Canadian VC’s late-stage pivot shows market coming of age

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The big story in Canada’s venture market in 2018 may be late-stage deals.

Since January, the market’s top financings have backed a long lineup of tech companies in scaling mode, among them Auvik Networks, Breather, Coveo, Ecobee, Elastic Path, Ritual, Rubikloud, TouchBistro, Wattpad and Wealthsimple.

VC funds poured more than $2 billion into these growth and late-stage rounds, the largest sum invested over a six-month period in 18 years, according to Thomson Reuters data.

As a result, late-stage activity at the end of June accounted for 85 percent of all VC invested, up from 73 percent averaged over the past decade.

The data suggest a key milestone for high-growth companies, many of which once struggled to raise cash but are now getting the resources to fuel ambitious global strategies.

That’s the view of Damien Steel, managing partner of OMERS Ventures.

Steel says a “phenomenal pipeline” of candidates for Series B, C, D and other rounds is currently emerging in Canada, born of years spent nurturing and funding early-stage companies.

Steel credits an ecosystem that today includes more capital, more repeat founders, and a world-class talent pool. It is making Canada an “amazing place to start up, grow and scale a tech company.”

Just as important is a “maturing” investor community that is increasingly attuned to the needs of high-growth companies, he said.

Damien Steel, Managing Partner, OMERS Ventures

Canada’s late-stage space has recently attracted new players. They include domestic funds large enough to steer rounds, often alongside U.S. and other foreign VCs that have long supplied most of the money going to this market segment.

Examples of the trend were on display in the first half.

They include the $72 million Series D of restaurant POS-software provider TouchBistro, which OMERS Ventures co-led with JPMorgan Chase, as well as the $90 million Series C of food-ordering app Ritual, led by Georgian Partners.

Caisse de dépôt et placement du Québec has led or co-led multiple late-stage financings of late. They include a May top-up to the Series C of smart-Wi-Fi-thermostat maker Ecobee, increasing it to $127 million.

And digital wealth manager Wealthsimple has raised its growth capital from Power Financial. In February, Power expanded the investment to $165 million.

Steel says this activity tells a “great new story in Canada” of tech companies looking to break out with a strong Canadian partner.

Of particular value to such companies is a core group of local funds with global reach, extensive networks and operational capabilities, he said. They offer benefits that “used to be afforded only by U.S. and other foreign investors.”

Jérôme Nycz, Executive Vice President, BDC Capital

Staying private longer

Jérôme Nycz, executive vice president of BDC Capital, agrees.

He says late-stage deals are further enabled by co-investment pools created by an expanding base of limited partners.

BDC Capital recently set up a co-investment arm to boost resources for VC rounds. It was this vehicle that joined the Caisse and AGL Energy in topping up Ecobee’s Series C.

One result of an improved supply side is companies that are “staying private longer,” Nycz said. CEOs formerly caught up with fundraising or pressures to exit can instead be single-minded about executing scaling strategies over time.

An extended runway is also supported by new ways of doing late-stage financings, Nycz said.

He cited the increasing use of secondary transactions, which help “early-stage investors gain some liquidity while ensuring continued company growth.”

A longer horizon serves the ambition of companies like Ecobee and TouchBistro, John Albright, managing partner of Relay Ventures, said.

John Albright, Managing Partner, Relay Ventures

Ecobee, led by CEO Stuart Lombard, and TouchBistro, led by CEO Alex Barrotti, reflect a new breed of Canadian tech company, Albright said. They have transitioned from “a single-product strategy to building a business.”

Both Relay portfolio companies are developing around a “wedge” technology that has won them revenue, customers, credibility and a brand.

However, their ultimate goal is bigger, Albright said. It is to become “multifaceted global businesses focused on diverse segments,” for Ecobee, as a smart-home platform, and for TouchBistro, as a complete restaurant system.

Such growth paths demand “conviction and capital” for 10 years of building and another 10 years to “really execute,” he said.

More late-stage funds

Along with the spike in late-stage deals, 2018’s first half saw fundraising of a similar theme.

Georgian, iNovia Capital and Yaletown Partners are among several investors raising growth equity funds. If just these firms meet their reported targets, late-stage rounds could soon tap into $1.5 billion of fresh resources.

Nycz says this shows Canada’s VC market is “coming into its own.”

However, more large funds are needed to be life-cycle partners to up-and-coming tech companies, he said. Ottawa’s $400 million Venture Capital Catalyst Initiative, which gives priority to late-stage opportunities, should help “unleash that potential.”