Canadian venture capital and startup predictions for 2019


Jim Orlando, managing partner at OMERS Ventures, photo courtesy of the firm

For the fifth year running, I am following up my review of my 2018 Canadian tech predictions with a look forward to the funding environment and technology trends within the Canadian startup ecosystem in 2019.

I have a few non-Canadian thoughts as well given that I led three OMERS Ventures‘ investments in Europe and the United States: Contentful, DuckDuckGo and OpenBazaar.

Canadian startup financing environment

There has been a lack of clear trend lines in both volume and sources of financing over the last few years.

Total venture investment in Canada was slightly lower in 2017 than 2016, but recovered in 2018. Conversely, international (non-Canadian, non-U.S.) investment increased significantly in 2017, and dropped equally so in 2018.

Fortunately, and seemingly out of nowhere, Canadian sources made up that difference in 2018, particularly in larger late-stage rounds. Adding to that, macro factors, such as weak equity markets, global political uncertainty and trade wars, make it difficult to predict 2019 venture investment levels in Canada.

Nevertheless, here I go:

1. At least two new tech-oriented investment firms form

In 2018, two new Canadian firms announced their funds: Panache Ventures and Ramen Ventures.

As capital from the government-backed Venture Capital Catalyst Initiative becomes available through the various fund-of-fund managers, institutional investors take more interest in the technology sector, and Canadian startups continue to make their mark on the world stage, at least two new technology-oriented investment firms will announce formation and funding rounds of size during 2019.

2 (a) Total VC investment in Canadian startups will drop…

Total VC investment into Canadian startups has been relatively flat (plus or minus 5 percent) for the last several years at about C$4 billion ($3 billion).

I believe the total level of investment will remain similar to previous years but overall market uncertainty will mean a lower level of investment for 2019.

2. (b)… and total investment in late-stage will be larger than early-stage

The surprise for 2018 was that for the first time since I’ve been doing these predictions, the total investment in late-stage companies was larger than total investment in early-stage companies.

I expect that trend to continue, as Canadian technology companies continue to mature, as round sizes continue to get larger, as the exit market remains challenged, and as investors seek lower-risk investments given an uncertain economic climate.

Technology-oriented private equity firms and growth equity firms will be the strongest drivers of this new normal of investment prioritization.

3. U.S. investment will increase, international investment will remain minimal

The sources of funding for the Canadian industry have been shifting over the last several years. International investors made up 20 percent of total investment in 2017, and then dropped back to their historical less-than-5 percent level in 2018. After increasing for several years, U.S. investors also dropped their contribution levels in 2018.

For 2019, I believe that U.S. investment into Canadian startups will increase and international investment will remain low.

4. One “top ten-in-ten” exit

Last year, I was feeling bullish on the exit market, and predicted three significant exits for the year. For context, to be a top 10 exit over the last 10 years in Canada, an exit of about C$250 million is required and, unfortunately, there were no venture-backed exits of that size last year.

I do believe that larger exits will occur as our industry continues to mature and predict one will occur during 2019. With C$4 billion in venture investment per year over the last several years, a sustained lack of unicorn-sized exits will eventually impact returns and Canadian VC fund growth.

Technology trends

The last wave of innovation, powered by social media uptake and an iPhone in every pocket, appears to be ending. There is strong negative sentiment around personal data abuse, iPhone penetration is peaking, and companies built specifically leveraging these platforms, such as AirBnB and Uber, are poised for IPO.

We are now in an innovation uncertainty period similar to the late 1980s, after personal computers but before the internet, and similar to the mid-2000s, after the dotcom bust but before the iPhone. There is uncertainty around what new innovation will be the next big platform.

I have a few predictions related to the emerging technology sectors.

Photo courtesy of Natali_Mis/iStock/Getty Images.

5. No apparent next new innovation platform

VCs are investing far and wide to find the newest innovation platform: robotics, artificial intelligence, autonomous vehicles, augmented reality, virtual reality, bitcoin/blockchain, quantum computing, internet of things, healthtech, foodtech, cleantech, proptech, synthetic biology…the list goes on.

Although it’s probably in that list somewhere, I do not think the next new innovation platform will be obvious by the end of 2019.

6. AI will be tainted by negative sentiment…Canadian startups to the rescue

Investment in artificial intelligence is booming and it is impacting every corner of every industry. AI has proven itself to be able to derive insights from virtually any dataset.

FAMGA (Facebook, Amazon, Microsoft, Google and Apple) and BAT (Baidu, Alibaba and Tencent) companies are leaders in the field of AI, partially because they have access to large proprietary datasets. In parallel, some of these companies have come under fire for leaking of personal information, enabling overly targeted ads and, well, for simply being too big.

While AI is not the cause of the negative consequences of large centralized data pools, I believe that in 2019 it will begin to be tainted as an enabler of them.

Fortunately, there is a strong body of research and several startups seeking to provide the benefits of AI but without the need for centralized data control.

Canadian startups were well-represented and funded during the first wave of AI deployment and several projects are underway to help bridge this centralization-decentralization gap.

As a result, we should see announcements of funding rounds for Canadian companies in the areas of data anonymity, personal data sovereignty and control, blockchain-based data marketplaces and/or new AI companies built around decentralization.

7 (a) Bitcoin will increase in value,

7 (b) a new token will be issued by a known company,

7 (c) stablecoins, security tokens and non-fungible tokens will make headway, and

7 (d) blockchain will find utility beyond bitcoin

Despite the crash in bitcoin value in 2018, I remain bullish on its long-term prognosis. Bitcoin has unique and valuable attributes that make it useful as a store of value and I believe it will increase in value during 2019.

Building on this, I believe that a new token will be issued by a known technology company, potentially even one of the FAMGAs or BATs. This will bring crypto more into mainstream usage.

