The venture capital industry in Ontario may be in for a bit of a shakeup over the next couple of years, with challenges on the horizon to both retail and institutional funds.

At the retail level, 2008 is scheduled to be the last year for the full 15% LSIF tax credit in Ontario. The credit will then drop 5% per year, vanishing in 2011 (currently, there is also an additional 5% credit for research-oriented funds). The 15% federal tax credit has been untouched, so far, but with the historically weak returns-on-investment of LSIFs, there doesn't seem to be anyone who expects that a 15% credit will be enough to sustain the LSIF industry in Ontario. LSIFs had already been in trouble before the Ontario government announced in 2005 that it was putting an end to the provincial credit.

The LSIF industry, with the support of the CVCA, tried to turn the LSIF tax credit into an Ontario election issue, but were met with a resounding chorus of cricket chirps from all four major parties. I didn't see a single response to the two news releases issued during the campaign asking for a return of the tax credit. And with Dalton McGuinty's government returning to power so handily, it really wouldn't have mattered anyway. The only small glimmer of hope for the LSIF industry may be that finance minister Greg Sorbara has chosen not to return to cabinet, but there's been no sign from the government—or from the opposition parties—that there's any interest in reversing Sorbara's decision to kill the credit.

At the same time, the institutional pools of money that have been the backbone of our VC industry are increasingly looking to invest their money outside of Canadian VC funds. It's not surprising, given the poor return rates that VC funds as a whole have delivered. Numbers published by the CVCA show that Canadian VCs have a negative net IRR over a 10-year horizon (and these numbers were based on partial, largely voluntary, unaudited data from VC firms, which are almost certainly higher than the real numbers). While U.S. VCs and real estate and other investment options have delivered huge returns (if the reported numbers are accurate), in Canada our VC firms and their highly paid managers have collectively delivered a weaker rate of return than your penny jar, according to numbers published by their own industry association.

So now we're starting to hear some "death of VC" forecasts, usually accompanied by inaccurate statistics passed off as comprehensive surveys of the level of Canadian venture capital. Some VCs may very well die, especially those that have failed to deliver the goods to investors. Welcome to the business world, where at some point you're actually supposed to provide value to your customers. VCs have been pulling the plug on bad investments for years. Now it seems that many of them are bad investments too. Live by the market, die by the market. Seems fair.

Other VCs will be successful and continue to attract funds. And companies that present themselves as strong investment opportunities will continue to find investors. In many cases, that funding may not come from a traditional VC firm. In Waterloo Region this year, we've seen a string of financing deals close, very few of which involved a VC firm. And these are seven-figure or high six-figure deals, not just $25,000 from an angel—although they're great to see, and there have been several of those too. It's been hard to take the "death of VC" stories seriously when one company after another has been successful in raising funds (or, in some cases, in receiving funding offers that they've turned down).

There's still lots of money out there looking for good opportunities. That's not going to change. If there's money to be made, there will be investors to be found. And, as I've always said to people claiming a shortage of venture capital, name three companies that should be funded and haven't been able to get funding offers. Maybe they exist somewhere, but I sure don't see them in Waterloo.