A 2014 Report on Venture Capital in Canada

Relative to our neighbors south of the border, Canada is a small market in the world of venture capital (VC). According to Ernst & Young, it is estimated that in 2013, the United States attracted $33B in venture capital while Canada attracted only a fraction of that at $1.0B, or 3% of the U.S. market.

Global Annual VC Investments 2006 - 2013

Some of this can be attributed to our smaller population size (35M vs. 320M), but that would mean that Canadian VC should be 11% of the United States, not 3%. If we use venture capital/population as a comparable metric, that’s $29/person in Canada versus $103/person in the United States. This points to the fact that Canada is a much younger market for VC and one that is likely to grow over time as the startup ecosystem matures and investors look outside of the US for their next opportunity. 

However, Publicly Available Research on Canada is Limited

Data that can reveal opportunities in Canada is limited to a few publicly available sources. The Canadian Venture Capital and Private Equity Association (CVCA) publishes an annual report on VC spending in Canada, however the report is more of a celebration to the top Canadian VC firms than a detailed analysis on how money is being spent in Canada. There are private research houses like Mattermark or CBInsights that provide more depth, but unless you can spend a few thousand dollars a year on a subscription, you are left in the dark.

In this blog post, I’ve created a more detailed and publicly available view of Canadian venture capital in 2014. Specifically, this report will look at breaking down funding by city, financing stage, industry and technology. For an understanding of how I collected the data and constructed the report, be sure to read the methodology at the bottom.

Investments by City

VC by City

Six cities attract 93% of all VC in Canada: Toronto, Vancouver, Montreal, Ottawa, Waterloo and Kitchener; Toronto and Vancouver alone make up 63% of the all investments. The emergence of VC ecosystems in Toronto and Vancouver is similar to how there are consolidated hotbeds of innovation in the US (Silicon Valley and New York City). It’s interesting to note that though I’ve heard that Waterloo and Kitchener are bound to host future successful start-ups, the data suggests that they are not as competitive as Toronto or Vancouver in attracting funding. Likely the reason is that despite the presence of the University of Waterloo, which develops world-class programmers, the city itself is not the most desirable place to live and can make retaining talent difficult. When I interned at Blackberry, I heard how managers and senior executives were often paid a premium to their Toronto counterparts so that they would commute to Waterloo. Waterloo and Kitchener will remain great cities to nurture talent, and will be a focus area for accelerators and seed stage VCs, but as companies grow and need to hire rapidly, many of these companies will begin to move head offices to larger cities where skilled talent desires to live.

On the right side of the graph we have the number of companies receiving funding. In some cities (like Toronto), the number of companies receiving funding is higher than their % share of VC invested while in other cities like Kitchener, Waterloo and Vancouver, the number of companies is lower. In other words, capital in Toronto is being shared among more startups while cities like Vancouver, Kitchener and Waterloo are seeing the opposite. Likely a few strong startups in these cities are attracting larger financing rounds through Series A or B investments. Let’s investigate further:

Investments by Financing Stage

VC by Financing Stage

For this next graph, I focused on cities that are successful in attracting greater than $10M in VC. As you can see, some cities are much more skewed than others. In the example of Waterloo, 82% of all VC in 2014 was collected by just 20% of the companies that received funding. Kitchener is even more extreme where 17% of companies  make up 93% of all funding. In the case of Kitchener this was an $85M Series B raise by Desire2Learn. Later-stage companies attracting financing can distort the idea that capital is readily available in some of these cities.  The data shows that seed stage companies are more likely to attract capital in Toronto, Vancouver, Montreal, or Ottawa, where funding is more evenly distributed across a number of companies.

If we look at a “mature” market like Toronto, we see a fairly even distribution of capital across each stage, however when you think about the amount of capital being raised by Series B and C companies, you would think that the mix should be somewhat skewed to the later stage financing. While Waterloo and Kitchener are extreme examples, 13% of capital in Toronto being distributed to Series B companies is low. It is possible that this is a sign of a Series B crunch in Canada and that there may be an opportunity for international VCs to step in and focus on these later stage companies. This is supported by news articles in the Globe and Mail and Financial Post on how Canadian startups need to go down south to seek Series B & C financing. The data becomes clear when we zoom out and look at Canada as a whole:

VC by Financing Stage 2

While capital is fairly evenly distributed across financing stages, only 24% of companies actually account for Series A, B and C financing. Startups can be fooled into thinking financing is easy when they go around to raise seed capital, yet when that money runs out and they need the next series, their chances begin to diminish quickly. There is definitely an opportunity for established later-stage venture capital funds in the U.S. to provide capital in Canada and not have to deal with the heated competition that is seen in Silicon Valley.