Relatively new types of tokens, such as stablecoins (each token backed by one dollar), asset-based tokens (a token backed by a more traditional asset, such as a share or real estate) and non-fungible tokens (NFTs, each token represents something unique such as a digital collectible) have started to make their way into the blockchain community.

Each of these types of tokens enable different use cases and for 2019 I believe that each will continue to make progress towards broader adoption. Related to this, we should see a few blockchain-based product launches from ICO-era companies during the year.

In the Canadian context, we should see activity in all the areas noted above throughout the year.

As has already happened in the United States, a meaningful Canadian real estate owner should announce a proof-of-concept of real-estate tokenization. And the leader in NFTs, Dapper Labs (maker of Cryptokitties) should continue on its journey of bringing digital collectible technology to market.

8. Fintech resumes its march into Canadian consciousness

Many financial technology startups launched five or so years ago with the goal of chipping away at the market share of the Canadian incumbent banks.

It is difficult, time-consuming and expensive to build an online brand from scratch that is trusted by consumers for their financial well-being. Hence, in the intervening years, many startups pivoted their business models and partnered with incumbents to bring their services to market.

For 2019, I expect the pendulum to swing back in the other direction, with some consumer-oriented fintech companies becoming more prevalent in the marketplace.

9. AR/VR meet blockchain

Consumer hardware in the augmented reality and virtual reality areas continues to follow its Moore’s law trajectory.

During 2018, new VR models were released by Sony, Samsung and FacebookOculus, while new AR googles were released by Magic Leap, Microsoft and Canadian startup North. AR capabilities were also directly incorporated into Apple and Google phones.

Although there was interesting and unique content developed, none really hit mainstream adoption.

During 2019, I expect to see Canadian gaming expertise combine with our rich blockchain expertise in the AR/VR domain. Think Minecraft meets VR meets digital collectibles, potentially built on the Decentraland or other similar platforms.

10. Micropayment adoption driven by privacy concerns and subscription saturation

Somebody famously said that if you are not paying for the product, then you are the product.

As it relates to online media, producers currently have two monetization options: automatically debiting credit card subscriptions (think Netflix and Spotify) or ad-funded (think Facebook and Google). As content quality increases across multiple domains and concern over privacy and cybersecurity increase, consumers will expect a third option: a micropayment to pay for an article or show on-demand.

Several Canadian startups are working on micropayment capabilities and I expect 2019 should see Canadian bank proof-of-concept around a micropayment wallet capability.

11. Remotely-controlled robotics

The popular conception of a humanoid robot is as an independent entity that walks and talks and acts as a servant for its human masters.

While this might be a long-term reality, the first step towards this should be available this year…an independent servant, yes, with certain levels of artificial intelligence for basic tasks, but in fact supervised and controlled remotely by a human. Outsourced call centres meet robotics.

Several Canadian startups are building the components of this…robotic hands with fine-grained control, virtual reality vision systems to allow remote monitoring and AI to provide the robot with baseline primitives that remote masters can invoke.

12. Non-animal protein becomes the new cleantech

The significant impact on the environment of raising animals for protein to feed the human population has made its way into my social feeds in recent months.

Although not an investment area for OMERS Ventures at this time, many U.S. venture investors have backed companies in the sector. (For example: Soylent, Impossible Foods and Beyond Meat.)

I expect to see some Canadian financing rounds in this new area of cleantech, likely built around some of the ongoing university research in Edmonton, Guelph, Montréal or Ottawa.

13. Synthetic biology VC funding will continue to increase

In 2018, CRISPR gene-editing technology made news on both ends of the “good news” and “bad news” spectrum. New disease cures were approved and human embryos have been genetically modified.

In 2019, I expect continued polarization of news stories in this area, while in parallel new industry norms and generally accepted principles become adopted by scientific and government bodies. While this is also not an investment area for OMERS Ventures, I expect the VC backing of Canadian technology in the disease treatment area to continue to grow.

International trends

As mentioned above, three of our new investments in 2018 were outside of Canada: Contentful (Berlin-San Francisco), DuckDuckGo (Paoli, Pennsylvania) and OpenBazaar (internationally distributed).

As we continue to build on the global OMERS presence to expand our venture investment activity into the United States and Europe, I have a few non-Canadian predictions:

14. Similar number of U.S. tech IPOs, despite some high profile ones

Weak equity markets, political uncertainty and trade wars mean that only the most in-demand U.S. technology companies will successfully complete an IPO, companies with profiles like AirBnB, CoinBase and Uber. But overall, the total number of IPOs and amount raised will be similar to 2017 and 2018 (19 companies IPO’d in both years).

15. Chinese tech company enters the top five market cap

I was wrong on this prediction for 2018, but I still think I am directionally right so I am calling it again: at least one of the BATs will have a larger market cap than at least one of the FAMGAs.

16. Tech plus non-tech activity increases

As technology continues to impact all industries, we should see continued investment and M&A by traditionally non-technology-centric companies into technology companies.

Retail companies will bolster their venture investment to compete against Amazon (Walmart/Jet.com), news/entertainment companies will increase their online activity, and transportation companies will further their M&A (GM/Cruise), etc.

Let’s see how things progress throughout the year…

Jim Orlando is a managing partner at OMERS Ventures, a venture capital firm that includes the Ontario Municipal Employees Retirement System (OMERS) as its lead investor.

OMERS Ventures invests in high-growth companies in the technology, media and telecom sectors across North America. Jim’s investments include Citizen Hex, Contentful, Digital Currency Group, DuckDuckGo, Jobber, Nudge, OpenBazaar, Ranovus, Shopify (NYSE, TSX: SHOP) and Wattpad.