Canadian VC deal sizes continue to lag those in other countries. Canadian venture capitalists invested $3.2 billion in 530 deals for an average deal size of $4.9 Million US in 2016. Meanwhile, American VCs invested $69.1 billion in 8,136 deals for an average deal size of $8.5 million.

Venture capital (VC) is a critical piece of a healthy innovation system. Investments timed correctly can propel a fledgling company to new heights. But venture capital is inherently risky, and making the right investments in the right company involves carefully considering a number of factors, including growth potential, technology type, and deal sizes.

Canadian VCs made a strategic decision to invest the way they did as they could just as easily have chosen to invest an average of $12.3 million in 260 companies. This begs the question; does the smaller deal size result in smaller returns?

While deal sizes remain smaller in Canada, our rates of return have always been significantly lower than those in the US. The 10-year Internal rate of return for Canadian VCs now averages 4 and in fact this return has only been positive for the last two years.

But is there an “ideal” deal size? Is it possible to correlate the amount of investment a firm receives with its growth rate? By investing in smaller deals, are Canadian VCs inadvertently throttling the growth of Canadian companies, limiting their potential returns, and creating an ecosystem where it is difficult to get late-stage financing that is sufficient to create world-class companies?

Was the decision they made to invest in smaller deals correct, or is it possible that by choosing to invest this way, Canadian VCs have become the architects of their own misfortune?

To shed light on the subject, we looked at the investments of over 350 public technology companies, 90 Unicorns, and 147 other US companies that obtained VC financing in July 2017 and compared that to 131 Canadian companies backed by venture capital. We looked specifically at capital funding per employee and growth rates as measured by revenue for public companies and by employee growth for private companies. The data showed us that:

  1. Unicorns have the highest funding on a per employee basis
  2. California based companies have the next highest rate of funding per employee
  3. US based companies outside California fall next in the rankings.
  4. Canadian companies ranked fourth.
  5. Public companies have the lowest funding per employee and the lowest average growth rates.

The amount of funding provided by the VC industry in Canada is substantially below that provided in the US on a per-capita basis. But does this matter? The results of our research suggest two closely related trends:

  1. The more funding a company has, the faster it grows.
  2. The faster a company grows, the more funding it can get.

This is why the rich get richer in the VC world. California-based companies that get higher levels of per-employee funding grow faster than companies in the rest of the US. As a result, these companies tend to grow quickly and turn into Unicorns, creating a dynamic where California boasts a disproportionate share of total VC funding. Since the funding-growth–funding formula is deeply embedded and well understood in the Silicon Valley culture, they are significantly more successful.

With funding levels well below that of their US-based competitors and other jurisdictions, Canadian companies tend to get left behind. Consequently, our companies do not grow as fast, do not attract later-stage capital, and are typically sold before they can be turned into world-class companies.

Unless Canadian VCs start funding companies at levels on par with those seen in the US and particularly in California, we will continue to experience lower growth rates, the earlier sale of companies, and lower VC returns.

We believe that Canadian VCs are the architects of their own misfortune. They are making strategic decisions to finance companies later, less frequently, and with less money than companies in the US, thus potentially generating low returns that may be largely driven by their own practices.

Read our report on Canadian VC Deal Sizes.