Venture capital investment in Canada is hitting levels not seen in more than a decade, leading to worries of another frothy market akin to the dot.com bust at the turn of the century.
Three hundred venture capital deals were reported in the first half of 2015, valued at $1.19-billion, according to data compiled by Thomson Reuters. That’s the highest volume in 10 years and the largest value in 13 years.
Experts however, say that such fears are unfounded for many reasons, not the least of which is that the sector has evolved considerably, and is built less on hype and more on solid business fundamentals.
“Now is the best time ever to be fundraising for a startup,” said Ryan Holmes, a startup company investor and founder of social networking platform Hootsuite. He said the market was much different back when he started fundraising for his company seven years ago.
“For years there was a lack of capital. There were great ideas dying on the vine,” said Holmes. “The talent is there and capital is finally stepping up.”
Eleven of the deals logged this year are valued at $20-million or more, compared to five in that range during the same period in 2014. Some of the top investments included $60-million in Markham, Ont.-based software company Real Matters, $36-million for Toronto-based biotechnology startup Northern Biologics and $34-million for Toronto-based IT services company VarageSale.
“There’s definitely some speculation that we’re in the same range as we had been back in the dot.com bust 15 years ago,” said Gavin Penny, Canada Lead, Deals and Private Equity at Thomson Reuters.
The difference between then and now, however, is that much of the spending today is being fueled by government-backed sources, which include organizations such as the Business Development Bank of Canada and a fund from Sustainable Development Technology Canada. Intended as a way to boost jobs, government funding was at an all-time high, accounting for 17 per cent of investments in the first half of the year.
“Though governments at the provincial and federal level are investing more in VC, it’s certainly been matched by other investment from the private sector,” Penny adds.
“It’s not as if government investment is propping up a struggling sector, but more like leveraging more private sector investment from domestic and foreign investors.”
Valuations are considered rich today, and could potentially fall in the months ahead, but that isn’t expected to put a damper on broader investment activity, said Damien Steel, managing director at OMERS Ventures, the venture capital arm of the Ontario Municipal Employees Retirement System.
“New, interesting companies will always get funded,” Steel said.
It’s true that if valuations do drop, companies with growth struggles could be hurt as they seek another round of financing. However, “the onus will be on the existing investors to support that company,” Steel said. “Depending on how those existing investors have managed their capital and allocations within their portfolio, you could see some companies that struggle to raise follow-on funding.”
Overall though, Steel sees a sustainable market for technology startups, believing sector is on more solid footing than it was back in 2000, when too many companies were built on impulse rather than sound business models.
“Companies are not getting funded on hype,” he said of today’s market. Steel said some companies may be fully priced, “but when you look under the covers, there really are solid business fundamentals there.”
The growing interest from foreign investors is also a good sign for future growth of Canadian startups. Thomson Reuters data shows foreign investors accounted for 9 per cent of dollars invested in Canada the first half of 2015, an 11-year high.
“That just speaks volumes about the quality of companies this country is producing. There’s a little more recognition now on the global landscape,” said Steel.
“Historically, the knock on Canada has always been a lack of funding. For good companies in this country, I think what we are proving is that there isn’t a lack of capital. This is a compliment to those companies that are able to attract capital around the world.”
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