Investments by Industry

VC by Industry

With the rise of cloud computing, software as a service, and mobility, it is becoming cheaper for start-ups to use technology to disrupt industries like never before. It would be great to see which industries are being targeted by Canadian startups and where gaps exists for future entrepreneurs. As seen from the graph above, the top 5 industries that received funding in 2014 were Education (17%), Technology (14%), Advertising (13%), Finance (10%) and Health Care (9%)/Construction (9%) (tied for 5th). You’ll notice some of these verticals like Education and Construction seem a bit odd and are not what come to mind when you think about the industries that drive Canada. That is because the graph is once again skewed by late-stage financing from companies like BuildDirect and Desire2Learn. If we focus on seed stage only, we get a graph like this:

VC by Industry (Seed)

Top five industries: Finance (21%), Health Care (18%), Entertainment (15%), Retail (14%), Technology (7%). Now this seems a bit more like the Canada I know. But what about oil & gas or agriculture? Don’t they seem a bit low for a country like Canada? To find out I compared the split between VC by industry against GDP by industry:

VC by GDP

When measuring against GDP, its impressive to see that we are investing a fair share in industries that are not known to be popular focus areas for tech disruption (ex: mining, oil & gas, and agriculture). We do seem to be over investing in sectors like entertainment, finance, and health care, but if your #1 startup ecosystem (by financing) is in Toronto, you can expect that these three industries will get more attention than others. Another reason is that finance and health care are two very old and slow moving markets that are ready for disruption. It’s a perfect time for startups to move in and provide solutions that leave incumbents scrambling to transform themselves.

Now what about areas we are under investing in? There is tons of room for improvement in other verticals that are not receiving as much attention as they should. These sectors include:

  • Education
  • Manufacturing
  • Real Estate
  • Transportation
  • Utilities
  • Public Administration
  • Construction
  • Professional Services

Thankfully we do have some great late-stage companies like BuildDirect (Construction), Top Hat (Education) and Clio (Professional Services), that can act as Canadian role models in industries that would otherwise seem unsexy. Hopefully these companies, in combination with hungry investors, will help foster the next wave of unsexy vertical-specific startups.

Investments by Technology

VC by Technology

Finally, we can take a look at financing by technology. Similar to the analysis by industry, I excluded late-stage financing so that categories are not distorted by one or two large rounds. We can see that 2014 was a fantastic year for big data companies, who took 29% of all seed stage financing. As the number of devices per user continues to grow, the amount of data being produced will multiply. Startups are looking at this as an opportunity to sell big data engines that develop insights and recommendations to realize new value for consumers (e.g., how do I take care of my health) to enterprises (e.g., monitoring store traffic and conversion rates).

For those wondering, “hardware” startups are companies with proprietary technology in the form of a new device, but do not necessarily have sensors or connect and talk to other devices, hence they do not fall under my definition of IOT. An example of a hardware seed stage startup would be SpringLoaded Technology. They have developed a new kind of knee brace that not only protects your joints, but can store and release energy as you move around. Another example would be BitAccess, a manufacturer of Bitcoin ATM machines. Despite the notion that software is eating the world, we can’t forget that proprietary hardware is still required to get your product to market.

VC by Tech Toronto

Finally, I want to take a look at how technology financing differs by city. If we look at Toronto and Vancouver (the two largest markets), can we see if one city is stronger in a certain technology than another?

Above, we have the breakdown for Toronto and its clear that SaaS (28%), Analytics (22%), Mobile (16%) and the Collaborative Economy (15%) are the city’s biggest four categories. The city also has a number of smaller categories like Hardware (10%), and BioTech (4%).

