Jim Orlando, Managing Partner, OMERS Ventures
It’s time to look back at my 2018 predictions of trends in the Canadian Venture Capital and Startup world. In July, half way through the year, I was tracking to 5 out of 10 .. let’s see how I actually did for the year.
My first prediction was a multipart prediction around the health, stage and sources of VC investment in the country.
Prediction 1: Total VC Investment in 2018 Will Decline Modestly, Driven By A Decline In Late-Stage Investment from U.S. And International Investors
I predicted a modest decline in VC investment in Canada in 2018, largely because I thought U.S. and international investors would reduce the amount of late-stage investment versus previous years. As shown in Figure 1 below, total investment in venture-backed companies was slightly higher (by about 4%), holding at $1.6B. This puts 2018 levels at about the same as 2016. Total VC investment in Canada is up for the year.
So did late-stage investment decrease? No. As shown above, the amount of investment in late-stage companies increased substantially (and the amount of investment in early-stage companies decreased by an equivalent amount.) More money was invested in late-stage companies than early-stage companies, reflecting a maturing of the industry. Clearly many growing companies in the Canadian ecosystem have been able to attract larger financing rounds as they continue to grow their revenue and market share.
As shown in Figure 2, the number of large (greater than $40m) venture rounds has increased steadily over the last several years. Companies in the OMERS Ventures portfolio in the 17 large rounds this year include Hopper, League, TouchBistro and Wattpad.
So this increase in late-stage capital and larger rounds means there was more investment from U.S. and international sources, right? Surprisingly, no. As mentioned above, a year ago I had thought that U.S. and international investors would pull back from the Canadian market during 2018. As shown in Figure 3, both U.S. and international investors have pulled back from the market.
This leads to the real surprise this year: While U.S. and international investors pulled back from VC investment this year, Canadian investors made up the difference. Canadian investors invested more in the industry than non-Canadian investors. During the year a wide array of familiar and new Canadian investors participated in larger rounds, including BDC, CDP, Georgian Partners, Investissement Québec, OMERS Ventures, Power Financial, PSP, Telus Ventures and Wittington Ventures. This Canadian late-stage activity should increase in 2019 as Inovia and other growth funds come online, CPPIB and potentially other Canadian pension funds re-enter the asset class, and further capital from the government-backed VCCI makes its way into the market. Our scale-up “problem” appears to be on the mend, and much of that capital is coming from Canadian sources.
Score: 0 for 1
Prediction 2: Three Top-Ten-In-Ten Exits During 2018
At the beginning of the year I thought that we would see several $250m+ exits of venture-backed companies through the course of 2018. (My specific prediction was that we would see three “top ten” exits as measured by all of the venture-backed exits in Canada over the last ten years; my colleague Brian has a summary of the Canadian Leaderboard). The resurgence in Canadian venture investment had started about six or seven years prior, and I had hoped that the fruits of those early investments would start to be seen with some mid-sized acquisitions ($250m+) or maybe even an IPO or two ($500m+).
In the IT sector for 2018, there were a number of exits in the $50m to $150m range, including Bonfire, BuddyBuild, Hubdoc, Layer6, Unata and UXP Systems. The management teams of these companies have clearly built strong businesses that are leaders in their areas, and generated strong returns based on the amount of capital that they raised. But the overall exit results for the year are a disappointment; in the context of the amount of capital raised each year by startups in the Canadian venture industry, total exits each year need to hit high single-digit billions of dollars in order for our industry to be self-sustaining. This means that we need a Shopify along with several mid-sized $250+ exits each year.
I’ve written about the need for realized returns in the past, and more importantly what I think Canadian startup CEOs should be doing to help position themselves for an exit should that path be the right thing for all stakeholders. Hopefully the group of maturing companies from prediction 1 will provide this source of realized returns in the coming years.
Score: 0 for 2
Prediction 3: Increased Number of Non-Tech + Tech Acquisitions
The line between a tech and non-tech company is blurring as traditional companies across all sectors continue to be impacted by and take advantage of advances in technologies. My third prediction was that we would see increased acquisition activity between non-technology and technology companies — financial institutions buying fintech startups, bricks-and-mortar retailers buying online challengers, etc. While the Layer6 acquisition by TDannounced early in the year is one example of a non-tech + tech acquisition, I wouldn’t necessarily say that activity in this area has increased.
