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Early exits – we do them well in BC
We are better at early exits in BC and Alberta than in any other province in Canada or state in the US.
This conclusion came from an excellent research study led by Thomas Hellman at the UBC Sauder School of Business. This was a significant research project conducted to the highest academic standards. Thomas and his colleagues analyzed 509 exits of Canadian venture capital backed companies that generated a total exit value of $30 billion and compared those to 3047 exits generating $381 billion in the US over the period 1997 to 2004.
The study: “Value creation in venture capital: A comparison of exit values across Canadian provinces and US states” by Thomas F. Hellmann, Edward J. Egan and James A. Brander is available here.
From the executive summary: “The primary objective of this study is to calculate the amount of value that is created by venture-capital backed companies, and to compare these valuations across jurisdictions.
Our measure of value creation is the value of companies at the time of an initial public offering, or at the time of an acquisition. Since venture capitalists and other early investors have an opportunity to liquidate their investments at this time, this is commonly referred to as the “exit value.”
By focusing on exit values we are looking at “output” measures of venture capital performance rather than “input” measures, like total investment. Exit values are a fundamental measure of venture capital activity. They quantify what is arguably the most important outcome of venture capital investments, namely the value of the companies they finance. As such, exit values allow us to compare the performance of venture capital markets across different jurisdictions (i.e. Canadian provinces and US states).”
This methodology makes a great deal of sense to me as an investor and fund manager. That’s exactly how we should measure the performance of a fund or fund manager – by how much they make - not how much they invest.
So, if we sell companies in BC and Alberta sooner than anywhere else, is that a good thing?
The study showed that it is very good. Hellman found: “If we compare total exit values against GDP, we find that Canada outperforms the US by 3%. When compared against the amount of venture capital investment, Canada outperforms the US by 15%.
Comparing the performance of the two countries’ venture capital markets against the amount of R&D spending, Canada generates more exit value for every dollar spent on R&D. Canada generates 79% more exit value per dollar spent on R&D. This figure increases to 125% for private sector R&D.”
And specifically: “British Columbia and Alberta are the two most profitable juriscitions across all of Canada and the US when evaluated against R&D spending.”
Again, this makes intuitive sense to me as a fund manager. Veteran investors know that a well designed and executed exit can easily add 50% to the value of a company. The reasons exits increase value are described here.
By exiting earlier we can realize on that additional value and then reinvest the gains in new investments.
“We were intrigued and surprised when we found out how well Canada performs overall against the US” said Hellman. “The notion is that we are terrible here, that we are small and we don’t know how to do venture capitalism. The numbers don’t support that pessimism.”
So it turns out that, in fact, BC entrepreneurs and investors are good at creating returns – very good. And we are good in part because we are really great at early exits.
The results of my early-stage venture capital fund, The BC Tech Fund, showed how early exits can maximize returns.
Some notable examples of other early tech exits in BC are on this page.
