In the past decade, Montréal’s tech ecosystem has gone from fledgling to a Canadian leader in startup investment.
In 2017, Montréal saw a 64 percent increase in deals, with over $1 billion invested in the city’s burgeoning startups. Four of the five biggest deals in Canada last year ($592 million invested in total) involved Québec companies, highlighting the global ambition of the region’s entrepreneurs.
With the much needed increase in venture capital funding, government programs and support for new entrepreneurs, plus a global competitive advantage in artificial intelligence, the pieces have fallen into place for a proliferation of high impact companies.
When Real Ventures announced our $180 million raise in November, we noted that as well as broadening our horizons and investing in later-stage companies across Canada, we plan to continue to focus major energy — and a dedicated team— on our OrbitMTL strategy, which allocates $30 million in seed investment and hours of mentorship and support to early-stage startups in Québec.
To dig into why now is such a great time for tech entrepreneurship in Québec, I spoke with two of Real Ventures’ investors: Tom Birch, vice president, funds and technology, at Caisse de dépôt et placement du Québec, and Jacques Perreault, associate vice president, technological innovations, at Desjardins Business Capital régional et coopératif.
We discussed the state of the tech ecosystem, opportunities for growth, and their view on what the province needs to continue building on this new momentum.
SC: Let’s start with the current state of the Québec tech ecosystem. Why is it a great time to be in this business together?
JP: If you look back 10 years at the state of the venture capital industry in Montréal, it was basically a nuclear winter. Nobody was in the market.
For tech companies, it was tough to get financing and I think Real Ventures was one of the first to come back and restart the startup community with its first fund (Montréal Start Up, 2007). It was a nice trigger to the ecosystem in Montréal and other funds followed: iNovia Capital, Brightspark, White Star Capital. That was the beginning of a positive cycle.
When I’m looking at the ecosystem today, we see different kinds of players —angels, VCs, institutional VCs, corporations. And the corporations now believe in technology and the fact that we should invest in early-stage companies.
With the emergence of angel investors and corporations we are seeing more and more involvement, either by buying the technology or starting to invest in some of the startups here in Montréal, in Québec and in Canada.
TB: The Orbit investment fund is also very, very important because Real Ventures built the FounderFuel program — a way to coach entrepreneurs.
Lots of people have great technology but they don’t know anything about sales, marketing, direct sales, indirect sales channels, online, etc. But these guys (at Real Ventures) get it: they have to coach all the entrepreneurs in Montréal, in Québec, and eventually (the entrepreneurs will) start a first company, maybe create a liquidity event for Real Ventures, but then they’ll have a second time at bat, and a third at bat and then they’ll have more and more chances themselves.
JP: That’s a big change: to see the ecosystem evolving with time and seeing more and more great projects. We didn’t see that 10 years ago.
We’re also seeing a new generation of entrepreneurs, either first-time or second-time entrepreneurs, coming into the market with realistic projects. They know the space, they know what they need to do. Some of the entrepreneurs made mistakes in the past but now they know what to do to create success.
TB: Another problem we had in Québec 10 years ago was if an entrepreneur could sell his company for $40 million, they sold it. The VC funds were so small they wanted to create an early exit so they could go raise another fund. We were in this never-ending vicious cycle where people wanted to build a company and sell it; build a fund, make a bigger fund, and nobody was actually building for the long-term.
SC: So now there’s more capital available for startups but there are way more startups too. Do you see that as one of the challenges for startups here in Québec? What have you heard or seen that shows us the struggles of entrepreneurs?
JP: I see two holes. For seed investment, although we have players like Orbit/Real Ventures, I think we’re still missing players in that space. We are seeing angels, we have all kinds of accelerators and programs, but I don’t think we have all the financing needed at the beginning of the food chain for all of the tech startups. I think that’s the first challenge here. We should have a stronger financing structure at that point (in the cycle).
The other challenge is after companies have gone through seed financing, Series A, Series B and getting to Series C — at this point I also see a lack of investors. Big institutions are only just starting to invest, but there’s still a big hole there.
Sometimes the financing also comes from U.S.-based VCs, which is good, but it would be interesting to have more local players. U.S. VCs come in and fund or acquire those companies and sometimes we are selling them too early.
