Canada’s burgeoning technology sector is poised to break venture capital funding records for the second consecutive quarter and is on track to surpass the all-time high for a single year, set during the dot-com bubble a generation ago.
With the second quarter still days from closing, Canadian companies have raised more than $3.79-billion in venture capital since April 1, according to preliminary data prepared by market data company Refinitiv for The Globe and Mail. That is well ahead of the previous record of $3.2-billion set one quarter ago.
After nearly six months, venture capital funding of Canadian companies stands at $7-billion, according to Refinitiv. That is close to the full-year high of $7.5-billion set in 2019, and on pace to surpass the all-time record, adjusting for inflation, in 2000. That year, as the Nasdaq peaked amid a global frenzy for internet stocks, Canadian companies raised $6.4-billion, equal to $9.4-billion in 2021 dollars.
Driving this year’s record performance has been an unprecedented number of $100-million-plus funding rounds. There have been 20 so far, including two of the five top Canadian venture capital deals of all time just this month, as Vancouver online identity verification provider Trulioo Inc. raised US$394-million and Waterloo, Ont.’s ApplyBoard Inc. landed a US$300-million financing. That compares with the previous high of 12 nine-figure venture deals in 2019, according to Refinitiv. The slew of big deals has triggered a stampede of newly minted Canadian “unicorns,” or early-stage tech companies valued at US$1-billion or more.
“This year has been pretty ridiculous; it seems every week we have a brand new top-10 deal coming out,” said Greg Beaman, private equity contributions manager with Refinitiv in Toronto. “It’s way higher than anything we’ve seen in the past.”
There are several reasons for the venture capital boom. It is a continuation of a long-term trend of rising private-capital investing globally as low interest rates have driven investors to look for returns from alternative investment classes - a category that typically does not include stocks, bonds or cash. Technology companies have continued to capitalize on increasing trends toward digitalization, which has disrupted a wide swath of industries, from energy to financial services. Average deal sizes have gone up globally. “I think there is a recognition that technology will transform every single industry and that the upside in these companies is massive,” said Janet Bannister, managing partner with Real Ventures in Toronto.
Another driving force in Canada is the maturing of a domestic technology sector that has blossomed since the 2008-09 credit crisis. A decade ago the sector was scarred by the demise of Nortel Networks and BlackBerry Ltd.’s decline. Access to capital for startups was scarce and venture capitalists pleaded with governments for financial aid. Domestic technology companies were underfunded and sold out to foreign buyers for bargain prices. The few local startups with promise were told by U.S. venture capitalists they had to move south to be funded.
But a new wave of Canadian entrepreneurs started building digital companies to take advantage of emerging trends, including the mass adoption of smartphones and social media, the shift to cloud-based software and commercialization of artificial intelligence. A 2010 change to Canadian tax law made it easier for foreign venture capital firms to invest here, and several new Canadian venture capital firms, including Golden Ventures, Version One Ventures and Georgian Partners, made bets that would generate returns on par with leading U.S. funds. Canada and some provinces committed fresh funds to venture capital, which helped finance more Canadian startups.
While many Canadian startups failed, stumbled or sold out, a significant crop of others have now reached the scale and size that they are attracting increasingly larger financings and valuations and emerging as globally relevant players or industry disruptors. Tophatmonocle Corp., which raised US$130-million this year, has started buying up textbook publishers in a bid to digitize education content for postsecondary students. Vancouver-based Dapper Labs Inc. has helped to redefine the collectibles market as a leading purveyor of blockchain-based non-fungible tokens. And Toronto’s Tenstorrent Inc. and Xanadu Quantum Technologies Inc., which both raised nine-figure fundings this year, are among the leaders in a global race to develop next-generation semi-conductors for artificial intelligence and quantum computing, respectively.
Tech centres Toronto, Vancouver and Montreal have seen an influx of foreign technology companies setting up operations, and the Toronto Stock Exchange has been flooded with the largest crop of technology IPOs in two decades.
“Every part of the ecosystem is a lot stronger” than a decade ago, said Ian Carew, managing director with Toronto-based Northleaf Capital Partners, a leading financier of the Canadian venture capital sector.
Then there is the COVID-19 impact. The pace of private deal-making was initially interrupted, and then accelerated, by the pandemic last year. A worldwide shift to the internet for commerce, financial services, communications, health care and education during extended lockdowns improved growth and funding prospects for digital startups and accelerated their progress by years.
After initial fears that the interruption of travel would slow the pace of investing, companies and financiers alike embraced the benefits of fundraising by Zoom. Companies now line up a wall of investor meetings one after the other online, rather than having to get in an elevator, an Uber or an airplane between appointments. Private capital firms no longer wait for weekly internal meetings to discuss potential deals, and increasingly aggressive and fast-moving funders such as New York’s Tiger Global have shortened the fundraising process by weeks and months
“We were able to meet investors so much faster and the processes have all sped up,” said Michele Romanow, president of e-commerce merchant financing company Clear Finance Technology Corp. The Toronto-based company hit unicorn status earlier this year when it raised US$100-million in venture financing.
“When I fundraise I mentally prepare for things to take six months. I think this was four weeks from when we started to receiving the first term sheet. That is epically fast.”
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.