The lack of Canadian venture capital has been denounced consistently in studies and think tank reports, and by the media, entrepreneurs, and even venture capitalists themselves. Yaletown Partners completed a report on the state of venture capital in the country, stating among other things that:
“Yaletown found there is too little capital spread too thinly across Canadian tech companies compared to the U.S., and that the lower amounts of capital available for Canadian companies hamper their competitive position and dampen their value when they either sell out or go public.” Sean Silcoff |The Globe and Mail |July 12, 2016
The general view expressed in the press is that Canada is short-changed by the lack of venture capital; and this hurts our prospects as a world-leading innovator.
“Despite recent successes, tech firms in Toronto and the country at large still face funding challenges that hurt their growth prospects.” Shane Dingman | The Globe and Mail | Feb. 14, 2016
However, a sign of changing times was the recent report in the National Post that stated:
“Venture capital surged to a new record in the first quarter (of 2016)….The value of venture capital investments made in Q1 surged to $838 million, nearly double the amount recorded during the same period last year….The CVCA [Canada’s Venture Capital & Private Equity Association] said that it expects the frenzied pace of the first quarter to continue this year.” John Shmuel | Financial Post | May 18, 2016
Venture capitalists are funded by outside investors to provide capital to companies at three distinct stages. In the seed stage, small amounts of money (typically under $1 million) are used to establish a position in a market and ensure traction for an idea or product. Growth capital ranging from $5 million to $50 million is needed to accelerate growth for a business with a proven market. In the third stage of growth, amounts over $100 million are needed to create a significant international presence and to turn a company into a Unicorn or prepare it for public markets.
If Canada is truly underfunded in terms of venture capital, then what stage is underfunded?
- Do we lack funding to seed smaller enterprises at the startup stage?
- Is funding insufficient at the growth stage to establish solid mid-sized companies?
- Do we have enough later-stage funding to create world-leading enterprises and Unicorns?
This report attempts to examine how much capital Canada has available per business stage and whether Canada has enough VC funding to take its startups from inception to world-class companies.
Available data suggests that for seed- and growth-stage VC deals, Canada compares favourably with most other countries in the OECD.
However, if we want to have the capacity to create Unicorns locally and not rely on external funding, then we need to do one of two things.
- We could increase the proportion of funding available to later-stage deals away from seed and earlier-stage companies. We could do that either through reallocation of funding from seed to later stages, or we could do it by raising more dollars in the aggregate and allocating it entirely to later-stage funding. We would also need to create significant funds that have enough horsepower to invest larger amounts in select companies.
- Privately funded Unicorns are a relatively recent phenomenon. Only recently have US VC funds been large enough to fund later-stage deals entirely in private markets. One result of this trend has been technology companies going public at a much more advanced stage that they used to. When such large funding amounts were not available, companies had to rely on public markets, going public at lower valuations than Unicorns now command. Perhaps when combined with government incentives, Canada could establish a vibrant market for later-stage deals in public markets.
In addition to determining whether we have sufficient levels of Canadian venture capital funding available, we need to determine whether we have enough experience to be effective at managing larger funds (should we be able to raise them). We must also better understand whether we are investing in companies at the right time and in the right amounts to create Unicorns.