Are Canadian Startups Starving?: Canadian VCs Answer

Screen Shot 2013-02-02 at 7.45.54 AMAfter seeing David Crow’s tweet last week, I wrote a post about how his take was bang on. Then, I asked seven Canadian VCs for their thoughts. (It’s a lengthy post; click on “read more” to see all of it)

Mark MacLeod, Real Ventures
I agree with him. There is always money for great founders and great opportunities. The perception there is a lack of VC in Canada is driven by two things: i) An insufficient understanding of how VC works. To deliver the returns our LPs expect, we need to filter hard and select the best opportunities; and ii) because of this harsh filter, most of the companies that approach VCs don’t fit. With new funds coming online coast to coast and with US VCs investing here more than ever, there has never been a better time to raise VC in Canada (save for the web 1.0 bubble)

Roger Chabra, Rho Canada
On whether there is NO money for startups in Canada…the data proves otherwise. Entrepreneurs are getting funded by both VCs and angels at a good pace. If a startup team is struggling to raise money in today’s environment in Canada over an extended period of time, they need to take an honest look at themselves, their product, the market they are targeting or their approach to raising capital. Entrepreneurs should evaluate and optimize based on the feedback they receive.

On whether there is ENOUGH money for startups in Canada…in general, entrepreneurs (and VCs, who are in the process of trying to raise funds, will always say there isn’t enough money around. Well funded VCs who are actively investing might argue otherwise. In terms of whether there is enough money in Canada for tech startups today – to me at least – it doesn’t feel like we are there yet, but it does feel like we are getting close. Over the last two or three years, we have seen the Canadian ecosystem finally have multiple players at every stage again - seed through series A and B through to late stage. Globally, a very small percentage of of businesses receive VC because VCs have a very specific criteria that fits only a small subsection of the businesses out there.

Canada shouldn’t be any different. In order to deliver the returns that investors in VC funds demand, only the companies that have the potential to reach a billion dollar enterprise value relatively quickly (typically 5-10 years) should be VC-backed. Again, we don’t yet have a balance between the amount of VC and amount of VC-backable startups now, but we are approaching it. Most of the best startups are getting funded and IMHO we have at least 25 companies in Canada now that I think have the potential to have big exits. Once we have some multi-hundred million and billion dollar exit outcomes, we can handle expanding the capital pool even further which, of course, is great for everyone involved.

Chris Arsenault, iNovia Capital
Is there money for startups in the hands of Canadian VCs? Yes, over $1.7 billion since 2010 and another fresh pool of $1.3 billion coming together now in part because of the new $400 million from the federal government, which is acting as a catalyst.

Is all of this money going into Canadian Companies? No. But most of it is. And the best part, is that the average ratio of funds attracted into Canadian companies coming from foreign investors is around 3x what we put in.

Furthermore, we need to add the capital flowing from USA VCs directly into Canadian companies without having a Canadian VC as an anchor investor – in addition to all the corporate investors and angels investors active in Canada.

So, is this enough money to fund every Canadian company that needs cash? No.

Could we do with more capital? Yes, of course. Just compare the money invested into Canadian tech companies in 2002 versus 2012, and you’ll quickly notice that last year there was but 1/5th of the capital put at work.

But, when there is a lot of cash available, it’s not necessarily generating better results (meaning we aren’t seeing more real big valuable companies being built) than when there is not enough! Interesting no?

So could we do with more VC cash going into Canadian Startups? Yes, in order to put more money at work into the out-performers, and to do a little more funding of potentially viable and interesting companies that still need to confirm that they can become big companies within a few years. The accelerators have been proving this model, as well as the seed focused funds such as Real Ventures. But not more money to simply fund every startup out there!

VC funding is NOT made for every company. VC deal selection is triggered by: company momentum, individual relationships, market potential, market understanding, disrupt-fullness and ability of management to execute and hire talent and close on revenue.

So, VC funding remains very subjective. We see many great ideas and opportunities, that simply don’t have the drive we look for in the entrepreneurs behind them.

Boris Wertz, Version One Ventures
Agree with everything that was said – for great opportunities there is more than enough money. Having said that, there are probably two differences to the funding situation in the Valley: a) for a company of similar quality, they will probably always have an easier time raising money in the Valley than in Canada just because there are 20-25x the amount of funds you can target for your raise. B) There is definitely less “silly money” here in Canada than in the Valley – Google, Facebook, Yahoo millionaires throwing some money at entrepreneurs without necessarily having the intention of making money with those investments. You look at a lot of funding rounds for Y Combinator and this could definitely not happen here in Canada.

Matt Golden, Golden Ventures
Since we’re examining availability of capital for  “startups”, we can’t just examine the access to capital at the “venture” stage to determine whether there is a dearth of capital in the Canadian ecosystem.

Boris and Chris both alluded to the important fact that there is significantly more angel capital available and a greater tolerance for risk in the U.S. and I think that we should be just as concerned about ensuring there are enough funds at the angel stage.  We have definitely made great progress in this regard with the introduction of many accelerators and other programs but they actually end up touching relatively few companies/potential entrepreneurs relative to the potential of a program to incentivize angels to invest more money. John Ruffolo was working on a tax credit program for angels who do direct or indirect investing through seed venture funds but it ultimately got killed somewhere along the way).

