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Canada’s startup scene struggling to compete because of funding woes

Canada’s startup scene struggling to compete because of funding woes

Posted by PanamericanWorld on March 21, 2016

John Somorjai, head of Salesforce Ventures, the investment arm of San Francisco-based isn’t shy about talking about what is wrong with the Canadian tech startup scene. They are underfunded compared with their U.S. cousins and the result is a lot of fledgling companies with unformed business models and insufficient resources to support proper sales and marketing, he said.

And he should know. Since 2009, Salesforce Ventures has invested approximately US$500 million in more than 150 companies, six of which are in Canada. It has also acquired Canadian companies, most notably New Brunswick’s Radian6, for which it paid $300-million.

With a commitment to spend US$100 million investing in European startups, the company is increasingly seeking enterprise cloud startup investments beyond Silicon Valley. The goal is to invest in startups whose cloud technology could benefit Salesforce customers.

Salesforce is also on the hunt in Canada, where Somorjai said the innovation and engineering talent is as good as any place in the world. “It’s certainly a hub of innovation and our goal is to try to seed more companies (there),” he said in an interview from California.

That’s not necessarily an easy task, especially when you’re not receiving many pitches. Salesforce typically co-invests with other venture capitalists — in Silicon Valley, New York, Boston and Europe, VCs bring potential deals to Salesforce. The company is sought out for enterprise cloud investments because of the access it can provide to its executives and customers.

“But Canadian VCs do not send us many opportunities. It’s actually been a while since we got an attractive opportunity from a Canadian VC,” Somorjai said. “Most of them, we’ve found on our own.”

While he said many of the pitches he receives in Canada are weak compared to those he hears from startup founders in Silicon Valley and elsewhere in the U.S., he admitted companies in California “probably have a little bit more practice at pitching investors and knowing what will resonate.”

Somorjai said he can look beyond the Canadian shortcomings, but he believes other investors won’t — they’ll demand a strong business model and proof a company can turn into something huge, he said. “Often times we meet with (Canadian) entrepreneurs who have no idea how to raise money. They’re starting from scratch.”

U.S. entrepreneurs more often supply a “crisp pitch” and show a solid understanding of how they plan to grow the business. Canadian business plans tend to be “less fully formed.” The founders might have a demo version of their technology, but still require help turning it into a business, he said.

Somorjai in part blames the lack of venture capital in Canada for this. Canada’s underfunded startups are unable to reach the stage necessary to prove their full worth to investors, he explained.

“They haven’t had the opportunity to really invest in sales, in marketing, in growing out the team. They may just be engineering and product focused when we first see them,” he said. “We’ve got too much investment pipeline to focus on just an idea or a technology. There really needs to be a business model behind it.

“I think a lot of this just goes back to the fact that there’s less opportunity for venture capital and mentoring in the Canadian ecosystem,” he reiterated.

Somorjai said he sees many Canadian companies travelling to the U.S. in search of funding. That’s where Kitchener, Ont.-based Vidyard first secured funding from Salesforce Ventures.

Vidyard, which helps businesses secure revenue through online video, took part in the Y Combinator accelerator in Mountain View, Calif. in 2011, and Michael Litt, co-founder and CEO of the startup, connected with Salesforce Ventures at Demo Day. Salesforce contributed to the startup’s seed round and, last year, put cash into its $18-million Series B round, led by Silicon Valley’s Bessemer Venture Partners.

This year, Salesforce again put money into Vidyard, contributing to its US$35-million Series C round. Litt says his company has benefited hugely from its association with Salesforce, from the knowledge of its executives to the lessons that can be gleaned from its “vast” portfolio of other investment companies.

Litt said Vidyard’s customer base and associated revenue has increased 380 per cent in the past year, and the company has grown to more than 100 employees, from 38. It recently leased a 30,000-square-foot office space capable of housing 280 employees — a number Litt hopes to hit within two years. Vidyard also recently made its first acquisition.

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