As Canada’s startup ecosystem has gained more momentum, one of the most puzzling issues is why there is so little corporate venture capital.
As much as Canadian startups need more capital, the absence of corporate players is strange, particularly given there’s so much momentum in the U.S.
You would think large companies such as Canadian Tire, Tim Horton’s, Loblaws, Sobeys and Shoppers Drug Mart would be looking to invest in innovative startups to jump-start growth and establish stronger digital footholds.
Unfortunately, this isn’t happening. Instead, Canadian companies are watching from the sidelines. At best, they are dipping their toes in the water by creating low-risk partnerships and opening offices in startup hubs. But if you’re looking for corporations actively investing in startups, you’re out of luck.
So why the absence of corporate VC activity?
Is it a lack of expertise or sophistication? Are there bigger financial priorities? Are they still licking their wounds from the 1990s when corporate VC portfolios didn’t perform well?
It may be all of the above but my take is that Canadian corporations have to get back into the VC business.
The biggest reason is they need to pro-actively and aggressively address disruption in their business models.
In a growing number of sectors, startups are changing the rules of engagement. The old ways of doing business are being destroyed. New players are outmaneuvering large companies by doing business differently or better. Look at what Wealthsimple, for example, is doing in the financial management industry by lowering fees within a margin-happy landscape.
If Canadian corporations aren’t actively involved in supporting startups, they risk having their business models weakened or, even worse, they will be marginalized competitively. It’s not a matter of whether Canadian corporations should invest in startups, it’s about how much, how many, and how aggressively.
The big issue facing Canadian corporations is how they get into the VC game. Do they allocate capital into an established VC fund? Do they invest directly and, if so, how would this activity be operated and structured?
There are a variety of options, but perhaps the easiest is simply a public declaration by a large, established player that it wants to invest in innovative startups. This would unearth a flurry of interest from startups looking for capital, and, as important strategic partners. For companies, the biggest challenge would be sifting through the different opportunities to identify potential investment candidates.
This approach is a win-win proposition: It will give corporations an excellent way to see what’s happening within the startup ecosystem and, as important, to establish connections within the startup ecosystem. As much as startups can benefit from new sources of capital, there are also benefits for corporations looking to be more agile, innovative and forward-thinking.
If Canada’s startup ecosystem is going to thrive, there have to be multiple players at the table. It requires entrepreneurs, incubators, accelerators, VCs, universities, and government (albeit in a supportive role) and large companies. This is how a healthy and vibrant ecosystem will be created that delivers benefits to everyone.
Given the exciting things happening with startups, it makes no sense for Canadian companies to be sitting on the sidelines. My suggestion is that they jump into the game now. Forget about a slow, no-risk approach that involves partnerships or alliances. Instead, let’s see some capital poured into startups that are aligned with a large company’s strategic vision and the challenges being encountered as new technologies disrupt their businesses and industries.
This new course will take courage, a leap of faith and new ways of doing business, but it has become a competitive necessity.
A final thought: In a world of low interest rates, Nicolas Colin argues that venture capital investments are a low-risk, high reward proposition.
Note: This article was originally published at markevans.ca.