One of the most overlooked stories on the North American venture capital scene is the variety and quality of investment options in Quebec, Canada’s second largest province. The trend line in recent years has seen U.S. VC firms increasingly taking advantage of these opportunities. And those that don’t could be at a disadvantage.
Quebec is one of the best places for U.S. firms to profit from the fundamental venture capital equation: buy low, build value, and sell high.
The first and probably the most important step in the venture capital equation is to find the ideal investment, and to get in at the right price. Quebec offers a range of opportunities, which for a variety of reasons result in excellent value for U.S. investors.
According to PricewaterhouseCoopers’ Global Private Equity Report Canada is the only country of the 20 largest venture capital markets in the world where entrepreneur demand for capital substantially exceeds supply.
The difference was considerable; $4.3 billion was invested in venture capital deals in Canada during 2000, but only $2.8 billion was raised. That means venture capital firms have their pick of deals, and that they usually get good value for the money.
Canada and Quebec are particularly rich in early stage deals, which attracted 60% and 52%, respectively, of all VC investments. This makes it particularly attractive for foreign venture capital firms to get in at the ground floor and profit from increased upside leverage.
These factors combine to make Canada an ideal option for U.S. venture capital firms, many of whom operate in a highly competitive local market where far more capital has been raised than can be invested.
But finding a good venture capital investment opportunity at an attractive price is only half the battle. The next step is building the company’s value so the investor’s stake can attract a high exit valuation down the road.
The next question in the U.S. investor’s mind is: are the key ingredients, such as co-investment partners, good people and world class technology, in place to enable us to build that value?
Of all the Canadian provinces, Quebec is particularly well positioned in the number of knowledgeable and deep-pocketed investors that U.S. venture capital firms can team up with to fund the venture.
They include well known groups Caisse de Depot et Placements du Quebec (US $10 billion private equity assets under management), the Fonds de Solidarite FTQ, (US $2.5 billion), the Innovatech group of investment funds (US $300 million) and BDC Venture Capital (US $270 million).
But all that money doesn’t do much good without the right management talent in place. Fortunately, Quebec is the ideal place to find that talent. Montreal Quebec’s largest city has a highly knowledge based economy.
Although the city is the 15th largest in North America by population, according to a study conducted by MontrealTechonoVision, Montreal has the 10th most technology jobs.
That figure is even more dramatic on a per capita basis. Montreal has the second most aerospace jobs per capita in North America (behind Seattle), is fourth in information technology jobs per capita, and third in BioPharma.
Biotechnology has been particularly hot in recent years, with Quebec now home to half of all Canadian bioscience firms, including several multinationals.
The value of Montreal’s human capital is dramatically illustrated by the city’s seven world-class universities, two engineering schools and the country’s largest biotech research facility. As a result, the city leads Canada in the number of university professors employed, patents issued and scientific papers published.
Not surprisingly numerous organizations have taken advantage of this talent pool, and clusters of knowledge have accumulated in a variety of areas. Montreal is home to Canada’s space agency. In addition, numerous companies such as Ericsson, Merck & Co. and Rolls Royce among others are conducting worldwide research and development mandates here.
Of course, venture capital is not just about investing and building value, it’s also about getting the money out, at the right price. So, is it possible to achieve an exit from a Canadian based venture backed company?
Indeed, Canadian venture capital investments have been shown to be remarkably liquid. According to a study conducted by NASDAQ for the Business Development Bank of Canada, of all the foreign companies listed on NASDAQ in 2000, more were from Canada than any other single non-U.S. country, more in fact, than all European based countries put together.
With all these advantages, is should not be surprising that both the Quebec and Canadian venture capital industries have shown considerable strength in recent years, and have weathered the market challenges of the recent technology bubble.
While U.S. venture capital investments dropped 65.0% between 2000 and 2001, the relative declines in Canada (-27.0%) and Quebec (- 32.0%) were far lower. In fact both jurisdictions registered their second-best years in history with disbursements of $4.9 billion and $956 million, respectively.
Quebec firms concentrated technology investments in non-Internet areas
While many U.S. investors were severely burned in the Internet tumble, Quebec and Canadian investors, many of whom concentrated the bulk of their technology investments outside of the Internet segment, emerged from the debacle in relatively good position.
For example, during 2001, 93% of Canadian venture capital money went to technology driven companies, but of that amount, only 12% was disbursed to Internet focused organizations. In Quebec, technology deals comprised 82% of the money invested, and once again, only 12% went to Internet related deals. Quebec continues to lead the rest of Canada in the number of deals done.
With Canada’s unique qualities it’s not surprising that about 34% of all venture capital investments comes from foreign (mostly U.S.) funds. However Quebec, despite its high technology focus remains a well kept secret, with only 10% of venture capital investments coming from outside the country.
To sum up, Quebec, and in particular Montreal, has made incredible progress in the last ten years. The province has produced a slew of world class winners whether it is Softimage, MetroWerks and Discreet Logic in software, BioChem Pharma, Axcan Pharma and Conjuchem in biopharmaceuticals, or C-Mac in electronics.
These successes have created a culture of achievement and a unique talent pool, and we believe that more opportunities exist today than ever before. A select few U.S. players have discovered the new scouting grounds that Quebec offers and are actively seeking to bolster their returns. The big question U.S. fund managers need to ask themselves is whether they can afford to stay on the sidelines and watch the parade go by?
Claude Miron is President of Reseau Capital, Quebec’s Venture Capital Association. He also is in charge of BDC Venture Capital, an early stage technology venture fund that operates six offices in Canada. He can be reached at firstname.lastname@example.org