The big story in Canada’s venture market in 2016 is larger rounds.
A growing number of well-funded deals, like September’s US$120 million financing of Thalmic Labs, are providing unheard-of resources to startups looking to compete in global markets.
VC funds have invested $2.2 billion in Canada so far this year, according to preliminary data from Thomson Reuters. This indicates activity is likely to match or exceed the robust $2.7 billion invested in 2015.
A key factor is deals sized north of $20 million. To date, 22 companies, including Thalmic Labs, Dalcor Pharma, Real Matters, Zymeworks and Blockstream, raised financings in this range. Taken together, they captured $1.2 billion, or 54 percent of the total invested since January.
That’s a record concentration of cash in Canada’s top VC deals.
The share garnered by $20-million-plus rounds in 2016 even exceeds 2000, the peak year of the dot.com era, when massive telecom financings contributed to a high water mark of $6.4 billion invested. Then, $20-million-plus rounds took 42 percent.
Breaking with old patterns
Why does this matter? Because it suggests a new trend may be replacing an old pattern of underfunded startups in Canada.
In the past, high-growth companies were often disadvantaged by small deals, which can undermine an ability to realize time-to-market goals or keep pace with better-funded competitors.
With improved deal capitalization, startups have more opportunity to become “category leaders,” iNovia Capital Managing Partner Chris Arsenault said.
“What’s happening today is not a valuation or funding-size bubble,” Arsenault said. “Many companies are now raising enough money to execute scale-up strategies and competitive product road maps. Increased availability of capital gives CEOs optionality. It puts them in the driver’s seat.”
The push toward larger deals is reflected in iNovia’s early-stage investments, which have doubled in size since the firm’s inception, Arsenault said.
INovia backed Thalmic Labs’ latest round. It also led this month’s US$30 million financing of Clearpath Robotics, a deal Arsenault says highlights the meaning of improved funding conditions.
“Clearpath has been developing self-driving vehicles since before the industry’s commercial emergence,” he said. “When robotics began to blossom, it put money into industrial-materials transport, which is now huge, a powerful innovative force. With access to the necessary resources, Clearpath can own the space.”
Deeper pools of capital
Bigger rounds result partly from bigger funds. The latter have driven Canadian fundraising of about $1.7 billion so far this year, preliminary Thomson Reuters data show. The largest of these, Georgian Partners’ US$375 million third growth equity fund, is more than twice the size of its predecessor.
American and other foreign VC firms are also playing a key role. Since January, foreign investors deployed at least $849 million to Canadian companies, or 38 percent of the total invested.
Additionally, Canadian corporate, high-net-worth and institutional investors are putting more dollars into VC syndicates. Many of them are LPs co-investing alongside of funds.
INovia, for example, has drawn an unprecedented $105 million in LP co-investment capital in the past 24 months. Arsenault says this speaks to an alignment among entrepreneurs, funds and investors, born of greater appreciation for the potential of Canada’s startups and what it takes to grow them.
Not there yet
While VC rounds are getting larger, there remains some distance to travel.
Canada continues to significantly lag the United States and other countries in financing sizes. A recent report by Yaletown Partners indicates the capital shortage is particularly serious for late-stage companies.
The topic should be top of mind in Ottawa as it considers a possible follow-up to the Venture Capital Action Plan, a program established three years ago to shore up VC supply.
Montréal-based iNovia is currently investing from its fourth fund. It closed last year at $175 million, up 60 percent from its predecessor.
Photo of Chris Arsenault courtesy of iNovia Capital
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