The Future of Impact Venture Capital in Canada: Spotlighting Women’s Health

Global health is a team sport.

The Pfizer-BioNTech COVID-19 vaccine was invented in Germany and commercialized by an American company. 

In fact, so was the birth control pill, which was also developed in the United States. 

And the first infant incubator was invented and launched to market by a French medical doctor. 

Canadians have benefited from these medical technology discoveries while also making significant contributions of their own. While these collective contributions have altered the course of human health and well-being, we have only scratched the surface of what’s possible, particularly when it comes to women’s and children’s health. 

An increasingly borderless world, coupled with advancements in technology and more gender diversity in positions of power, is changing the lens through which we view investments in the medical technology sector.   

Tapping into the broadest talent pool and enabling the best and brightest to bring their ideas to market are the best and most impactful ways to advance human healthcare. 

Investments With Measurable Social, Environmental, and Financial Impacts 

To date, an environment, social, and governance (ESG) approach to investing has been the main vehicle for people to align their pocketbooks with their values. With growing concerns about environmental and social issues ranging from climate change to racial inequalities, investors have increasingly been championing companies that are leading ESG movements. At a minimum, they have adopted internal practices that reduce harm. 

This is all well and good, but it’s not enough. 

On the other hand, impact investing is driven intentionally, targeting positive and quantifiable social and environmental impacts alongside financial returns. By 2030, the global impact investing market is expected to hit the $4.5 trillion mark, reflecting investors’ increasing desires for both financial returns and positive societal impact.

As the simultaneous transfer of wealth estimated to be worth trillions of dollars begins to flow into the hands of millennials and women—who are attuned to disparities that have largely been ignored over the past century, even in light of tremendous economic growth—impact investing presents a great opportunity for the Canadian investment industry. 

To date, women’s health has remained grossly underfunded, historically accounting for only 4% of the overall funding on research and development and only $650 million out of $136.7 billion in venture capital investments in 2019 (less than 1%). 

This underinvestment can be partly attributed to the lack of gender diversity at the venture capital decision-making table, which results in the underestimation of market size and the overestimation of adoption risk. For example, in Canada, women make up only 20% of venture capital decision-makers or investment partners. This number drops to 11% south of the border. 

In addition, there are only a handful of venture capital firms explicitly focused on women’s health, and a small number that provide capital for medical technology deals that have a history of investing even a fraction of their funds in women’s health, inclusive of sexual, reproductive or maternal health. 

Another factor contributing to the chronic underfunding is the complexity of testing products on women due to concerns about hormonal changes around menstruation, pregnancy, and menopause. In addition, women have been intentionally excluded from participating in certain studies. For example, until 1993, US regulations prevented women of childbearing age from taking part in trials, skewing conclusions relevant to women. However, complexity does not equate to poor performance, particularly in a market where transformative medical solutions have been lacking for decades. It just requires focus and expertise.

Growing Femtech in Canada 

Despite these obstacles, the full participation and rise of women in the economy has resulted in a consumer base—50% of the population—that is highly educated and interested in better solutions to their health and well-being challenges, as well broader social issues such as the environment, children and adolescent health, and racial equality.

The evolution of the femtech industry is beginning to destigmatize discussions around women’s health, including historically taboo topics such as menopause and menstruation. While not yet fully established within the investment industry by investment capital deployed, women’s health is now recognized by experts in the field as a subcategory of digital health with the highest potential growth in the industry in terms of compounded annual growth rate (CAGR).  

Here are three ways the Canadian investment community can capitalize on the trifecta of impact-driven decisions, the growth of femtech, and demographic shifts to maximize positive impacts and financial returns. 

1. Support new intermediaries led by diverse teams representing diverse interests.

We are seeing an emergence of new and diverse venture capital teams that span the gender, age, and race continuum. This often means that their funds are representative of a broader range of interests and smaller in size. 

However, institutions that invest in funds tend to prefer established firms that manage a larger pool of assets. This has created an investment disparity. For example, the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board only invest in funds that have long track records and are $1 billion or more. However, the most impactful of the funds tend to be less than $500 million and are managed by younger firms with shorter track records. Additionally, data shows that funds managed by these younger firms perform as well as or better than their more experienced peers, meaning that investing in the funds they manage provides investors impact as an added bonus without compromising financial performance. 

2. Invest in diverse theses and approaches on both a local and global scale.

The current pool of capital for new funds is quite limited, with a preference to ultimately invest in Canadian companies with the goal of encouraging local entrepreneurship and economic growth. However, when investing for global impact or specific priority areas such as gynaecological health, it is crucial to broaden the criteria to ensure Canadians have priority access to best-in-class medical products and solutions. 

Medical products are more likely to be commercialized in the regions from which they receive funding. For example, during the COVID-19 pandemic, the Canadian government was part of several consortiums and ensured that our investment was accompanied by commitments to bring these solutions to our market. The same can be achieved in other areas of health that are top priority to Canadians such as cancer care, cardiovascular health and sexual and reproductive health. 

3. Encourage impact investing via incentives and regulatory frameworks. 

The Venture Capital Action Plan (VCAP) offered capital to private investors to create venture capital funds that supported smaller, early-stage Canadian companies, such as femtech businesses. VCAP played a critical role in re-launching the Canadian venture capital industry following the bust of the tech bubble in the early 2000s by providing a layer of concessionary capital to commercial investors to attract them to the sector while allowing the Canadian government to earn strong cash-on-cash returns, albeit slower than commercial investors. 

Similarly, access to concessionary capital for global impact funds could play a significant role in growing the Canadian impact investment industry. By mitigating perceived risk for investors and boosting the internal rate of return (IRR), the Canadian government could help grow this segment of the investment industry while generating significant positive externalities for the local population, including—in the case of health technology impact funds—preferential access to world-class medical innovations. This would yield both financial and social returns for our country. Otherwise, these innovations would take significantly more time to become available in Canada, given our small yet complex market.  

In addition to financial incentives, regulation can help build the industry by creating a mechanism for funds to become recognized as impact funds, thereby avoiding “green” or “impact” washing. A framework similar to the European Union’s Sustainable Finance Disclosure Regulation (SFDR) would foster transparency in financial transactions related to sustainability. More specifically, Article 9 of the SFDR outlines requirements that ultimately improve transaction terms, open up more pools of capital, and enhance governance. This would go a long way in building trust in these funds and increase awareness of their existence in the market. 

A Global Vision for Medical Technology

Impact investing offers an opportunity for alternative asset allocations that can generate high, uncorrelated, risk-adjusted returns. When alternative assets first came to market, pension funds would contribute anywhere from 2% to 5%. Today, those numbers range from 10% to 15%. Pension funds can play an important role in helping to evolve impact investing strategies. 

For foundations, the potential is even greater. Today, Canadian foundations are only required to invest 5% of their capital towards their missions—even when the remaining 95% may in fact be invested against achieving the mission. 

A good example of this is a foundation dedicated to funding research in mental health while investing in a company like Meta, whose very activities have been proven to lead to mental health challenges in adolescent children. By investing all their capital towards positive societal impact, including investing across asset classes such as impact funds, foundations can continue to realize their financial goals while also achieving significantly more impact and limiting investments that negatively contribute to their missions.

The growth and maturity of impact investing as a financially viable strategy is well underway. It behooves the Canadian investment community to get behind alternative investments that drive progress on a global scale. 

Clearly, we can marry the concepts of giving and investing into one to help drive the next wave of innovations in medical technology that level the playing field, and ensure we’re all winners in the pursuit of global health.