What is this metric and why is it important?
Venture capital (VC) is a source of financing for many new and growing firms developing or launching new products or services. It is a useful source of financing for firms who lack the collateral to justify debt financing, and it is an important ingredient for innovation and growth. We measure it here as a percentage of GDP to allow for comparison across different-sized economies.
How is Canada doing?
- At 0.18%, Canadian firms attract proportionally more venture capital as a percentage of GDP than almost all OECD countries, except Israel (0.38%) and the United States (0.55%).
- While impressive by global standards, the fact that Canadian firms attract only one third of what US firms attract, proportional to economy size, is troubling given that US-based firms are more likely to compete with Canadian firms than those in Europe, Asia, or elsewhere.
- Canada has experienced steady growth in VC since the 2008 recession—better than other G7 peers, and nearly tracking US growth. However, the absolute difference in investment between Canada and the US has grown due to the fact that US firms had more to begin with.
- Quebec-based firms attract more VC than firms in other provinces (a three-year rolling average of 0.27% of GDP), followed by Ontario (0.19%), BC (0.18%), and Nova Scotia (0.16%). Alberta, Newfoundland and Labrador, and Saskatchewan attract the least VC (a three-year rolling average of 0.02% for all three).
Although there is no shared definition of what is included in venture capital, there is a shared understanding of it as referring to relatively risky investments in firms that are just starting or growing. We take the total amount of VC investments in a jurisdiction in a given year and divide it by the GDP for that jurisdiction.
Venture capital provides emerging firms with a source of early and later-stage financing to support product and market development, innovation, and growth. New and pre-revenue firms often lack the collateral and revenue histories to justify debt financing and therefore often have to rely on VCs, who ask more in terms of ownership but have a higher tolerance risk. Where more VC is available, promising but collateral-lacking firms are able to access a necessary input to innovation and growth.
Because venture capital often comes with management knowledge and expertise—including general entrepreneurial experience, sector-specific expertise, and insider knowledge of sector-specific supply chains, customers and suppliers—it also serves as a useful signal of another important ingredient in the innovation ecosystem: innovation management. Given Canada’s weakness in management expertise for innovation, particularly in scale-up activities, higher levels of VC have the potential to improve innovation overall.
Venture capital investment is notoriously difficult to track, due to two main challenges. First, there is no standard international definition of venture capital. While there is a general consensus on what counts as VC—thus allowing us to make some reasonable comparisons—there are cross-country variations in exactly what kinds of investments count as VC when reported to and/or collected by the OECD. Second, countries differ in their ability and interest in collecting VC data. Governments have different reporting requirements, and in many cases VC investments are voluntarily reported.