Canadian venture capital investing hit a 10-year high in 2015, driven mainly by a booming technology scene.
According to new figures from the Canadian Venture Capital & Private Equity Association, funding for entrepreneurs comprised 536 deals for a total of $2.25-billion in 2015. That's the best result for Canadian startups since before the 2008 financial crisis, and according to CVCA president Mike Woollatt the trend is likely to continue in 2016, since Canadian venture investors raised another $2-billion last year, and are now on the hunt for new deals.
"The world needs to pay attention to Canada," Mr. Woollatt said in an interview. "If you're not paying attention, you're missing out."
Such traditionally strong VC sectors as information and communication technology (ICT), life sciences, clean tech and agribusinesses led the way, with ICT accounting for 325 deals that raised $1.37-billion. The two largest deals were Montreal point-of-sale software firm Lightspeed POS Inc.'s $79-million round, led by Caisse de dépôt et placement du Québec, and cryptocurrency startup Blockstream Corp.'s injection of $73-million with Horizon Ventures and AXA Strategic Capital leading the round.
Life sciences companies have seen a significant jump in funding: In 2015, 110 deals worth $647-million were announced, compared with two years ago when only 54 deals brought in $272-million. Montreal's Clementia Pharmaceuticals Inc. saw the biggest deal, with a $74-million round that included Janus Capital and New Enterprise Associates.
Clean tech funding has declined significantly in the past three years from $394-million spread across 39 deals in 2013 to 2015's $135-million in 44 deals. One of the biggest deals was a $21-million follow-on fund for General Fusion, the Burnaby, B.C.-based company chasing the dream of commercialized fusion power. Mr. Woollatt attributes clean tech's falling fortunes to the glut of cheap oil, which reduces the urgency to diversify Canadian energy sources.
But perhaps the healthiest metric for venture capital last year were the exits: There were 44 so-called liquidity events in 2015 (initial public offerings, sales or reverse takeovers) that netted $4.26-billion. A huge chunk of that came from Shopify's almost $1.6-billion IPO valuation, but even without the Ottawa e-commerce player, the remaining $2.6-billion (which includes 32 mergers or acquisitions for $1.3-billion) swamps 2014's haul of $1.45-billion and 2013's $1.3-billion.
While 2015 was a good year for venture activity, there are signs the bubbly tech company valuations of recent years are losing some air in 2016. The tech-heavy Nasdaq Stock Market has been under siege for most of 2016, and writedowns on the valuations of some of the so-called tech unicorns have begun to leak out. At the same time, the larger Canadian economy is stuttering as oil prices hover near 12-year lows.
The CVCA surveyed 160 men and women from private equity, venture capital and service provider sectors and found that most felt the bargain-basement price of oil would worsen their business outlook (67 per cent of the private equity investors and 47 per cent of the VC investors).
Some see the oil shock as an opportunity for venture-driven innovation to grow into a larger slice of the economy, but Mr. Woollatt offers a note of caution. "We need to get real here; [tech's] not going to replace oil and gas."
On the same survey, 57 per cent of VC investors felt the slumping loonie would improve their business (51 per cent in private equity). The optimism comes from the opportunity for currency arbitrage: If a Canadian technology company earns its revenue in U.S. dollars but incurs its main costs in Canadian, they earn a 20– to 30-per-cent premium.
"Everyone's talking about raising capital from the U.S., because it is very good value," said Bridgit Inc. CEO Mallorie Brodie, a graduate of Western University who moved her construction-IT startup to the Waterloo region from London, Ont. Like a lot of CEOs in Waterloo, Ont., she's hiring rapidly to expand her team, and says she hasn't yet run into the other potential downside of a higher U.S. dollar: wage inflation.
The concern among VC veterans who lived through the last crunch that came with a low dollar is that, eventually, Canadian startups have to start paying in-demand talent in U.S. dollars. "The longer you go, the more you're going to be fighting with guys who could go to the U.S., so the brain drain turns on," said Brent Holliday, founder and chief executive officer of Garibaldi Capital Advisors in Vancouver.
"It makes it that much more difficult to scale your business in Canada, and it has always been hard," says Matt Roberts, an associate director of the IT Venture Fund at BDC Venture Capital, which just launched a new $150-million tech-focused fund, and was by far the most active government fund last year with 75 deals worth $453-million.
Among investors, Mr. Roberts believes the first to be hit by the currency gap will be angel investors, who are key cogs that help launch companies from the idea stage, and who for the most part hold their wealth in Canadian dollars. "They will find it much more difficult to stay in companies; they might not do follow-on funding," which would dilute ownership stakes, making startups less attractive.
While these issues may affect the tech companies most VCs invest in, Mr. Woollatt said the larger concern remains that venture capital in Canada is still nowhere near the per capita level of the United States.
While the United States has 10 times Canada's population, it invests between 25 and 30 times more money in venture capital. While Mr. Woollatt is not sure what the right level might be, Canada would need to invest $5-billion or maybe $7-billion in venture capital to match the U.S. per capita rate.
That's just not going to happen, Mr. Woollatt said, so long as the big banks and financial institutions, the telcos and most of the major pension funds continue to limit their exposure to the VC market.
"If I was running Canada as a corporation and I looked at my assets, and my growth, I'd be shifting some of my savings to venture," he said.
Visit The Globe's data store to purchase comprehensive tables from the Canadian Venture Capital & Private Equity Association at tgam.ca/datastore. Tables include the top venture capital and private equity deals of 2015 and the CVCA's exclusive member list.