McKinsey charts minor adjustments for BDC's VC division

Clear as the nose on your face.

That has to be one of the true joys of a management consulting assignment from time to time. The answer is obvious from the moment you arrive on the scene. But for an estimated $3 – $5 million fee, that doesn’t mean it isn’t worth doing the work to ensure your suspicions are right.

According to an internal memo dated November 16th, McKinsey has delivered the “State of the VC Nation” report to the Business Development Bank of Canada Board of Directors (see prior post “An idea for McKinsey & Co.” July 8-10). The memo outlines some key changes that are being implemented, none of which are particularly groundbreaking:

– Venture Capital boss EVP Jacques Simoneau is on his way out in the next four weeks (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept 27-10), and BDC CEO Jean Rene Halde will run the business himself while an external search is underway to find Mr. Simoneau’s replacement.

– all existing BDC VC employees will have to compete for jobs in one of the three new VC “firms” being created: Information Technology, Biotech and Healthcare, and Clean Tech. Each will be led by a “Managing General Partner”, who will likely come from within the internal BDC ranks. Three General Partners will make up the rest of the management teams of each fund. Another three or four people will round out each team. Which means more savings for BDC’s G&A line as there are far more bodies than chairs to suit them all in the new model.

– the three new VC Funds will be structured notionally as GP/LP relationships, with BDC as the founding limited partner.

– via these new internal “funds”, BDC will continue to invest directly in companies.

– BDC will also continue to invest in external funds.

I can’t say they took any of my unsolicited advice, but according to others in the industry, I’m not alone. Not one non-BDC Canadian VC appears to have been interviewed in McKinsey’s research about the state of Canada’s VC industry. Perhaps it wasn’t necessary, given the excellent info available via half a dozen relevant blogs. Perhaps it wasn’t part of the mandate.

For the BDC VC team itself, this “exciting new strategy” may well be good news. One can be hopeful about that.

Having existing staff compete for the right to retain their own jobs is something the Canadian banks have been doing for the past half decade when they shake-up divisions. After the cuts the BDC VC ranks have already suffered, it’s not clear how many more bodies will be jettisoned once the org structure of the three “Funds” is ultimately set (see prior post “BDC makes further cuts to VC team” Sept 30-10).

Rumours abound that, in the interim, BDC will cease making new investments, but I doubt that’s true. The Senate of Canada is currently reviewing BDC’s mandate as part of a 10 year Statutory Review by Parliament, and the last thing Mr. Halde would want to do is give anyone further ammunition about BDC’s documented retracement from the space (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010” Sept 21-10).

Although with just 6% of Canada’s annually deployed VC capital coming from BDC as it is, there’s not much further to fall.

I also hear that each BDC Fund will have to raise their subsequent fund from external limited partners, and compete for the Crown’s follow-on LP commitment. Since the Senate Banking Committee was just told how important BDC was to the venture landscape, one has to take this with a grain of salt, even if it is something I’ve recommended (see prior post “An idea for McKinsey & Co.” July 8-10).

It is such an easy thing to have this as part of your “New Strategy”, after all, and it will definitely please those members of the House of Commons Finance Committee who believe that taxpayers shouldn’t be investing in venture (see prior post “HoC Finance Committee appearance: good news/bad news” Oct 12-10).

Government arms can make whatever soft commitments they want when the effective date is eight years out. Eight years from now, which is the natural life for a VC fund, someone else will have to deal with that promise since the terms of every BDC Board member will have long expired. Mr. Halde will also have retired by then (his term is 5 years at a time). Which doesn’t mean it isn’t worth stating; just that the status quo is being maintained for another decade.

The notion that the federal government should continue to do external fund investing will come as no surprise to anyone, and certainly didn’t warrant a $3-5 million consulting assignment. The problem is that, despite the advice of Canada’s Venture Capital and Private Equity Association (see prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” Dec 26-08), BDC will continue to manage the Federal Government’s Fund of Fund program. At the present time, BDC has just $59.5 million of its $17.7 billion of assets in external VC funds (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010” Sept 21-10). According to BDC’s 2010 Annual Financial statements, far less is actually in external VC funds than the $300 million+ the Senate Banking Committee was advised just two weeks ago.

The idea that BDC needs to launch a “Come to Canada” outreach for foreign VC funds is the most unnecessary and wasteful of the minor fixes recommended by McKinsey. At the present time, the Department of Foreign Affairs and International Trade has dozens of trained, fulltime staff geared to this effort. In Miami alone, for example, three International Trade officials focus all of their energies on VC and entrepreneurial-related mandates. They have Trade Commissioner colleagues in San Jose, San Francisco, Buffalo, New York, Boston, etc., etc., etc. And let’s not forget Export Development Canada’s existing outreach program.

The energy about to be wasted over the invariable bureaucratic turf war is one more example of the unhelpful, self-serving and fortress-building advice this government has been receiving on the VC topic over the past three years.

What won’t solve the problems of the domestic start-up and VC ecosystem is more Crown employees within BDC trying to bring foreign capital to Canada. After all, weren’t we led to believe the challenge was Section 116 (see prior post “If it’s not built, they can’t come” March 6-10). Now that 116 has gone the way of the DoDo bird, I sure hope no one is advising the government that the next problem to solve is letting foreign VCs know that Canada has an IT, Clean Tech and Biotech space.

I’m pretty sure that the likes of Lumira, Emerald, BlackBerry Partners Fund, Wellington Financial, Bridgescale, et al have broadcast this message across the USA; and beyond in certain cases. And with 40% of the VC money raised for Canadian companies in 2007 coming from the United States, it’s not as though this is untilled soil. And there are companies such as Ballard Power, RIM and Open Text to serve as constant reminders of what success can look like.

Just last week we had two U.S. growth capital/VC firms in our office asking about the various names in our portfolio, and for a general update on the landscape. The two-way, North-South infohighway is fabulous as far as we’re concerned. Half our pipeline is U.S.-based, and 6 of our 8 last deals were for U.S.-headquartered companies.

For our friends and allies within the BDC VC group itself, if they are happy with the “new GP/LP model”, then we’re happy too. As for the rest of the “fixes”, it is either too late, too small, too self-serving, or not what the industry has been calling for to even begin to resolve Canada’s VC crisis.

MRM
(this blog, like all posts, is an Opinion piece; these views may or may not represent the views of the CVCA and its members, but are definitely not official)