Investing in Canada
Being based in Canada for more than a decade, first as an entrepreneur myself — I exited my company AbeBooks to Amazon in 2008 — and more recently as a Venture Partner for Acton, I have observed the North American VC landscape for a fairly long time. I developed a knack for investing in Canadian businesses for reasons that align very much with our investment philosophy — growth driven by reason. The Canadian founders I met are charged with technical prowess, dedicated to create value and possess the drive to make a difference.
Humble mindset and reasonable valuations
For us, Canada combines the best of both worlds: As investors we like to stay away from momentum and hype but we’re excited about solid business models and reasonable valuations. Both can be found in Canada, which is still underserved by VC financing options. In addition to that, the country’s proximity to the U.S. makes it an ideal test market to build innovative companies: no language barriers, a stable market environment and access to the world’s largest domestic market. Thus, with good reason some Canadian startups can be described as hidden US champions. Even though the money is pouring in, Canada’s start-up scene remains by all means humble compared to its big brother in the U.S.
Canadian VC deals surge
The Canadian startup ecosystem is still young and less mature than its big brother in the U.S. In the past, the country lacked VC investment and less active M&A and IPO markets. But things are changing rapidly and the industry is maturing with the level of capital increasing on par with the investment base. As the U.S. has seen a slowdown in VC deals, Canada has seen a surge. The interest of U.S. based funds in Canadian companies is increasing as well. According to PitchBook data, Canadian private companies raised a whooping $881 million in the first quarter of 2016.
A banner year for venture capital
Canada saw a true banner year for venture capital and private equity in 2016, hitting levels of investment not seen since the dot-com boom. According to the Canadian Venture Capital and Private Equity Association (CVCA) venture investment in Canada has been growing tremendously. At $3.2B, VC investment in 2016 exceeded 2015 by 41 per cent ($2.3B) and is the highest on record since 2001. The internet sector saw the most venture capital investment in Canada in 2016, at US$731 million.
A maturing ecosystem
Toronto alone boasts more than 3000 technology startups. According to the provincial government of Ontario the region already has among the highest concentrations of tech firms outside Silicon Valley. Vancouver proved its potential for entrepreneurial greatness by yielding fast-growing tech champions like Slack, D-Wave Systems or Hootsuite. With its cheaper cost base and its cluster of universities producing engineers and developers Canada has turned into a hotspot for entrepreneurs.
With its ambitious innovation agenda, Justin Trudeau’s Liberal government aims to foster the surge of homegrown tech champions and a vibrant VC industry. The government supports the emerging ecosystem through tax credits and special fast-track visas for tech workers. The recent budget set aside $950 million for innovation superclusters, fintech, and artificial intelligence.
A recent Bloomberg report points out that Google, Microsoft and Uber are all building artificial intelligence research teams in Canada, what could potentially become the most important field of tech ever.
Challenges on the road ahead
But some difficulties remain. Canadian founders still struggle to attract talent from the Valley. While the availability of tech talent is no longer an issue, there’s still a lack of business talent. Big tech giants like Amazon and Microsoft often capitalize on Canada as a stepping-stone to bring talent into the US. After being granted a work permit for Canada, they push for immigration to the U.S. as a second step. However, with Trump induced immigration fears as well as Brexit, Canada might benefit from the emerging opportunity for economic growth. The country has been vocal about its continued pro-immigration stance.
Despite major success stories, such as Ottawa’s Shopify, big exits are still scarce and Canadian startups are often blamed to sell out too fast. Founders still have to push past their risk aversion. Scaling issues are also persistent. One of the primary causes of the smaller exit size may be the smaller average size of VC funds in Canada. According to the BDC Canada the average Canadian fund size is $111 million in contrast to $172 million in the U.S. In consequence Canadian companies still only raise half as much capital on average over their lifetimes as their U.S. peers.
What forces Canadian companies to operate in a capital restrained environment, might be a blessing in disguise: Canada stands out due to its efficient use of venture capital financing, healthy valuations, a stable startup ecosystem and thus opens up great opportunities for foreign investors.
Dr. Hannes Blum is Venture Partner for North America at Acton Capital Partners, a leading European Venture Capital firm based in Munich, Germany. More: actoncapital.com
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