Venture

Canada’s Burgeoning Tech Sector Is Attracting More US Venture Money

When Canadian e-commerce startup Shopify went public two years ago, it brought attention to a growing tech ecosystem in a region that had largely remained under the radar.

Fast forward to 2017, and the country’s startup scene is booming with significant amounts of US venture capital dollars flowing into Canada.

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According to Crunchbase data, there were 60 percent more funding deals and 150 percent more venture capital dollars pumped into Canadian companies in 2016 compared to 2012.  More specifically, companies in the region raised $2.7 billion (CA$3.3 billion) in 2016 across 427 deals compared to US $1.1 billion (CA$1.4 billion) across 267 deals in 2012.

This is in line with findings by the Toronto-based Canadian Venture Capital and Private Equity Association (CVCA), which shows that VC funding climbed 68 percent from $1.5 billion (CA$1.9 billion)in 2014 to $2.6 billion (CA$3.2 billion) in 2016 – an all-time high for the country.

Much of that money came from south of the border. More than half of VC investment in Canada in 2016 originated from U.S. firms, according to Mike Woollatt, CEO of the CVCA. U.S. money accounted for about 60 percent of the money in 40 percent of the deals, Woollatt said.

In 2016, 10 Canadian startups each raised more than US $40.5 million (CA$50 million), compared to 2015, when five companies raised more than $40.5 million (CA$50 million), according to the CVCA.

In June 2017, Montreal, Quebec-based Element AI  – a platform for companies to build AI solutions ­– raised US $102 million (CA$125.6 million) in a historic Series A round of funding a mere eight months after it launched. Notably, San Francisco-based Data Collective led the round along with a slew of other investors. And let’s not forget that Menlo Park-based Bessemer Venture Partners invested in Shopify’s Series A, B and C rounds – deals that likely yielded high returns for the firm.

“In Canadian terms, that was enormous. Overall, from 2000 to 2010, it was hard to raise money in Canada,” Woolatt told Crunchbase News. “But in the last few years, things seem to have exploded.”

As evidence of that, more U.S.-based institutions are establishing a presence in the region. For example, Silicon Valley Bank earlier this year was reportedly seeking a license to open a lending branch in Toronto. And more U.S. venture capital firms are looking at Canadian companies.

Tarek Fahim, general partner of Palo Alto-based Endure Capital, said his firm recently invested in its first Canadian startup, Aspect Biosystems. Spun out of the University of British Columbia, the four-year-old biotech company focuses on the 3D printing of human tissue. As a whole, Fahim said Canada is appealing from an investment perspective.

“The availability of top-notch technical talent combined with far lower burn rates enables founders to achieve big audacious goals,” Fahim said. “And this is the essence of building something that matters.”

So what has changed in Canada aside from Shopify’s successful IPO?

Politics Matter

Prime Minister Justin Trudeau’s election in 2015 also has proven to be nothing but good for tech companies. The Liberal government has made clear it supports innovation, and made decisions such as fast-tracking visas for tech workers.  In May 2017, Prime Minister Trudeau addressed a gathering of CEOs at the Microsoft CEO Summit in Redmond, Washington in an effort “to encourage innovation, promote investment in the technology sector, and draw global talent to Canada.”

One of the movements driving investment in Canada in recent years has been the Canadian government’s Venture Capital Action Plan (VCAP), which was established to encourage private sector investment into early-stage companies.

The plan offers incentives to private investors who create venture capital funds to support smaller businesses. For every $2 committed by the private sector, the government commits an additional $1, up to a maximum of $100 million per fund, according to the Business Development Bank of Canada.

Between 2013 and 2016, the $400-million VCAP program backed four successful private sector-led funds, which led to nearly $900 million in private investor funds being added to the ecosystem.

A change to Canadian tax laws in 2010 also cleared the way for more foreign investors. The removal of a withholding tax essentially meant “that the red tape of section 116 of the Income Tax Act no longer applies when foreign investors dispose of their interests in tech ventures,” according to the Financial Post.

On top of that, let’s not forget the obvious: a favorable exchange rate makes Canada more attractive for U.S. investors, and cultural barriers are less of an issue.

“It also helps that we speak the same language, are in the same time zones and have roughly same culture,” the CVCA’s Woollatt said. “Plus, Canada is relatively cheap from a labor standpoint and we have one of the most highly educated populations in the world with a huge number of engineers per capita.”

Next week, we’ll break down the geography of Canada by venture capital activity and talk to a local VC firm and startup founder to get a firsthand perspective of the country’s growing tech ecosystem.

Illustration: Li-Anne Dias

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