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Canadian startups scoring bigger deals

Canadian startups scoring bigger deals

Posted by Juan Gavasa on February 14, 2015

Who needs Silicon Valley? Increasingly, not Canadian tech startups able to secure big buckets of venture funding without moving south.

In the last 18 months a series of large venture capital investments have signalled an important shift in the Canadian technology startup scene. To hear industry insiders explain it, this is not a story about out-of-control valuations, but rather a case of a new class of maturing businesses reaching the stage where their market opportunity is now being matched by large investments.

According to the Canadian Venture Capital and Private Equity Association annual funding report, the total venture dollars invested declined in 2014 to around $1.9-billion on 379 deals, compared with 2013’s $2-billion on 452 deals. The average dollar amount per deal, however, rose from $4.4-million in 2013 to $5-million.

That’s still a far cry from the more than $48-billion (U.S.) in venture capital that accounting firm PricewaterhouseCoopers LLP estimates was invested in U.S. companies in 2014. But observers are confident that gap will shrink.

The Globe compiled 21 examples of the largest venture funding announcements in Canadian technology over the last 18 months. The list reveals a growing number of big-dollar deals among medium-sized startups – a change for a sector that has historically focused on mostly seed, or early-stage financing.

Those 21 companies collected more than $784-million (the massive $100-million funding of Ottawa’s fast growing e-commerce provider Shopify in December, 2013, and the $60-million raised by Vancouver social media dashboard maker Hootsuite in September, 2013, make up a significant chunk of that total).

“The bite sizes are certainly getting bigger, it’s without a doubt a sign of significant growth in Canadian tech,” CVCA CEO Mike Woollatt said of the funding scene. “We’re not competing with Canadian companies any more. There’s a tech boom all over the place right now… the race to be first is mattering more and more.”

Until recently, startup entrepreneurs could credibly complain about a lack of mid-level funding in Canada. Montreal’s Real Ventures specializes in early-stage investing and meets with more than 800 startup teams a year, and hears from thousands more. Founding partner John Stokes said that in 2014, the company was part of 42 deals worth more than $130-million (some of that total was provided by other partners). Even more than bigger cheques, the trend Mr. Stokes sees is a quickening of the pace of development.

“There are 10 times as many startups and entrepreneurs as there used to be, and 10 times as many angel investors, who are trying to create value,” he said. And the speed at which those early funding rounds are followed by second and third rounds is finally starting to catch up with the pace set by Silicon Valley.

Silicon Valley startups that raise $1-million can get a second round of $6-million in two or three years, Mr. Stokes said. In Canada, it’s been taking seven or eight, but that’s changing as U.S. venture capital firms get more exposure to the quality of Canada’s startups, he added.

“There is an ongoing recognition that Canada is a place where some great companies can be built,” Mr. Stokes said. “As you move north of the border there has been less capital, there’s certainly not been less brains available, and no less ambition either.”

Mike McDerment, CEO of 2ndsite Inc., the maker of Freshbooks cloud-based accounting software, is not short on ambition for himself, or for Canada. The company, founded in 2003, toiled in his mother’s basement to achieve scale over many years of “bootstrapping,” which means it took no outside funding. In July, 2014, it announced a $30-million investment.

Mr. McDerment wants to bust the myth that Canadian tech companies need to relocate to Silicon Valley to grow into major competitors. Industry players say a handful of Canadian cities, including Waterloo, Vancouver, Montreal and Toronto now offer reasons to stay.

“Our goal is to be an anchor tenant in Toronto. At Freshbooks, we want to build a global company that really contributes in some meaningful way to the city,” Mr. McDerment said. He touts the local schools and talent pool and downplays the Valley’s head start.

“The money is shameless – it’ll just go wherever. It wants the opportunities,” Mr. McDerment said. “I don’t see why Toronto can’t beat Silicon Valley.”

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