Canada’s technology sector had one of its strongest showings for venture- and growth-capital financing in the third quarter, as large funds continue to seek bigger investments in private companies.
Preliminary data from Refinitiv show Canadian companies drew $2.4-billion in venture- and growth-capital investment in the third quarter, a level second only to that of the fourth quarter of 2000, during the last stages of the dot-com bubble. Domestic tech companies received $2.1-billion then, the equivalent of $2.9-billion today when adjusted for inflation.
Venture funding – defined as investments in relatively young, private companies with high growth rates – surpassed $5.2-billion in the first nine months of this year in Canada, compared with $4.5-billion in all of 2018. This year already ranks as the third-largest for financings in dollar terms, after adjusting for inflation. “This space is strong, the companies are strong, the capital is flowing,” said Kim Furlong, chief executive of the Canadian Venture Capital and Private Equity Association.
The lion’s share of the quarter’s funding came in September, when Burnaby, B.C.-based legal software provider Themis Solutions Inc. (operating under the brand name Clio) set the record for largest investment in a private Canadian tech firm with a $333-million transaction. That was surpassed by Verafin Inc., a St. John’s-based company that sells fraud detection and anti-money laundering software, with a $515-million transaction.
Three other September deals by biotech startup Repare Therapeutics Inc., Montreal’s Element AI Inc. and Toronto restaurant software provider TouchBistro Inc. all topped $100-million.
This year could also set a post-dot-com bubble high for Canadian technology “exits" – initial public offerings or sales to other companies – after the IPO by Montreal point-of-sale software provider Lightspeed POS Inc. and the sale of Wave Financial Inc. and Intelex Technologies Inc. for more than $500-million each.
“The Canadian venture-capital landscape has been transformed in the past few years, and there are encouraging signs in terms of quality of the managers and companies and meaningful exits,” said Senia Rapisarda, managing director with HarbourVest Partners Canada, which invests in Canadian venture funds.
But does that mean the country is reaching its potential as a tech hub? Or is the sector here and globally in the midst of a bubble, with valuations getting out of hand? “It’s a bit of both,” said Jim Orlando, a veteran private capital investor who leads the Weston family’s new venture-capital arm.
Mr. Orlando said U.S. private funds, which are increasingly looking beyond Silicon Valley for investment opportunities, are closely tracking Canadian tech firms. “A Canadian company that hits the right metrics is going to get funded by a U.S. growth or late-stage venture fund, and increasingly Canadians have woken up to this asset class. … There are a number of Canadian startups that have hit that level of maturity,” he said.
But that also underscores aspects of the environment that appear somewhat frothy. Venture-capital investment globally increased more than sixfold from 2012 to last year’s $267-billion and surpassed $185-billion in the first nine months of 2019, according to Refinitiv. Later-stage private equity firms invested almost $500-billion last year, more than double 2012 levels.
In Canada, several large Canadian institutions have moved into later-stage growth investing – private companies that are beyond the startup phase but still have healthy growth rates – including OMERS, the Caisse de dépôt et placement du Québec, Georgian Partners, iNovia Capital and the Canadian Business Growth Fund, bankrolled by Canada’s largest financial institutions.
But that means more dollars are chasing deals than before, driving up valuations amid mounting concerns over a possible global recession. “I think there’s more money than good companies” to back, said Mike Wessinger, CEO of Mississauga-based health-care software firm PointClickCare Technologies Inc., one of Canada’s largest private software firms.
“We compete with it,” he said, adding that a private-equity fund outbid his company to buy a software firm last year, paying 25-per-cent more than PointClickCare was willing to spend. “You tell me: Does that sound like there’s too much money in private equity?"
Recently, a chill has set in in the U.S. tech sector after prospective investors balked at the inflated valuation of workspace sharing firm The We Co. (WeWork), prompting it to pull its planned IPO. The stocks of several other high-profile tech names that went public this year have performed poorly, including that of Uber Technologies Inc.
“The reality is some of these businesses that got supervalued had weak moats like Uber or low margins like We,” said Boris Wertz, general partner with Vancouver-based venture fund Version One Ventures. “Canada has very few companies in that category. I think this is just a healthy pulling back.
"There has never been more opportunity. Software is eating the world, billions of people are accessible by mobile phones, there’s more acceptance of buying new technology, including over the cloud. There are big secular trends rolling out, and I don’t feel we’ve run the course on that. [The pace of large deals] is real proof there are great technology companies being built in Canada.”
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