As Canada's largest venture capital investor, we know that venture capital plays a critical role in transforming cutting-edge research into companies that make our country more productive, innovative and competitive.
Venture capital plays a critical role in transforming cutting-edge research into businesses that make our country more productive, more innovative and more competitive.
Canada is fortunate to have a remarkable technology ecosystem comprised of world-class universities, research facilities and business incubators, as well as a highly talented pool of researchers and business owners.
Venture capital supports this ecosystem by financing exceptional companies that offer new products, services, business models, processes and management approaches.
Venture-backed companies outperform non-venture-backed companies
How important this role is can be seen when we compare the superior performance of venture-backed firms to that of non-venture-backed firms. For example, venture-backed firms account for a disproportionate share of market capitalization and research and development spending in the United States (Chart 1).
Key Results of Venture Capital-Backed Public Companies in U.S. Market Presence
Moreover, by most measures, the innovation achieved by venture-backed firms is more fundamental and of higher quality. For example, an analysis of patent quality shows that venture-backed firms have innovated significantly better than non-venture-backed firms (Figure 2).
Relative probability of patents reaching thresholds for shareholder database innovation performance measures
Venture capital-backed companies create more jobs and generate higher revenues
Additionally, studies have shown that venture capital-backed companies generate significantly more jobs and revenue.
In terms of job creation, the compound annual growth rate of employment of venture capital-backed firms is 2.4% higher than that of non-venture capital-backed firms (Figure 3).
Impact of venture capital financing on employment growth
In terms of revenues, venture capital support is associated with annual revenue growth up to 3.4 times higher than the average (Figure 4).
Venture capital in Canada has made significant progress
The Canadian venture capital ecosystem has made great strides over the past decade . The number and diversity of general partners has increased significantly, and venture capital performance has improved, attracting more private capital to Canada.
In fact, Canada now has one of the best ecosystems in the world in terms of the size of venture capital investments (Chart 5).
Venture Capital Investment Intensity
At the same time, Canada has seen an explosion in the number of start-ups, which bodes well for the future. The country has had the highest rate of early-stage companies among OECD countries every year since 2015. In addition, Canada has surpassed the United States in creating companies based on university research.
It is essential to continue on this path
Given the growing importance of the technology sector to the economy, it is our responsibility as a country to maintain this momentum. This will be quite a feat to accomplish in the midst of a recession caused by the COVID-19 pandemic.
Our research shows a trend of declines in venture capital investment during recent recessions, leading to significant reductions in investment and an increased focus by funds on lower quality, less fundamental innovation.
However, the tech sector has proven resilient so far and the pandemic has not slowed down innovation globally, especially in the deep tech sector.
We have seen how essential venture capital is to Canada's international competitiveness and to maintaining our standard of living. This is not the time to relax our efforts. Instead, we must renew our commitment to building an ever more robust venture capital ecosystem that can support a new generation of technology specialists for the benefit of all Canadians.