TB: Exactly. In the case of Lightspeed, we (CDPQ) went in and invested in their Series C round — roughly US$32 million, then two and a half years later there was an opportunity to take out Accel Partners, which was a previous investor, and we put in US$136 million. It was very important for us because now the founder, Dax Dasilva, and his management team can take a five-year view of building out the company versus trying to create a liquidity event for an American investor.
We need to think bigger and that can only happen if we take a long view and invest in these companies for the long-term.
SC: When we were fundraising last year, our partner, John Stokes, often said it’s year 10 of a 20-year cycle. So what’s next? Anything we should be doing given those two gaps in the market?
JP: I think we are starting to see the ingredients: the accelerators, the investors, the government programs, corporations.
What I think we are lacking here in Québec, if I compare it, for example, to Toronto, is that we are working in silos. I don’t see a common view or a common strategy for what we should do next to make sure we’re able to build the leaders of tomorrow in terms of tech companies.
TB: In terms of building out the ecosystem, we also really need to invest in small early-stage VC funds to increase the size of the farm team. We have to make sure we have a minimum critical mass. The venture capital market in California is roughly US$34 billion per year, in Tel Aviv it’s US3.2 billion per year. Israel has roughly the same population as the province of Québec, and Québec is roughly US$500 million a year.
The only way for us to create more success is to start more companies and get more bats and create more opportunities to create the next “Google of AI” or “Google of IoT”, but if we don’t have enough at bat, we won’t have the chance to succeed.
I also believe that 25 years ago we had a world competitive advantage with respect to telecom software, which turned into fibre-optic technologies, and semiconductors that associate with fibre-optic technologies, and we haven’t had a competitive advantage in any other technological field until now.
Having the opportunity to work with Yoshua Bengio, the founder of MILA (Montréal Institute for Learning Algorithms, Québec’s AI institute) we’re going to actually have a chance to build up the critical mass in AI. One of Real Ventures’ investments, Element AI, will be in the same building, as well as other Montréal VC-backed big data scale-ups and startups.
Within three years, we’ll have 5,000 AI knowledge workers in two blocks in Montréal, and for me that’s minimum critical mass.
So now VC funds are starting to come to Montréal to invest in our ecosystem, so that means we’re going to develop more and more companies in Montréal that want to stay in Montréal even when they create a liquidity event. They’re going to want to stay here and build other companies, so in terms of world sustainable competitive advantage, I think with AI we finally have a chance to do it.
It’s weird because when the internet was founded in 1992, everyone was investing crazily. In 1997 to 2000, it was like the wild wild west. But now, I actually believe the wild west is just starting because we have all of the fundamental technologies available today, we have the foundations and it’s going faster.
We now have the people to manage the technology evolution, and you throw AI in there and I think in the next ten years we’re going to see such massive technology growth that we’re in the right place at the right time.
SC: Any closing comments?
TB: I’m excited to be in Montréal. Québec is taking a strategic approach to creating long-term value by investing in innovation.
That’s really key: we’re selectively investing in AI and 5G, which are key enablers of the internet of things, and investment in innovation will drive the rest of the economy. We have a great quality of life and some of the world’s best technologies, so I think we’re sitting in a nice position.
JP: For me, what you’re building — Orbit, Real Ventures, FounderFuel — is one of the catalysts of the Québec ecosystem. Because of your reach, the number of companies you’re seeing, the intelligence you’re able to get with those companies, all of your co-investors, your LPs — you’re playing a very important role in the market.
At Desjardins, we have the same philosophy and yes, we want to make a return but we also want to build something that’s sustainable. It’s very important and it’s part of our DNA but we’re also looking for partners with the same views. We want to build the leaders of tomorrow and there’s only one way: we have to be patient, work closely with the companies and make sure that everyone in the ecosystem is aligned and has the same goals.
Sylvain Carle is a partner at Real Ventures. He and Isaac Souweine, a fellow partner, manage the firm’s Québec-focused Orbit strategy launched last year with the $180 million close of Real Ventures IV. Carle joined Real Ventures in 2014.
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Photo of Sylvain Carle courtesy of Real Ventures