He says Canada’s current approach in addressing these three problems is simply spending money on R&D. Instead, what Canada needs is to spend money on commercializing companies so that they can grow.

But he says he’s not expecting this change in mindset to come any time soon.

R$