Part #3: What does systems venture capital mean for Ontario?

Part #3: What does systems venture capital mean for Ontario?

Money for biotech
How to fix Ontario's venture capital for biotech?

Editor’s note: This is the final part of a three-part series on what Canadian venture capital can learn from emerging markets.

We tend to think of Canada as a single entity, but the truth is that each province has its own character and policy heritage. As I alerted readers to earlier, much like how we need to be careful in generalizing lessons from emerging markets (e.g., China is not the same as India), we also need to be careful in applying to Canada what we learn from emerging markets. Not every approach to systems venture capital is equally applicable in every province. Ontario will never take the same approach as Quebec, but arguably lies somewhere between the bottom-up, private-sector-driven approach taken in India and the top-down, government-driven approach employed in China.

With that caveat in mind, what are the specific concrete steps that VCs and policymakers in Ontario could take towards systems venture capital?

Biotechnology: Ontario should focus its efforts on specific therapeutic areas where the research is clearly world-class, and there exists a comparative advantage. The failures of the last decade should silence the critics who claim that “picking winners” does not work. In biotechnology, these areas would probably include cancer research, diabetes and stem-cell research. This means creating a dedicated pathway all the way from early-stage research in biomarkers or basic mechanisms, to servicing clinical-trial needs with dedicated investment in hospitals focused on cancer research such as Princess Margaret Hospital.

Technological shifts with the growing importance of biomarkers for companion diagnostics, and surrogate clinical markers for clinical trials with the growth of targeted therapies and biologics, required explicit linkages between investments. VCs in Ontario need to give up their “shots on goal” approach and work together with government to make deep, forward-looking investments into areas with critical capacity. Taxpayers are effectively subsidizing the activities of the existing funds through their limited partners such as the Ontario Teacher’s Pension Plan, so the lack of alignment is questionable.

Beyond Ontario, the Business Development Bank of Canada (BDC) should spin out its life-sciences-focused VC funds under independent management with a mandate of providing late-stage Series C and D financing support that private-sector VCs lack (outside of Quebec), which results in firms moving abroad to the United States. At the same time, Ontario could benefit from emulating Quebec’s model in providing a centralized one-stop shop for investors entering the province instead of having dozens of organizations with regional mandates that overlap and create unnecessary overhead.

Health-care systems: Ontario’s hospitals are largely centralized and bureaucratic entities that have been fairly inflexible with regard to organizational and technical innovation. In The Innovator’s Prescription, Clayton Christensen has argued that one of the key cost drivers in the United States has been the centralization of specialties into multi-centre hospitals as opposed to creating specialty hospitals that can improve quality of care and reduce cost through sheer volume. Given the significant cost that health care imposes on taxpayers, the lack of experimentation and innovation is baffling. At the very least, specialty hospitals should be established (regardless of whether they are public or private-sector owned).

One low-cost mechanism, which would require only $100 million (a tiny fraction of the $192 billion spent annually on health care in Canada) would be to establish a small-scale venture capital fund that would create and experiment with these business models. A precedent in emerging markets is Acumen Fund, a social venture capital fund oriented toward health-care services. It is prototyping low-cost health-care delivery on a wide scale in emerging markets through a systems approach by creating specialty hospitals and services run by the private-sector whose models are adopted and scaled by the public sector. These specialty hospitals would create a critical mass of clinical talent that could drive iterative feedback from the lab to the clinic. Kaiser Permanente’s early-stage venture capital fund has been widely cited as a great example of how an entire health-care system has invested in early-stage technology development, and leveraged its health-care system in order to drive proof of concept and adoption. At some point in the future, the University Health Network should consider creating its own venture capital fund.

Medical devices: Ironically, despite the scarcity of investment capital, Ontario has often overlooked opportunities in the less capital-intensive area of medical devices. Medical-device innovation, as I’ve alluded to in previous discussions, requires the intimate involvement of physicians as well as iterative feedback from the lab to the clinic. The Ontario government should establish an early-stage venture capital fund linked to a medical-device incubator (similar to the pioneering model established by ExploraMed and New Enterprise Associates in California), and make the low capital-intensive investments to create complementary innovation and educational programs that engage physicians (e.g., BioDesign at Stanford and the All Indian School of Medicines). Sunnybrook and the University of Western Ontario could take a pioneering role by implementing such a training program through its recent $27.3 million grant for a “Centre for Imaging Technology and Commercialization and Research.” Beyond applied research, Ontario research hospitals could also open up actual product commercialization wings similar to what Aravind Healthcare Systems in India did with Aurolab, where the creation of a low-cost cataract surgery procedure was complemented with the development of a low-cost ocular lens.

The growing importance of linking health-care delivery with technology development is reflected by the recent investments in entire HMOs by famed KPCB VC John Doerr in order to scale up e-health systems, and the integration of his portfolio of investments ranging from EHRs to analytics. NexJ Systems, my former employer, took a similar approach after its predecessor VC fund (XJ Partners) realized that the only way that e-health could ever scale would be to take an end-to-end systems approach that integrated all the individual technologies in which it had invested into a single offering (in fact, XJ Partners actually dissolved rather than continuing a “shots on goal approach”). Furthermore, NexJ Systems effectively created a third-party arrangement similar to Aurolab at North York General Hospital where the company is deeply embedded with academic researchers in prototyping and testing new products. We need more investors willing to commit to developing the intricate user-driven linkages in a hospital-centred ecosystem necessary for medical device innovation.


As a proud Canadian (and Ontarian) about to embark for California to work in investment banking and venture capital, I’m often asked why I’d ever leave Canada for the United States. Clearly, I believe that Toronto and Canada has a strong health-care industry, otherwise I would never have learned as much as I have. Nevertheless, I believe that an anemic VC industry is holding Ontario back from meeting its full innovation potential. This requires drastic changes to be made in a bold and unconventional fashion.

The parallels between emerging markets such as India and Ontario are uncanny and cannot be ignored by both VCs and policymakers. The creation of MaRS Innovation was a strong step in eliminating redundancies and streamlining the innovation process toward a systems-minded approach. (Note: The university-VC model has been broadly applied in China through exclusive first-right-of-refusal arrangements with private-sector life-sciences VCs.) However, there are multiple organizational gaps left in the innovation ecosystem at the provincial and industry levels that need tending. Ontario is taking steps in the right direction and is at the cusp of making a breakthrough, but it cannot afford to misstep by making anything less than a systemic change from the bottom up.