Moving the Mountain – Encouraging a generational shift in wealth creation from old industries to tech

Gluskin Sheff + Associates’ chief economist, David Rosenberg, recently wrote that that one of the main reasons to be bullish on the Canadian economy is the technology sector, now driving 5% of job and wealth creation and poised to do much more. Services drive 70%, and tech improves and re-invents services constantly, in sectors as diverse as healthcare and fast food.

And yet our venture capital industry (and its life-blood, our entrepreneurs) complains loudly about a lack of source capital. We’re at a $3B-per-year tech investment level with a billion or two in dry powder, compared with levels 100 times higher in our southern neighbour. That’s a 10x per capita discrepancy!

Our growing companies have a really hard time raising capital beyond the seed stage, limiting growth aspirations to tens of millions in enterprise value before selling out, versus creating the next wave of billion-dollar companies.

The federal government has continued its VC stimulus program with new branding and new features, implemented through the Business Development Bank of Canada, and focused on raising matching funds from institutional limited partners. There is no way for families to participate directly in any of this, and it is generally long-term single-digit value creation that is best left to the pension funds and sovereign wealth funds. And it is nowhere near enough to close that 10x per capita gap.

How can families take advantage of growth capital scarcity and fill the gap, capturing high double-digit returns from private tech companies as they grow?

Should 7% to 10% of your investment portfolio be in tech? Think about it, and then ask your financial advisor how you might make that happen. You’ll probably get advice to double down on the large-cap (American) tech names that have yielded handsome returns in recent years.

OK, but the vast majority of wealth creation in tech is below the IPO line (unlike mining and oil & gas), in private companies as they mature from seed stage to $100M in revenue. Getting a piece of that pie is very hard for the average investor without deep insights and connections into the industry.

To address this problem, we have created a private growth-stage venture capital platform designed from the ground up for families. We’ll talk about the features of this platform, and discuss our learning in getting to the current model, in another post.

Rob Richards
Managing Partner, PV