Canada should be concerned with cultivating entrepreneurs, not venture capitalists. Silicon Valley succeeds because it attracts entrepreneurs first. Where entrepreneurs congregate, venture capital naturally follows.

Venture capital is generally perceived as being critical astute investors but they still miss many opportunities, turning to any growth strategy, an essential element for the development of the new economy. But to what extent is fixing the laggard Canadian venture capital industry a key to creating the new businesses in emerging sectors the wider economy so badly needs?

Take 2011, a good year for the venture capital industry. Canadian venture capital firms invested in 444 companies, only one-third of which were first-time investments. In other words, Canadian venture capital firms helped around 150 new entrepreneurs launch their businesses, with $300 to $400 million invested. For context, there are over a million businesses in Canada, and about 100,000 new ones are created every year. The 150 new businesses supported by venture capital amount to specks in the Canadian business universe.

It is true that some of these venture capital firms are those with the greatest potential. In Profit$ magazine’s annual list of Canada’s 50 fastest growing firms, venture capital firms are typically found backing about one-third of these companies. Venture capital targets these high-potential startups, usually in sectors connected to emerging technologies.

But while roughly two-thirds of the Canadian venture capital industry investments are in information technology and life sciences, the majority of new businesses in these sectors do not receive any venture capital backing at all.

Providing more government support to the venture capital industry will not change this reality. Venture capitalists may be down entrepreneurs that wind up being very successful. Venture capitalists like to brag that they invest only in one deal out of fifty that they’re pitched, long odds that leads to them rejecting many businesses that turn out to be winners.

Furthermore, many entrepreneurs would rather build a new business without turning to venture capital, seeing the industry as greedy for big returns and unable to bring any significant value to the table beyond money. Indeed, not only do venture capitalists seek ambitious annual returns, but they also demand a great deal of control over the companies they invest in. And they must cash in, preferring to sell out within seven years. These are not appealing conditions to many of those with an entrepreneurial spirit.

The result is that the majority of new businesses, including those in the new economy, are still funded by the entrepreneurs themselves and by their “friends and families.” While policy-makers are right to seek ways to stimulate the venture capital industry, it is this essential personal pipeline of investment funding that they must ensure remains healthy.

Much is often made of the desire to create a Canadian version of Silicon Valley, replicating the mix of bankers, suppliers, networks and venture capital that makes the Bay Area a complete ecosystem for developing new technologies and businesses. But the core of Silicon Valley’s success is its ability to attract the best entrepreneurs — many of them Canadian, by the way. Our problem in Canada is not underinvestment in venture capital. Our problem is we do not have sufficient entrepreneurial spirit, and we lack the business and tax conditions to help people with new ideas thrive.

Entrepreneurs and their ideas are the key component of the ecosystem. Where there are good entrepreneurs, venture capital will follow.

Photo: Shutterstock by Rei Imagine