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The next billion dollar SaaS company? Try looking in Canada

What do Hootsuite, Shopify, Radian6, and Freshbooks have in common? They're all category-leading SaaS (software-as-a-service) companies. They're also all Canadian startups.

Many of us in the tech investing business assume that Silicon Valley is the centre of the SaaS universe – with the likes of Box, Dropbox, Netsuite, and Workday based in the Bay Area. But lately, Canadian companies have attracted the attention of big tech investors and acquirers alike.

E-commerce platform Shopify announced in Dec. 2013 a cash injection of $100-million, making it Canada's first online startup to join the billion-dollar club since the dotcom crash. HootSuite's $165-million financing was rumoured to put its valuation in the billion-dollar range as well.

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CRM giant recently swept across Canada acquiring startups Radian6 (Fredericton), Rypple (Toronto), and GoInstant (Halifax) for a combined half billion dollars. Not to be outdone, Oracle spent nearly $3-billion to acquire SaaS leaders Eloqua and Taleo, both of which had their beginnings in Canada.

So what is it about being Canadian that lends itself to building great SaaS companies?

For starters, Canadians are sophisticated users of online services. In their daily lives, Canadian consumers over-index on popular social networking services such as Facebook and Twitter. In 2011, Canada had the most social networking users in the world on a per capita basis, according to online research firm eMarketer. This online sophistication makes Canadians naturals when it comes to building and consuming SaaS services.

On the business side, the model for selling software has shifted with the cloud to the benefit of companies in Canada. In the past, an enterprise software company would have required an on-the-ground sales team for in-person meetings with corporate buyers. Now, a new generation of SaaS companies thrive by targeting small and medium business customers via online and telesales channels.

As enterprise software becomes further "consumerized", we will see major SaaS companies emerging all over the world. In fact it's already started – the majority of publicly-listed U.S. SaaS companies are headquartered outside of Silicon Valley.

In this respect, Canadian companies are ideally positioned. Canada has a natural affinity to the world's largest market for business software – the U.S. – with overlapping language, culture and time zones. Yet Canadian companies are just far enough away from their American customer base that they need to be extra disciplined and innovative at creating online marketing and sales machines.

The constraints of early-stage funding in Canada, which is proportionally more limited than in the U.S., can actually benefit growing SaaS companies. SaaS products often have a much clearer path to revenue than their consumer-focused counterparts. As a result, a focused and patient SaaS entrepreneur can build a cash-flowing business that thrives with limited external investment.

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Toronto-based FreshBooks has yet to take any funding, yet they've organically grown to become the top cloud accounting solution for small businesses with more than five million users. While Hootsuite took a big investment last year, they went several years and reached millions of users with less than $2-million in venture financing.

Where's the next billion-dollar SaaS company As investors scour the world for the next billion-dollar SaaS company, eyes are increasingly turning north. Already, entire online business software categories are seeing their ranks crowded with Canadian companies.

Companies like Freshbooks, Hootsuite, Rypple, and the host of other successful Canadian SaaS companies are creating a vibrant ecosystem of technical and managerial talent that will spawn even more great companies. With U.S. tech companies like Twitter, Google, and Facebook setting up development centers in Canada, we'll see an even greater flow of talent and contacts between the two countries. This gives Canadian startups even greater access to selling into America's big tech players.

Now it's not a matter of "if", but "how many", billion-dollar Canadian SaaS companies we will see in the next decade.

Anthony Lee is a general partner at Altos Ventures, as well as a charter member of the C100 <>, an association dedicated to connecting Canadian technology entrepreneurs to the Silicon Valley. Find the C100 on Twitter @thec100 and Anthony @aplee

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