Score: 0 for 3
Prediction 4: Crypto Headlines Will Be Negative But Valuations Will Hold
Not. Even. Close. In 2018, Bitcoin went from over $13000 down to $3500. That said, I remain a believer in the role of Bitcoin as a store of value with unique and sustainably differentiated attributes, and on the disruptive opportunity for blockchain-based applications that we are investing in here at OMERS Ventures.
Score: 0 for 4
Prediction 5: No Commercially Available Autonomous Vehicle
In the category of autonomous vehicles, the year saw an extreme low (a death caused by an autonomous vehicle) and a promising development (the launch of a limited domain ride-hailing service). A fully autonomous vehicle appears to be years away.
Score: 1 for 5
Prediction 6: No Breakout AR/VR App
There have been some amazing recent releases in the AR/VR sector — hardware such as North, Oculus Go, Magic Leap and soon-to-be-released HoloLens 2, and content/apps such as Spatial and our own portfolio company Felix and Paul. However, nothing ignited the market the way PokemonGo did in 2016.
Score: 2 for 6
Prediction 7: A Chinese Company Cracks The Top Five Big-Tech
After several years of wrongly predicting that a Chinese-branded app would make its way to the west (eg WeChat and Alipay aren’t really things here), I changed direction at the beginning of 2018 to predict simply that a Chinese tech company’s market cap would surpass one of Apple, Amazon, Microsoft, Google, Facebook. While closer than ever, the two largest Chinese tech companies remained smaller in market cap than the five U.S. big tech companies.
Some interesting, close-but-no-cigar, facts:
- the largest private company valuation rests with China’s ByteDance at $75B. Uber’s most recent valuation was set at $72B.
- unbeknownst to me when I made this prediction, TenCent’s valuation actually exceeded Facebook’s in late 2017.
- Alibaba’s “Singles Day” in 2018 had $30B in sales, which exceeded the aggregate Thanksgiving / Black Friday / Cyber Monday $18B in sales.
Score: 2 for 7
Prediction 8: The Disruptor Technology Of Big Tech Will Become Clear
At the beginning of the year I thought that a new technology would clearly emerge that would be accepted as the new new thing .. the thing that would disrupt the business models of Big Tech. Examples that I cited at the time: micropayments emerging to disrupt online ads, or distributed apps built on blockchain or increased focus on privacy would disrupt current incumbent apps such as Instagram or Snapchat, or quantum computing or AI would gain enough momentum so that Big Tech multiples would compress. Our investment earlier this year in OpenBazaar / OB1, a blockchain-based distributed peer-to-peer eBay service, is an example of the kind of thing I had expected to see. While innovation continues and progress has been made in a number of areas, no one technology area appears to be a breakout that will bring a new wave of startup challengers to big tech.
Score: 2 for 8
Prediction 9: No Canadian GDPR in 2018
Privacy and personal data sovereignty continue to dominate headlines throughout 2018, but there was no specific Canadian legislation launched during the year. We continue to study the area of privacy, and announced our DuckDuckGo investment earlier in the year.
Score: 3 for 9
Prediction 10: Augmented Humanity and Space Become VC Investment Areas
At the beginning of 2018, I also thought that augmented humanity(inconspicuous wearables initially, but also synthetic biology) and spacewould become areas of focus for VCs as they look for the next new thing. With the launch of various new VR/AR and hardware throughout the year, the level of attention that CRISPR has received (some downright scary) and launch of venture-backed microsatellites, I’ll call this a win.
Final Score: 4 for 10
There you have it, about half right for the year. In early January I’ll publish my predictions for 2019. I am planning to go deeper into hot technology topics such as AI, fintech, blockchain, quantum computing, robotics and synthetic biology; make a few sector predictions in the areas of healthcare, manufacturing, real estate and retail; and see if I can redeem myself with better guesses on where investment levels might go in the Canadian startup world.