This is Roger Martin, reporting from Mars
I have little doubt that Roger Martin’s brain is bigger than mine, and that he is lovely and warm person. We have many mutual friends who sing his praises, both professionally and personally. But when it comes to his findings about venture capital in the Task Force’s Seventh Annual Report on Ontario’s Competitiveness and Prosperity, he has definitely mailed it in from Mars. The planet, not the Parthenon of concrete at University and College in Toronto. He is so wrong that you have to wonder if Dr. Martin was taken hostage a year ago and some anti-Entrepreneur prankster falsely filed the Report under his name.
Here are some choice quotes from his Report:
” …we continue to encourage the provincial government to follow through on its plans for ending special treatment for Labour-Sponsored Venture Funds, as the evidence is clear that such approaches reduce the quality of venture capital – a more important problem than quantity of venture capital.”(p. 17)
“…we continue to conclude that Ontario’s and Canada’s key challenge for venture capital is the quality of investments we are making.”(p.45)
“..to fund broader reductions in taxes on business investment, eliminating the special tax treatment for LSIF’s is a first excellent step.”(p. 45)
“…venture capital policy should be focused on efforts to raise its quality through higher returns, not its quantity.”(p.61).
For the life of me, I’ve yet to meet an entrepreneur who would agree that there is too much venture capital available in Ontario. Ontario’s share of national VC dollars has declined for five consecutive years, on both an absolute and relative basis according to statistics. Quebec received more VC dollars in 2007 than Ontario, for example, despite having a far smaller population.
Let’s be frank, when Dr. Martin criticizes the “quality” of VC investments in this province, he’s really speaking about the quality of our entrepreneurs. VCs might pull the investment trigger and sit on the Board of Directors, but the CEO, CFO, CTO and VP Sales are the folks who run the companies on an hour to hour basis. Perhaps you all would benefit from an upgrade at the $85k U of T EMBA program.
On the topic of Labour Sponsored funds, I won’t fail point out that they’ve all outperformed the investment performance of CitiBank, Goldman Sachs, RBS, UBS, Merrill Lynch, CIBC, etc for the past several years. I own both Goldman and an LSIF and I know all too well. But that’s too easy a comparitor.
When Dr. Martin speaks about the poor quality of venture capital investments in Ontario, and LSIF’s in particular, consider these facts:
– The 2008 Deal of the Year award for venture capital went to Platespin Ltd. LSIF’s Covington and VentureLink backed the story, along with CastleHill Ventures and Four Quarters. Covington first invested in PlateSpin Ltd. in March 2003 and upon exit in 2008, the investment had generated an internal rate of return (IRR) of 117% and a multiple of 18 times original investment.
– Richard L’Abbe, former President and CEO of Med-Eng Systems, was the recipient of CVCA’s 15th Annual “Entrepreneur of the Year Award” in May 2008. An investment managed by LSIF GrowthWorks came into Med-Eng in 1997 in the amount of $2 million. Med-Eng’s revenue grew to $261 million by 2006 and the company was acquired in 2007 for $650 million.
– The GrowthWorks Canadian Fund won the 2007 Deal of the Year in the venture capital category for its investment in Galleon Energy Inc. The investment in December 2002 generated an internal rate of return (IRR) of 134% and a multiple of 7.6 times investment. Growthworks was “one of Galleon Energy’s largest and most active investors through multiple rounds”. Galleon is a technically oriented high growth oil and gas company with focused operations in the Peace River area of Alberta. Galleon commenced operations in October 2003 and has had significant success in acquiring undeveloped acreage, drilling and purchasing production.
– Dave Caputo, Co-founder, President and CEO of Sandvine, was the recipient of CVCA’s 14th Annual ‘Entrepreneur of the Year Award’ in 2007. In March 2006, Sandvine was listed on London’s AIM Exchange, raising $37 million and reaching a market cap of over $230 million at first day of closing. Sandvine was listed on the TSX in October 2006, raising a further $13 million. As of May 28, 2007, Sandvine (TSX: SVC) had a market cap of approximately $580 million, the highest market cap of any Canadian VC-backed IT company that has gone public since 2000. Celtic House Venture Partners led Sandvine’s $20 million seed financing in September 2001 and participated in each subsequent funding round. The other venture investors included BDC Venture Capital, LSIF Vengrowth Capital Partners, and Tech Capital Partners in Waterloo.
– The LSIF BC Advantage Funds won the 2006 Deal of the Year award for the venture capital category award for its investment in Aspreva Pharmaceuticals. The investment in September 2003 generated an internal rate of return (IRR) of 272% and a multiple of 23.4 times investment. Jim Heppell, President, of BC Advantage Funds, said at the time: “We consider Aspreva to be the poster child for our model of investing early and maximizing returns by applying the expertise of our Advantage Mentors”. Aspreva’s vision is to change the treatment landscape for people living with less common diseases by increasing the pool of evidence-based medicines available for these patients. In early 2003, Advantage led Aspreva’s seed round of financing at a pre-money valuation of $5 million. In October of that year, Aspreva signed a major partnership agreement with F. Hoffmann-La Roche for the development of CellCept in autoimmune diseases. In just 18 months, Aspreva initiated three Phase III clinical trials in three different autoimmune diseases. In March 2004, it closed a $76 million initial venture financing, one of the largest Series A financings reported in North America. One year later, Aspreva raised $112 million and became a publicly traded company is listed on the Nasdaq National Market and the Toronto Stock Exchange. At the time of the award, Aspreva had over 100 employees, quarterly royalty revenues of over $50 million and a market capitalization of approximately $1 billion.
– The 13th annual Entrepreneur of the Year Award went to Teresa Cascioli, Chair and Chief Executive Officer of Lakeport Brewing Income Fund. Using angel financing to take Lakeport Brewing out of bankruptcy protection, Ms. Cascioli was able to lead the company from a struggling, underutilized operation to the 3rd largest brewer in Ontario. Lakeport’s market share increased from just over 1 per cent in 2000 to approximately 11 per cent to March 31 of this year, and two of the brewery’s brands are on The Beer Store’s Top 10 list. Prior to its acquisition, Lakeport Brewing Income Fund was an Ontario-based brewery focused on producing value-priced quality beer for the Ontario take-home market. LSIF VenGrowth Private Equity Partners backed Lakeport’s management buyout in 2004. With VenGrowth’s support, the formerly insolvent Lakeport went public prior to its highly-valued takeout by Labatts.
I could go on, but it’s time for bed.
Dr. Martin, the facts are these. The past three “Entrepreneurs of the Year” had LSIF venture capital backing. The last three “Deals of the Year” for Canada’s venture capital industry had LSIF backing, with two of the three firms seeing Labour Sponsored Funds lead their financing rounds.
I think it would be useful to factor this reality into the statement on page 17 that “the evidence is clear that [LSIF] approaches reduce the quality of venture capital – a more important problem than quantity of venture capital”. I respectfully suggest you put out an erratum version of the Report, just as any of your MBA students would be forced to do if their Mid Term Paper was found to be as flawed as the findings in your Report of earlier today.
An “F”‘ grade will have to do in the interim.
(disclosure – these are my owns views and not necessarily those of the CVCA, its membership or anyone I know)