A large company may take a minority stake in a young company, usually for strategic reasons. It may also make an indirect investment as a limited partner in an independent venture capital firm. Some large companies go so far as to create their own venture capital fund or business incubator.
This approach to innovation has radically accelerated the pace and success of research, development and commercialization for companies around the world.
Venture capital investments by large growing companies in Canada
In the United States , venture capital investment is popular with large companies. In fact, they participated in 26% of venture capital transactions made in 2018, according to our analysis.
Before the COVID crisis, the percentage of venture capital deals made by large companies in Canada had also started to increase, but not quickly enough to catch up with the United States . Our data shows that large Canadian companies participated in 14% of venture capital deals made in Canada in 2018.
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Globally, Canada is not investing as much as it could. Venture stockholder database capital deals by Canadian-based companies account for 1% of the global value of venture capital investments by large companies between 2011 and 2017, while Canada’s GDP represents 2% of global GDP, according to Global Corporate Venturing .
Who has driven the growth of venture capital investment by large companies in Canada?
Venture capital investments by large companies in Canada were increasing before the pandemic, but much of this growth appears to be driven by investments by foreign companies in the Canadian venture capital ecosystem. By our calculations, only about a quarter of strategic venture capital investments are being made by large Canadian companies.
When we look at the sector distribution of venture capital investments by large companies in Canada, we see that banks accounted for 55% of investments, while industrial, manufacturing and energy companies accounted for only about 5%.
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This situation has long-term implications for the Canadian economy. Canada has a competitive advantage in the production and processing of primary resources. Companies in the manufacturing, resource and agricultural sectors account for 80% of Canadian goods exports . 1 One-third of Canada's largest publicly traded companies are active in these three sectors . 2
The lack of participation of these companies in the Canadian venture capital ecosystem threatens their future productivity and competitiveness. It also deprives Canada's start-up community of a formal connection to traditional sectors where Canada has a competitive advantage.
What's holding back big Canadian businesses?
In our view, there are three main problems preventing large companies from “traditional” sectors from investing in the Canadian venture capital ecosystem.
1. Poor product-market fit
Very few Canadian start-ups are solving problems affecting companies in the mining, energy, agriculture and traditional manufacturing sectors.
2. Lack of experience
Canadian industrial companies do not have the experience of their American counterparts in interacting with start-ups. Such interactions are not part of their corporate culture and they have not yet developed the organizational strength necessary to create this type of partnership.
3. Unconventional business models for venture capital
Canadian industrial companies operating in “traditional” sectors require large capital investments and have longer business cycles. As a result, it is difficult for start-ups to penetrate these sectors and develop large-scale solutions that can be adopted by major customers.
Unlocking Canada's innovation potential
As Canada's most active venture capitalist, BDC believes that large Canadian companies have everything to gain from collaborating with the venture capital ecosystem. Greater convergence between start-ups and traditional sectors, in particular, could have a huge impact on Canada's economic development.
That is why we created the $250-million Industrial Innovation Fund to invest in talented business owners who are developing new technologies that will increase productivity in these sectors. When the opportunity arises, the Fund will enter into partnership agreements with major Canadian companies.
We also work with Canadian companies to help them gain skills and experience in venture capital investments. For example, we invited senior executives from major global venture capital companies to attend the Canadian Innovation Summit for Canadian Companies in 2017.
Before the pandemic, venture capital investment in Canada was growing and was becoming an increasingly important part of the ecosystem. Investments by large companies tend to be cyclical; we cannot be certain of the effects of the crisis, but there is a risk that they will slow down their investments.
At BDC Capital, we will continue to monitor the situation and respond if we deem it necessary. Please feel free to leave a comment below this blog or contact us directly if you would like to learn more.
