Analysis of source of Seed vs Series A funding of Canadian tech startups

tl;dr: Canadian tech startups tend to raise their seed funding from Canadian investors; while their growth capital, Series A, once they have traction and product/market fit, is primarily from US-based investors, with Canadian investors playing a connecting role.

A recent report by Vancouver-based Yaletown Partners piqued my curiosity about the growth capital available to Canadian startups. The report was titled “Canada’s Technology Investment Gap”, where they analyzed over 20,000 financings and 3000 exits since 2006 across Canada and the US to reach this conclusion:

There is a lack of growth capital in Canada beyond the seed/early stage, which leads to startups scaling more slowly, taking longer to exit and with smaller outcomes.

It is a broad dataset, over a wide timeline, with a hard-hitting conclusion. Time to put the coffee down — I tried to look at a more relevant sampling to derive more meaning from this as an entrepreneur, specifically the path from Seed to Series A. Hope below findings will help first-time/potential Canadian tech entrepreneurs think about their strategy for their Internet Scale venture.

NOTE: While the data below seems exhaustive, it is not and is limited to a sampling of tech startups founded in Canada which raised a seed round; and then a follow-up Series A round of at least $5 million (data lookups from CB Insights; with gaps plugged from AngelList, Crunchbase; and other references from Techvibes and BetaKit). Charts made by using Plot.ly, which is a venture-funded startup based in Montreal with a satellite office in San Francisco, all very fitting for this post.

Most startups in this sample got their seed funding from Canadian investors

These startups, seed-funded in Canada, got their Series A funding from US-based investors

For Canadian startups raising growth capital from Canadian venture capitalists only, one pattern which emerged was a very strong founder (often a past successful entrepreneur) who found traction. And then there is beyond Series A funding, which in a previous post I highlighted Pitchbook’s data how over 75% of venture capital invested in Canada in Q1 2016 went in rounds above $25 MM. That post also documented how 3/4ths of the exits of Canadian startups in that quarter were to US-based acquirers. And, 2/3rds of all venture capital invested in Canada in Q1 had US investor participation.

With a large chunk of your potential customers, growth capital and potential acquirers being from the US, you need to have a vision for how you will engage with that audience. Your odds of building a great Internet Scale venture isolated from the US market/capital are next to nothing. Here is how some others have done it.

Raise seed in Canada, then raise Series A from US-based investors

The above two charts document this well enough. The reason this happens is because of connections the Canadian VCs have with US-based VCs. As an entrepreneur wishing to live, build and grow your venture in Canada, your best bet is to have investors with US connections committed to your venture. Even if you want to move to the US, getting seed funding from Canadian investors is a good idea. For instance, AppDirect’s founders were Canadian who connected in San Francisco, raised initial seed funding from Canadian investors, and then further rounds from US investors (link to their story).

Love thy Canadian VC! Real Ventures, iNovia, BDC, EDC, Highline, Version One, Hedgewood, MaRS IAF, Six Squared Capital, Ryerson Futures and local angel investors are all doing amazing work seed funding local Canadian tech startups. And now, 500 startups has also come to town with a focus on Toronto! It is not just $$, but the experience, advice, mentorship available from local entrepreneurs who have already had successful exits in the past is amazing. Join StartupNorth if you haven’t already and tap into the community for advice and contribute back any way you can.

Move to the US and live/work/network there or partner with somebody who does

Head to a US tech region directly and build your connections locally in SF/Seattle/Boston/NY/LA. Study/live/work there and network; or find a well-connected co-founder already based there. Breather’s story, co-founded and initially launched in Montreal, and then in NY, is a great inspiration for this. Not that raising a Series A is easy for anybody anywhere (read Breather’s story):

Creating a hockey stick (of basically any kind that isn’t bullshit) is what’s really needed to raise a Series A.

Move to the US as part of an accelerator or incubator

Some have built their product locally in Canada and tried for product/market fit; before getting accepted and going through a US-based incubator/accelerator such as YCombinator, TechStars, or 500 Startups. That then has opened up connections for them and helped them raise further funding, such as for YC-backed 500px and Vidyard. In the past BackType (acquired by Twitter) went through a similar route — founded in Canada, YC, then successful exit.

Most recently, Shyft, while it built/pivoted and sought to find product/market fit and raised $380k locally, moving from Toronto to Seattle to participate in TechStars facilitated in connecting it with investors where it was able to raise over $1.5MM.

Raise seed round in the US while building your startup in Canada

Sounds far-fetched ? Bench, FreshGrade, Shopify (IPO-ed since), HootSuite, ScribbleLive and 500px have done it and are still based in Canada, with presence in the US.

As a founder/CEO of a venture aspiring to be Internet Scale, once you get beyond the seed stage and have traction, a good chunk of your life will be about travelling to the United States (if not moving there outright). If that’s not what you want, consider not building an Internet Scale venture and build a niche business for your small, local market instead which is not interesting enough for venture capital.

Until then, enjoy the ride to getting to product/market fit. Toronto, for instance, is a great place to experiment with new products with its 6 million plus population (including the suburbs), access to talent, and generally swell quality of life. So are Montreal, Vancouver and other regions in Canada as well. Once you have traction, you need to find a way to the US.