Wednesday, March 25, 2009

Ont. Gov't As A VC: In with a Whimper, Not a Bang

As budget day approaches, the usual flurry of press releases is trickling out, including one in which the Ontario's Fund of Funds (the OVCF) at long last announces an investment in a investment fund. You can read Mark McQueen's take on it over here.

The principals behind Georgian Capital are the former operators of DWL, a Toronto software firm that was backed by local VCs and New York's Insight Venture Partners. Mark speculates that Georgian Capital may also be receiving backing from Insight in the future, (welcome news; Insight has been a long time shopper here in Canada - in Eftia, Airborne, Platespin among others), in which case OVCF's commitment to invest "up to $15 million" may be one that never closes, unless Insight or some other LPs also invests in Georgian. No reason to get too excited, although the fact that Georgian Capital has now leased out space in a Rosedale office building (Patachou croissant, anyone?) likely means it is here to stay, regardless.

The issue I have with all of this is about the press releases which OVCF has not issued. As Mark points out, those of us in the industry are well aware of the rumoured deals being considered by OVCF. (Ordinarily, the fund of funds world is a private one whose managers operate outside of the public disclosure light. Which funds they support, and the terms of their investments, are rarely announced.)

Many private FOFs are sitting out the current market, and in one sense, it's hard to fault OVCF's managers for taking the same prudent approach as they appear to be doing. But this is not a private fund of funds, and the Ontario government did not form it for the sole purpose of generating capital gains. The OVCF exists to support the Ontario venture capital industry and to create Ontario jobs. Don't listen to me - check out John Wikinson's 2007 press release if you're uncertain.

Given the mandate of the OVCF, is waiting out the market appropriate? And when our tax dollars are being managed, should there not be greater transparency?

Why should we care? In the current market, with few options for limited partners, the OVCF in effect holds a monopoly over the venture capital industry in Ontario and, in turn, over the future of Ontario's venture-backed companies. The decisions OVCF's managers make in the near term will determine whether any local venture capital funds survive, and who will receive the lion's share of the profits resulting from any Ontario innovation.

If the majority of OVCF funds go to foreign VCs, then investing in Ontario's future becomes a one-cycle event. The amount of capital gains that recycles into our economy from successful start-ups will be significantly diminished. If that is a decision that is being made by OVCF, we are entitled to understand why it's the right tradeoff for Ontario.(Me, I think it's a question of proportion - equal parts local and foreign, in case you're asking.)

Of course, announcing investments in US funds just before delivering a budget would not be the most popular public relations move by a government. But was this press release an improvement? It underscores the fact that, more than a year after our tax dollars were handed over to OVCF's managers, the chance of any Ontario company receiving funds is likely still months away. (Investment funds still need to be deployed to VCS before they can trickle down to investees.) Which is perhaps why John Wilkinson has created the recently announced investment matching program for "qualified" investors.

There needs to be some kind of oversight or audit of this kind of government investing activity - call it an ombudsmen function if you want to make it catchy, I don't care. But there is clearly a misalignment between public policy and private sector implementation of that policy and the two need to be reconciled. I am one of those who believes that in the current economy, careful government support of the venture ecosystem is absolutely necessary. How that support is provided needs to be monitored and adjusted.