While Canadian tech firms used to get $2 million in growth-stage financing, they can now attract anywhere from $30 million to $100 million
capital (VC) sector has seen its fortunes rise and fall more than once. At their high point at the beginning of the millennium, VCs attracted $4.6 billion — an influx fuelled in part by a tax credit for investors who contributed to labour-sponsored venture capital funds. The lowest point came in 2009, when Canadian VC funds attracted barely more than $1 billion. But since then, growth has been steady and 2014’s totals are almost twice what they were five years earlier. During this latest cycle, a new generation of Canadian infor-
mation technology stars — Shopify, Thalmic, Hootsuite and D-Wave, among others — has emerged. And they are “just the tip of the iceberg,” according to Mike Woollatt, CEO of the Canadian Venture Capital and Private Equity Association. The new stars have emerged in large part because they’ve
taken advantage of dramatic changes in the way startups connect with investors. This new financing “ecosystem” in- cludes angel investor networks, mentoring programs and accel- erators — all tremendously useful aids in taking a good idea from concept to commercialization (see “The new tech financ- ing ecosystem: a glossary,” p. 53). While Canadian firms used to get $2 million in growth-stage financing, they can now attract anywhere from $30 million to $100 million, says Chris Arsenault, head of iNovia, a Montreal-based VC firm. “The market is healthier than it’s ever been. People are more and better networked than ever before,” he says. Arsenault’s firm, which is the second largest of its kind in
Canada, recently set up an office in tech-friendly Waterloo — an understandable move, since information and communications technology deals accounted for 66% of VC financing in 2014. Robert Nardi, Deloitte’s national practice leader for technol-
ogy, media and telecommunications, has also seen the times change. “There’s been a significant shiſt,” he says. Nardi cites the feedback Deloitte received on questionnaires filled out by firms that submitted entries for the company’s latest Fast 50 ranking. “Nearly 90% said they stayed in Canada because there’s sufficient financing available.” One major change is that US venture firms are more willing to
buy into Canadian deals, even if the target firm doesn’t want to relocate. That is partly because of administrative changes at the Canada Revenue Agency that allow those investors to streamline their filings, but it is mostly due to an overall change in attitude. Tech startups are more aggressive and US investors know that if they don’t provide funding, the startups will find it elsewhere.
52 | CPA MAGAZINE | JUNE/JULY 2015 Brian Cozzarin, an associate professor of management sci-
ences with Waterloo University’s engineering faculty, notes that the number of “incoming” cross-border VC rounds jumped to 112 in 2013 from 31 in 2009. In D2L’s case, the company attracted capital from VCs in Silicon Valley, San Francisco and New York, as well as Canada. While Woollatt believes some US VCs are looking to Canada because Silicon Valley valuations are too “frothy,” others say the influx of offshore capital isn’t just about bargain hunting. “They want winners and companies that can be dominant
players,” says Ajay Agrawal, a professor of strategy at the University of Toronto’s Rotman School of Management and founder of the Creative Destruction Lab, a program for seed- stage technology companies that has attracted the attention of both ambitious entrepreneurs and investors. He points to the fact that a decade ago, D-Wave, a Vancouver quantum comput- ing firm, attracted an equity stake from Draper Fisher Jurvetson, a Menlo Park, Calif., VC powerhouse. “That sent quite an impor- tant signal,” says Agrawal. “Once a US firm was inside the tent, they were encouraged to bring along their brethren.” It’s not just dedicated VC firms that have turned their sights
northward. Woollatt notes that the venture arms of large US tech firms such as Cisco, Google and Salesforce are also in Canada, scouting for opportunities. D-Wave recently secured another US$29 million — mainly from In-Q-Tel and a fund called Bezos Expeditions, run by Amazon founder Jeff Bezos. In domestic venture financing, the main shiſt in recent years
has been the decline of labour-sponsored venture funds — a tax shelter for investors who contributed to capital funds that included union participation on their boards. The first of these funds was launched in Quebec in 1982. More recently, however, Ottawa has moved away from labour- sponsored funds because they were not seen to be especially effective in spurring innovative firms. Instead, it has launched the Venture Capital Action Plan (VCAP) — a program whereby it provides sidecar funding or invests in funds of funds if the sponsor can attract $2 for every $1 of public money. The Ontario government has also allocated $500 million to invest in VC funds, as well as providing funding for incubators. One VC that has worked under the new program is Kens-
ington Capital Partners, a 19-year-old Bay Street VC with $600 million in investments. Last fall, it completed a $160-million round for a new venture fund and Ottawa put in $64 million as
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