Canadian venture investing hit a 15-year high in 2016 thanks to numerous large-sized rounds, many of them the outcome of years of heavy lifting by local investors.
VC funds invested $3.7 billion in 459 companies in 2016, up 36 percent in value from 2015, according to data from Thomson Reuters.
These results, which ran counter to global trends, represent the largest VC deployment in Canada since 2001, as well as the largest year-over-year growth rate since 2000.
The key variable was big financings. Fourteen rounds sized north of $50 million, backing such tech companies as BlueRock, Thalmic Labs, DalCor Pharma and Real Matters, took $1.4 billion, or 37 percent, of the total invested. That’s a record concentration of cash in Canada’s top deals.
But that’s not all.
Some 38 financings of $20 million-plus raised $2.1 billion, or 56 percent of the total, while 74 financings of $10 million-plus raised $2.6 billion, or 70 percent. These statistics are also unprecedented in Canadian venture capital.
They indicate that last year’s dollar flows were not confined to a handful of deals. Investments instead seem to have benefited a wide range of companies in innovation hubs across the country.
The robust deal-making owed to greater market confidence, born of a maturing ecosystem, home-grown entrepreneurial talent and improved supply. It also owed to the blood, sweat and tears of local investors who laid the foundation for 2016’s large rounds.
Paving the way
Roughly 90 percent of Canadian companies are introduced to venture investment by Canadian funds in seed and startup financings, Thomson Reuters data show. This share is unchanged over time, even when U.S. funds are especially active north of the border.
One of Canada’s most prolific seed-stage VCs is Real Ventures, which targets opportunities embracing software, connectivity and AI. A number of its portfolio investments were among last year’s top deals, including Blockstream, Breather and League.
Real Ventures General Partner John Stokes told PE Hub Canada that his sector’s “record number of large rounds” was long in the making.
“Five-plus years ago, investors and founders believed that software and internet-powered companies could disrupt incumbents across all industries,” Stokes said. “Many usurping startups are now showing they can win — something that is being recognized in large scale-up financings.”
Real Ventures invests in companies at their earliest stages, when “potential may be seen but is not yet borne out,” Stokes said. Startups are essentially built from the ground up and prepared to “capture the imagination” of later-stage investors, he said.
Stokes says this activity can be undertaken only by VCs that are rooted in local ecosystems and able to work hand-in-glove with entrepreneurs. This is a continuous process, with investors always “stoking the funnel” to generate fresh opportunities.
When companies are ready to scale up, Real Ventures taps its network of VC partners, many of them U.S. funds. Thomson Reuters data show foreign investors deployed more than $1.4 billion in Canada in 2016, the most since 2001.
So what comes next?
North America’s venture industry is widely expected to pull back in the months ahead. What does this mean for 2016’s prodigious capital-raisers in Canada?
INovia Capital Managing Partner Chris Arsenault says many startups will now focus on exit opportunities, such as Luxury Retreats, an iNovia-backed company, did this week in its sale to Airbnb. Others may take advantage of a possible revival in tech IPOs.
INovia, an early-stage IT investor, also had portfolio investments among last year’s top deals, including ClearPath Robotics, Thalmic Labs and Vidyard. Arsenault says this was “a turning point but not an arrival” for his companies and the broader ecosystem.
“We’ve entered a new era of growth, never seen before in Canada, both in terms of revenue and financing sizes,” he said. “With it come new challenges of attracting experienced talent to cope with growth issues still unknown to most emerging entrepreneurs.”
Stokes agrees that 2017 will look different from 2016. He expects increased M&A activity, driven by startups that are ready to go to the next level by shifting strategies from “penetrating underserved segments” to “winning market share” from incumbents. That often unearths exit opportunities, he said.
VCAP II: yes or no?
VC fundraising trends have proved a boon to Canadian deal-making in the past two years. Much of this is attributable to Ottawa’s Venture Capital Action Plan, which leveraged more than $900 million in private-sector commitments, creating bigger funds and new co-investment pools.
Recent rumours suggest Ottawa may not unveil a second VCAP. This has sparked concern, shared by Arsenault and Stokes, about the potential fallout for Canada’s financing chain.
“An impactful plan must be executed with a long-term view,” Arsenault said. “It takes time to build a successful ecosystem. It requires a long series of investments, exits and reinvestments. These cycles must be accounted for, or else it becomes a waste of time and capital.”
Photo of John Stokes courtesy of Real Ventures
Photo of Chris Arsenault courtesy of iNovia Capital
Graphic courtesy ©iStock/StockFinland