A largely overlooked financial report was recently published by Canada’s BDC that is bound to send shivers down the spines of everyone in the venture capital ecosystem in the country.
BDC released its Q3, 2023 financial results, including its venture capital operations. These results for the nine months up to December 31, 2022 show a loss of $465.5 million compared to income of $886.4 million in the nine months of the prior fiscal year and ending December 31, 2021. In other words, an adverse turnaround of just over $1.350 billion in the short span of 12 months. This stunning reversal of fortune was attributed to the changing downward metrics of fair market valuations of BDC’s venture capital holdings. BDC is the single largest venture capital operation in Canada with its holdings valued at $3.851 billion as of December 31, 2022. This is a decline from the $4.133 billion as of March 31, 2022, and which implies a write-off of roughly $282 million over nine months.
These financial results reinforce emerging evidence that the fortunes of venture capital in the United States, from which Canada is not immune, have also taken a turn for the worse. For example, Forbes reported that venture capital was the top performer amongst a suite of asset classes over the ten-year period ending June 30, 2021, with average annual returns of 15.15%. Cambridge Associates, a leading returns performance data provider, noted that full-year United States venture capital returns to December 31,2020, stood at 50.1%. However, Cambridge also reported that year-to-date United States venture capital returns as of September 30, 2022, were – 15%.
BDC’s latest financial results also reveal that the crown corporation venture capital arm has invested in 152 funds as of December 31, 2022, 125 of which have received funding from the venture capital segment and 27 of which secured funding from the Capital Initiative Program (CIP) segment. This support for the venture capital industry was up from the 137 funds recorded as of March 31, 2022, of which 113 funds were backed by BDC’s venture capital segment and 24 by its CIP segment.
As my then six-year-old daughter was wont to say at that point in her life, “Who Cares?.” The argument can be made that the wider public should care for the following reasons:
First, we probably need to steel ourselves for worse news to come. BDC’s Q3, 2022 financial results pre-date the collapse of Silicon Valley Bank (SVB) and the seismic shock(s) following upon its demise that have included fears of financial contagion to other banks and the drying up of financing to companies in the Innovation economy.
Second, given the leading market position of BDC in venture capital and taking account of its investments in 152 funds and the massive valuation hit taken in its financial results, one can only conclude that the experience of BDC is likely mirrored across the entire venture capital industry. In other words, those Q3 results should probably serve as a signal that the future of a significant portion of the Canadian venture capital industry may be at risk. BDC has the luxury, some might say, of having a sole shareholder, namely the government of Canada while many, if not most, of the venture capital funds in the country are dependent upon the goodwill of institutional investors – goodwill which may be sorely tested in calendar 2023. Given that venture capital conforms to a ‘power law’, wherein outperformance tends to concentrate in a small subset of funds, some might question the advisability of BDC dispersing its funding among so many entities.
Third, the chances are that fewer funds will be able to raise capital in 2023, that the time it takes to raise capital will be extended, that capital raises will be smaller than in 2021 and even through part of 2022, that funds will prioritize backing the most-promising of their existing portfolio companies with their remaining ‘dry powder’ and that there are likely to be a growing number of ‘zombie funds’ – that is, funds unable to raise new capital and unable to make new investments but hanging on waiting for circumstances and the overall environment to change for the better.
Fourth, the public and media profile accorded some formerly high-flying firms that have hit a period of turbulence and experienced difficult discussions with their previous financial backers is likely to continue with venture capital funds, including government-backed ones, tagged as behaving badly. So, the public standing of venture capital in the wake of the SVB failure and the perceived role of venture capitalists in bringing about that institution’s demise plus an ongoing spate of ‘bun fights’ with entrepreneurial firms conducted in the media together with more reports of poor venture capital fund financial performance is likely to lead to much greater scrutiny of the operations of the whole industry. In other words, venture capital has a rapidly- emerging public relations problem that will only get worse before it gets better.
Richard Rémillard
Richard Rémillard is President of Rémillard Consulting Group (RCG), a unique, Ottawa-based, bilingual consulting firm specializing in providing private sector, government & trade association clients with creative, research-grounded solutions to business issues and public policies involving the Canadian financial services industry. For more information: rremillard@bellnet.ca
photo credit: https://www.flickr.com/photos/jar0d/6066734168/, Sander van der Wel
Disclaimer: The views expressed herein are those of the authors; they do not necessarily reflect the views of Private Capital Journal and CPE Media & Data Company.