Even though at this stage there is a high failure rate and it can often be considered “silly money”, there are two important by-products: a) more entrepreneurs gain the critical experience of building companies and likely gain experience pitching venture capital at some point in the process; and b) some of these non-venture deals ultimately pivot and become venture worthy down the road.  With an increase in both capital and risk at the earlier stages, the ecosystem matures and venture fund deal flow increases exponentially.

In my opinion, I think this explains what Chris described below…..investing more money in venture funds hasn’t generated better venture returns.  If we just invest additional money in traditional venture without concurrent investment in the early stage ecosystem, venture funds will be competing for very few deals with generally inexperienced entrepreneurs.  I think we’re on the right path but we should concentrate equally on this piece of the value chain because it’s ultimately about great deal flow and a large pool of experienced entrepreneurs and mentors.

Andy Yang, Extreme Ventures
I am empathetic to the entrepreneur David was speaking to/referencing, simply because of where I sit in the world.  IMHO, more does need to happen at the large seed / series A that our graduates look for, and beyond.  I hope investors both here and abroad are more driven by YOLO than FOMO.

That said, there has been a ton of progress since I’ve moved to Toronto two years ago – from accelerators, seed funds, and larger funds – so it’s not all just on the investors.  The critical piece is the entrepreneurs are still catching up on is experience – and I think this is a direct result of not having enough of a diaspora from a major liquidity event.  There needs to be more Tira mafias which spawned Five Mobile / Zynga, Wattpad, and Golden VP.   More entrepreneurs need to become educated about startups and funding before approaching investors.  Relative to the valley, it’s just not part of the DNA here – yet.

Sorry to sound preachy, but my general comment is that we ARE thriving as a startup community and I hope more of the community and media portray the glass as half full rather than half empty.   Things have improved significantly at the early stage on both the supply and demand side, and more needs to and will happen at the next stages – it’s just a cascading effect that will be good for everyone in time.  We, as a community, need less complaining / negativity and more execution, perseverance and celebration – of both wins and losses.

Duncan Hill, Mantella Venture Partners
We agree with everyone who said there is money out there for committed entrepreneurs that are getting traction with a compelling vision. Building a company from the ground up is hard.  Raising the capital needed to realize that vision is just one of many hurdles an entrepreneur will face while building a business – and often far from the most difficult.  I would suggest that anyone complaining there isn’t enough money for startups in the current climate just might not have the drive and fortitude required to be a successful entrepreneur.  When raising capital ceases to be a significant hurdle, the ecosystem is just setting itself up for a big fall.

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  • thomas

    Nice job guys. Well put. I especially like Duncan’s sucinctness!

  • Atlee Clark

    Great thread guys – hear often from founders who don’t even look in Canada for capital, they believe they should just hop on a plane and come down to the Valley because they believe there is no money in Canada. Most of the time I tell them: just because it’s hard to raise money doesn’t mean it’s not there (and despite what the movies say, there are not investors on the street corners of SF writing checks). Valley/US VC know that the locals always know more than the tourists, so get a Canadian angel or fund in first.

    • Chrisarsenault

      interesting facts: iNovia did 12 deals last year on a deal flow of 610 opportunities. One of our Tier-1 Valley based co-investor dis 18 deals on a deal flow of 3,100.

  • Saeed El-Darahali

    Excellent post. We need more companies that generate revenue and prove the business model before raising capital from VCs.

  • Sergio Escobar

    Well done! I would have preferred an analysis (answer) segmented according “startup stages”: seed stage, early stage post R&D + pre-revenue, late early stage, series A, series B. That way, we can better understand how many $ and players are present in each stage… and, of course, there’s always less money when the risk is higher (seed, early stages).

  • Zbigniew

    Canadian VC market is still young and GPs are still very “new” to VC world so capital availability is very sector specific. Unfortunately some industries are not well understood or covered by Canadian VCs therefore they might not see/appreciate THE billion dollar opportunity and that’s why many US VCs are getting good deals in meantime.

  • Jd Begin

    This question is very much stage specific. For “entrepreneurs that are getting traction with a compelling vision” there will, of course, always be funding available. The question is who gets to fund and what is the valuation. The real funding gap is in the category of “vision without traction” i.e The “crazy” folks who had the balls to fund Fabulous before it was Fab, Burbn before it was Instagram….

  • Debra Chanda

    Marketing, Marketing – ability to segment business arena, identify and close first customers/early adopters for forecast able revenue/business proof point – leverage this and plenty of capital in Canada; however, is it smart $? Does it come with linkages and know how/access to additional customers? Canada has a marketing problem/gap and sales a function thereof.

  • Tyler LeCouffe

    I’m an entrepreneur in a start-up right now. I see tons of opportunity for funding… when you’re pretty much anywhere else in Canada except for Saskatchewan – where I am. Saskatoon is getting better from what I sense. Unfortunately Regina (me) is still waayy behind. It’s pretty much save up your airmiles!

  • Apples

    I think an apples to apples comparison is needed here. How many deals do Canadian VC’s close per year (on Canadian Companies) where they are the lead.