VC by Tech Vancouver

When we look at Vancouver, it becomes clear that the city is very much dominated by SaaS as 52% of the companies that received seed stage financing were cloud-based platforms. What do we take away from the data? It’s possible that Vancouver may have a much stronger SaaS community than the rest of Canada, and if you desire to be close to Canadian leaders in this category, then Vancouver could be a great city to relocate to. On the other hand, Toronto is more diversified in Analytics, Mobile and Hardware and may be a better city for big data or hardware innovators.

In the end data only tells part of the story

In closing, I hope this report provided a bit more insight into the financing landscape in Canada. In order to attract more international financing and help the right start ups succeed, there needs to be more information publicly available that VCs, startups, and prospective entrepreneurs can act on.

I want end by saying that data only tells part of the story. With data like this we can create a hypothesis (Is Vancouver really a great city to build SaaS companies in? Is the transportation industry ripe for disruption? Is there really a Series B & C crunch?). But in order to answer these questions, we need to go out into the field and gather the qualitative information that comes from talking to stakeholders in the community. In the tight knit world of startups, its the meetups and networking events that matter. This is where knowledge is disseminated and carried from one company to the next. This is how TopHat will foster a new wave of Canadian EdTech companies, or how Clio will encourage prospective entrepreneurs to change consulting firms in the same way they are changing law. In the end, it is this dissemination of knowledge that creates great ecosystems like Silicon Valley, and if the data says anything, it’s that we are in the process of developing our own ecosystems in great Canadian cities today.

Methodology: What Does the Report Include

This report includes financing from Angel up to Series C investments. Any IPOs, grants, accelerator funding, debt financing, individual investments by private equity, or any other investments outside of a typical “seed or series” funding are not included. While angel investments are included, they are likely under represented as many startups do not publicly disclose them.

Data for this report was collected manually from Crunchbase, AngelList, and a series of press releases. This creates a bottom-up approach to the market where I have attempted to track down every publicly available financing deal I could find in Canada. This led to a sample size of 175 start-ups and $869M in capital raised. If we assume $1.9B is the total funding in the market for 2014 (CVCA estimate), then this study I am publishing accounts for 46% of the market. This means the remaining 54% of the market is either not publicly disclosed, or it includes financing stages mentioned above which are excluded from this report.

For a company to be included in this report, it had to be headquartered in Canada. For example, Slack is founded by Canadian Stewart Butterfield, however because the company’s headquarters are in San Francisco, its 2014 Series C & D financing of $163M was not included in this report.

Each company was assigned a technology category. The categories are as follows:

  • 3D Printing
  • Analytics
  • BioTech
  • Collaborative Economy
  • Digital Payments
  • E-Commerce
  • Gaming
  • Hardware (Does not have sensors or connect with other devices)
  • IOT (Internet of Things: They have sensors, collect data and connect to other devices)
  • Mobile
  • Robotics (Includes drones)
  • SaaS
  • Social Media
  • Software (Non-cloud apps)
  • Video Streaming
  • Virtual Reality
  • Web

Of course not all companies fit into just one category. For example Rover is a retail big data company (analytics) that runs on a cloud platform (SaaS) through the use of in-store beacons (IOT). For the sake of simplicity, I chose the category where the most value is being created for the company. In the case of Rover, the analytics segment is what will drive the valuation of the company as engine will turn data points into actionable insights; this is what businesses will ultimately look for in a solution like this.

Finally, I looked at major cities Canadian cities, including:

  • Burlington
  • Calgary
  • Edmonton
  • Halifax
  • Hamilton
  • Kitchener
  • London
  • Mississauga
  • Montreal
  • Ottawa
  • Quebec City
  • Richmond Hill
  • Toronto
  • Vancouver
  • Waterloo
  • Windsor
  • Winnipeg
  • Vaughan
  • Victoria

While I believe this report does have enough data to gain an understanding of the market, I did not use absolute numbers in order to not confuse readers that the sample size only includes publicly disclosed companies. By using percentages, the reader can use their favorite high level report from CVCA or elsewhere and apply these percentages to get the absolute numbers for the sub-segment of the market they are interested in.

About Amir Bashir

TMT Strategy Consultant, Canadian, Value Investor, TV Junkie, and Traveler
me@amirsthoughts.com


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