Last year, venture capital (VC) funds invested US$3.7 billion in 459 Canadian companies – a 36% year-on-year increase in value, according to Thomson Reuters. Seventy-four financing deals worth US$10 million and above accounted for 70% of the total, indicating that the monetary flows benefited a wide range of companies – firms that have gotten on their feet thanks in no small part to early-stage financing from local VC funds.
Data from Thomson Reuters show that around 90% of Canadian companies are introduced to venture investment by Canadian funds in seed and startup financings, according to a report on the PE Hub Network. One of Canada’s most prolific seed-stage VC funds, Real Ventures, was involved in several of the top deals from last year, including financing for Blockstream, Breather, and League.
“Five-plus years ago, investors and founders believed that software and internet-powered companies could disrupt incumbents across all industries,” said Real Ventures General Partner John Stokes. “Many usurping startups are now showing they can win – something that is being recognized in large scale-up financings.”
According to Stokes, companies at their earliest stages have “potential [that] may be seen but is not yet borne out.” They can “capture the imagination” of later-stage investors after being built from the ground up and prepared – a process that Stokes says can only be done by VC funds that work hand-in-glove with entrepreneurs.
When firms are ready to scale up, Real Ventures reaches out to its network of VC partners, many of which are US funds. Thomson Reuters data show that Canadian business received US$1.4 billion in VC from foreign investors, the most since 2001.
With the North American venture industry expected to pull back in upcoming months, INovia Capital Managing Partner Chris Arsenault said that many startups will focus on exit opportunities. “We’ve entered a new era of growth, never seen before in Canada… With it come new challenges of attracting experienced talent to cope with growth issues still unknown to most emerging entrepreneurs,” he said.
For 2017, Stokes expects an uptick in mergers and acquisitions among startups that are ready to shift strategies from “penetrating underserved segments” to “winning market share” from incumbents. That shift, according to him, often reveals exit opportunities.
Much of the Canadian deal-making in the past two years was enabled by Ottawa’s Venture Capital Action Plan (VCAP), which created bigger funds and new co-investment pools by leveraging more than US$900 million in private-sector commitments. Rumor has it that Ottawa may not launch a second VCAP, sparking concern about potential fallout for Canada’s financing chain.
“[Building a successful ecosystem] requires a long series of investments, exits and reinvestments,” said Arsenault. “These cycles must be accounted for, or else it becomes a waste of time and capital.”
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