Cross-border VC investment in Canadian firms: implications for exit patterns

Over the last few years, growth in the flow of venture capital (VC) in Canada has been driven primarily by increased reliance on foreign, primarily US, investors This is a situation that is not unique to Canada. Other countries (for example, Ireland and several EU nations) have small domestic VC stocks but are geographically situated near countries with relatively large stocks of VC. This paper reports research that shows this to be a mixed blessing. On the one hand, foreign investors make relatively large investments, thereby addressing the downward-skewed size distribution of VC funds in the Canadian VC market. Moreover, compared with domestic investors, foreign VCs' participation is associated with higher propensities of successful exits through IPOs, greater capital availability, and shorter time to exit. On the other hand, this research also documents a relationship between foreign VCs' participation and lower payments at exit per dollar of VC investment, raising concerns about the monetary returns to Canadian founders and early-stage, higher risk, Canadian syndicate VCs. The link between cross-border VC investment and higher likelihood of VC exit through cross-border M&As is also noteworthy. These empirical findings address the role of foreign VCs in financing Canadian growth firms, and help provide a yet more comprehensive understanding of the Canadian VC market.