The Rise of Venture Capitalism and Private Equity
Private capitalists are having their day across North America. From California to Quebec, the opportunities are startling – and they continue to grow.
Venture capitalists invest money into startups or small, expanding companies that lack access to public funding, so these investors risk massive loses if they back the wrong business. But, they also stand to reap massive rewards for taking on that risk – If they choose wisely.
Take Sequoia Capital partner Jim Goetz. As the sole investor in WhatsApp, Mr. Goetz secured $3 billion in Facebook stock when the social media giant acquired the global messaging service last year for $21.8 billion in cash and stock, Forbes reports. But, before Sequoia Capital could pocket its prize, the company had to invest an astounding $60 million into the enterprise. As the old saying goes, it takes money to make money.
And venture capitalists are making money. Big money. Last year alone, VCs invested $48.3 billion into 4,356 American deals – a 61 percent increase in dollars from the previous year, the National Venture Capital Association (NVCA) reports (using the MoneyTree™ Report by PricewaterhouseCoopers LLP and the NVCA, based on data from Thomson Reuters). The amount of capital involved in a single deal can be astonishing. The U.S. boasted more than 40 megadeals in 2014 – investments toping $100 million – and two deals worth more than $1 billion, according to the NVCA. Facebook’s acquisition of WhatsApp is the largest buyout of a venture-backed business ever, the Wall Street Journal reports, and industry insiders are optimistic that acquisitions involving venture-backed companies will continue to set records in the near future, particularly in the tech world.
Private equity is also booming across North America and there has been a significant spike in the number of investors jumping into the game. Like venture capital, private equity involves private capital and companies in need of funding, so the two terms are often used interchangeably. But, as a general rule of thumb, venture capital involves startups that have great potential – but need a lot of help getting off the ground. Private equity, on the other hand, usually involves an established company in dire need of a no-holds-barred rescue effort. “The difference between the two is basically just size and timing of the investment,” explains Mike Woollatt, CEO of the Canadian Venture Capital & Private Equity Association (CVCA). “Private equity is more later stage.”
Software is the single largest investment sector for American private capital by far, with $19.8 billion invested into 1,799 deals in 2014, the NVCA reports. That is a 10 percent increase in volume from the previous year, and a 77 percent rise in dollars. With 481 deals completed in 2014, the Media and Entertainment sector took second place in the U.S. when it comes to the number of deals made, but ranked number three in terms of dollars invested, at $5.7 billion, according to the NVCA. Biotechnology took second place in terms of dollars invested, with $6 billion spread across 470 deals – a 29 percent increase in investment dollars from 2013. The life sciences sector – which includes both biotechnology and medical devices – made up 18 percent of all venture capital investments in the USA in 2014. This sector enjoyed its highest levels since 2008, with $8.6 billion pouring into 789 deals, the NVCA reports.
While Canada cannot compare with the U.S. in terms of dollars invested, private capital is coming into its own there. “Canada is the big story to watch,” Mr. Woollatt insists. “Both private equity and venture in Canada are exploding. On the private equity side – the big number side – we set a record last year for investing. [There were] a huge number of investments and huge dollar amounts – both from U.S. private equity firms and Canadian – investing in Canada to the tune of $41 billion dollars in 2014. Canada is seen as an incredibly attractive market on the private equity side.”
With $2 billion invested in 2014, venture capital numbers are relatively low in Canada – but still turning heads due to the sector’s rapid expansion and exciting potential. “On the venture side the numbers are growing,” Mr. Woollatt points out. “We are bullish on venture right now. A lot of folks are coming into the space interested in investing; we’ve got high net worth individuals, retail, mutual funds, and banks sniffing around the sector, we’ve got a huge interest from corporate VCs. Cisco just set up a Canadian VC fund, Google’s here now, Amazon’s here now, most of the medical device and pharma companies have VC funds now.”
Just a few years ago, the landscape was strikingly different. Known as the lost decade, the 2000s saw little action when it came to venture capital. “We were behind the times. Before about 2008 we were a relatively nascent venture capital industry in Canada. We have matured quite quickly.” It took a shake up to push the industry forward. “We went through a complete restructure of how we go about venture,” Mr. Woollatt recalls. “Government has also jumped on board to help get the wheels turning and investments flowing. They prime the pump.”
The emergence of niche companies is one clear sign that Canadian venture capital has come into its own. “The venture capital firms themselves are growing increasingly niche and targeted. It is the sign of a maturing industry. We have venture funds like Pangaea Ventures, which is just advanced materials, or Lumira Capital, which is just health and life sciences, or Georgian Partners, which is just IT focused. We’ve got very focused funds.”
As in the U.S., tech is drawing a significant amount of dollars and attention. “We have a tech renaissance going on in Canada. We’ve got D-Wave, Desire2Learn, Hootsuite, Kik, BuildDirect – these are all firms people are talking about now, Canadian-based tech firms that are the next big IPOs… A lot of folks are wondering, ‘how do I get access to this? I can’t get in early, I can’t get pre-IPOs, so how do I do this?’ Well there is something called venture and that is how you do it.” Clean tech is garnering particular interest, with everyone from Exxon to Saudi Aramco eyeing opportunities in Canada’s clean tech VC funds. “We are really excited,” Mr. Woollatt remarks. “The returns are there and a lot of people are interested.”
From software to clean energy, the time is ripe for Canadian tech to have its day – and for private capitalists to have their payday. “We have a manufacturing sector that is in decline, an oil and gas sector that has gotten hit by routine shocks,” Mr. Woollatt points out. “People are looking to other industries.” Armed with “a highly educated workforce” and “a budding entrepreneur environment,” Canada has a solid foundation from which to build its burgeoning tech industry. And, by getting in early, savvy investors are finding windows of opportunity in Canada that have already closed in the United States. “It is still seen as a little bit less competitive than the U.S. in terms of evaluations, so people are coming up here.”
From Silicon Valley’s mind-boggling returns to Canada’s increasing tech potential, the private capital industry is enjoying an increasingly lucrative landscape. After a record year last year – and deals expected to continue pushing higher and higher into the billions – it is anybody’s guess how far private capital will go.