Jacques Simoneau, executive vice-president for investments at the Business Development Bank of Canada, says the economic slowdown has also had an impact. “The main way we exit from our investments is the merger and acquisition market,” he says. “All those VC funds haven’t been able to exit from their investments. So those companies are still part of the VC’s portfolio.” The investment pipe is clogged.
Some startups and investors argue the VC model is inherently broken. Most VC firms have a 2% management fee, encouraging them to raise more capital for their funds, argues Danny Robinson, managing director of Bootup Labs, a Vancouver-based incubator specializing in seed funding for software-based startups.
“If they spent all their time looking for $100,000 investments, they’d never make it through their $50-million in funds,” he says, explaining why the average deal size in the Canadian VC market still rests at $2-million. But savvy software companies want far less funding than that, making VC funds inappropriately large for them. “The Web world doesn’t need that much capital anymore,” Mr. Robinson says.