The headline posed a simple question: What’s wrong with Canada’s funding ecosystem?
It surfaced last Sunday morning on the Financial Post site, and featured a big photo of a smiling Michael Litt, CEO of Vidyard, a Waterloo Region video marketing and analytics company (disclosure: Litt sits on Communitech’s board).
My guess is that Litt wasn’t smiling by the time he finished reading the piece, judging by a Facebook post he shared on Tuesday. In it, he took aim at comments made by Michael Grant, director of capital markets research at the Conference Board of Canada, in the same Post piece.
Grant argued that ideas alone aren’t enough for Canadian investors to back startups, and that early-stage companies need to get better at running businesses if they expect to attract more risk capital.
To Litt, this underscores what he sees as the real problem with Canada’s funding ecosystem: Itself. He argues that too many would-be investors would sooner sit on their wallets and hold out for safe bets than take chances on audacious ideas, as Silicon Valley investors do.
As a result, Canadian startups turn to the Valley for investment, which inevitably means the returns go south, starving the Canadian ecosystem of vital fuel for growth.
I sent Litt a few follow-up questions by email as he boarded a plane in San Francisco, where he’d met investors, on his way to a conference in Orlando to meet customers. He used the time in-flight to craft his answers, colourfully as always.
Q – A Financial Post story this week posed the question, ‘What’s wrong with Canada’s funding ecosystem?’ How would you answer this question?
A – I was called a few weeks ago to share my opinion on this piece. Interestingly enough, the reporter had already concluded via other interviews that nothing was wrong with Canada’s investor ecosystem; the problem was with the founder ecosystem and that the founders themselves lacked appropriate business acumen to entice investor dollars.
To be transparent, I was infuriated by that conclusion. It’s the typical VC copout: “It’s not you, it’s me.” Bullshit. Did Drew Houston have business experience when he started writing code for the now > $5B Dropbox? Negative. Did Zuckerberg? What about Aaron Levie from Box?
Not a chance.
What these guys had were pretty interesting ideas and a heaping scoop of naiveté. This lack of business acumen was arguably their biggest strength. They went after an idea that anyone with an MBA would have avoided with a 50-foot pole, yet they’ve built the most influential, innovative and impactful companies/technologies the world has arguably ever seen.
The problem with the funding ecosystem is the funding ecosystem. Founders who make some money would rather relax in Muskoka then pay it forward spending time with this current generation of naive founders. Companies are left to scrap rounds together via the few Canadian investing institutions that get it and a slew of government backed initiatives.
It’s very rare to meet someone with a trigger finger on government money that has a lick of experience starting, building and scaling a modern tech company. I’ve seen many that think they get it, but they always try to rationalize what need to be irrational investments.
Canadians are OK with $5M in net worth. What we need are a bunch that are OK with $2.5M as a safety net, but the goal of becoming billionaires via investing in tech. Who am I to pass judgment? I save my pennies to invest irrationally in what I believe are great founders with interesting ideas. You’d likely cringe at the way I financially plan.
Q – The piece talks about how Vidyard was unable to raise institutional money in Canada right after it raised a $1.65M seed round from top Valley investors, and how that changed only once you brought in some senior talent. What does that tell you about the approach to risk capital in Canada?
A – To clarify, we had ~$500K raised from Silicon Valley when I asked a newly formed venture fund in Canada to take the rest of the round. They wanted to see more “traction” so I raised an additional $1.15M back in the Valley and never looked back.
Since there’s less capital available, there’s more risk in investing (lack of follow-on/differentiated investors, lead investors later on); since there’s more risk, cheques don’t get written.
There’s also a lack of individuals in Canada who *publicly* made a shitload of $$ investing early in what are now big startups. Who is Canada’s Ron Conway? Where is Canada’s Peter Thiel? We need these examples to pull old mining money out of the woodwork (literally).
Q – What does Canada lose when startups have to go to the Valley to secure funding, even if they return to build their companies, as you did?
A – Wealth creation. I’m potentially making a bunch of dudes who are already mega-rich in the U.S. even richer. More wealth in Canada = more investments in startups = more startups = more innovation = more jobs. We all know the government loves job creation eh?
Q – One of the people quoted in the Post story suggests the more-rational Canadian approach to investing ultimately means more companies are successful, even if fewer of them become huge successes like Facebook, Google, Airbnb etc. What do you think of that?
A – Rational money would not have funded any of those successes. Rational money funds rational companies, and rational companies generally don’t become $1B+ businesses. The logic there is broken – you need to kiss many frogs to find a prince, and this is about finding princes and princesses.
Read the full, original version of this article on Communitech.