In the wake of the CVCA conference in Toronto last month, I have been reflecting a lot on the state of the venture capital landscape and how Canadian investors can improve to better serve their country’s tremendous pool of entrepreneurs and engineers. Canada is building a healthy startup ecosystem with several vibrant hubs around the country, yet there’s still much more work to be done.
First, let’s look at where Canada is. In 2015, Canadian funds raised over $1.2 Billion CAD; and in just the first quarter of 2016, we’ve already raised $929 million (that’s 77% of last year’s total). The number of investments is the best we’ve seen since before the 2008 financial crisis.
According to data from the CVCA, Canadian VC investment was strong, at $2.2 billion in 2015 (a 12% increase over 2014). And we’re already at $881 million invested in the first quarter 2016. Exit numbers give us even more reason for optimism: there were 41 total exits for Canadian startups in 2015, netting a $4.3 billion transaction value.
As positive as these numbers may be, they still represent just a fraction of the activity in the U.S, where close to $60B (USD) was invested in 2015. The population ratio between the U.S. and Canada is 10:1, while the difference in investments is a staggering 30:1 ratio.
Canada is producing more world-class entrepreneurs than ever before and some of today’s major tech players call Canada home. But, Canadian unicorns are still few and far between. Canada has basically produced one tech anchor company every ten years: Nortel in the 1990s. RIM in the 2000s, and Shopify in the 2010s. Surely we can do better than one a decade.
The question is why does Canada have such a vibrant startup ecosystem, but have trouble scaling its promising companies up to the billion-dollar or ten-billion- dollar level? In part, it’s due to a general lack of senior talent in the country. Top global companies churn out top global talent. With tech giants like Apple, Google, and Facebook, Silicon Valley and San Francisco benefit from a very, very large pool of senior management talent. These individuals have seen how top companies do things and have direct experience scaling companies. There’s a chicken and the egg problem here: fewer tech giants mean fewer senior execs swimming in the local pool.
In addition to senior talent, we need world-class funds and investors to help build companies and create meaningful exits in Canada. This doesn’t just mean a Canadian investor should make frequent trips to San Francisco. It requires a change in mindset about the role an investor should play.
For years, we have been hammering home the message that Canadian entrepreneurs need to up their expectations and think globally in order to create a big company in Canada. It’s not enough to be the top SaaS company in Toronto or New Brunswick; you should aim to be a top player on the global stage. Now it’s time that we as investors think beyond domestic opportunities too.
In the past, many Canadians VCs invested geographically. The problem with this approach is twofold. First, it limits the exposure to opportunities and companies. By looking beyond the back door (and even beyond the U.S. to the rest of the world), investors are exposed to a greater number of opportunities and companies. This provides a better perspective and expectations of what ‘great’ looks like, in terms of management team, talent, ideas, products, etc.
Second, it’s hard to develop any kind of area of expertise when your portfolio is focused on geography.
The best investors—whether they’re in Silicon Valley, Canada or Boston—differentiate by developing and leveraging deep expertise in a specific area. For example, at Version One, we focus on SaaS, marketplace, and social platform start-ups (all network effect companies). Other investors narrow their focus to IoT, mobile, etc. By developing a core expertise, investors can provide a lot more value to to their founders than just writing a check. We can add our own experiences and ideas and to the conversation, as well as have the right connections and resources on-hand to help start-ups navigate the specific challenges in their industry.
The goal for any investor is to help build a better company. By looking globally, Canadian investors can grow their expertise, find world class companies, and be more ready to build great companies anywhere, including their own backyard.