Canadian venture capital sufficiency study: Key takeaways

Canada ranks third in absolute venture capital (VC) dollars invested, but businesses that rely exclusively on U.S. and other foreign funding in their Series A round raise more money than Canadian-financed firms, according to a study from the University of Toronto’s Impact Centre.

Canada also stands last among OECD (Organisation for Economic Co-operation and Development) nations that create unicorns, signaling a disconnect between reality and the general VC insufficiency narrative commonly heard in Canada. 

The Impact Centre says it carried out this study in an attempt to understand the current state of VC funds in Canada and identify existing gaps and the underlying reasons. As part of the exploration process, the availability of venture funding in Canada as compared to that in other countries was analyzed. In addition, the structure of the venture capital system in Canada, the sources and availability of funds by VC stage within the country, and the sources of VC that flows into the leading tech firms of Canada were also reviewed. 

“Internationally, Canada ranks third in absolute VC dollars invested, behind the United States and China, but far ahead of more populous countries such as the United Kingdom, France, Germany, and South Korea. Canada also ranks third on a gross domestic product-basis in VC invested per year, lagging only the United States and Israel on this measure,” the study reads. 

Many recent government planning documents have mentioned that the creation of world-class firms in Canada has remained to be a challenge because access to VC in the country is difficult. This justifies including capital considerations in the formulation of policies, the report noted. 

However, the study’s findings contradicted a popular belief for many years. The study revealed that Canada is performing exceptionally well globally in terms of availability of both relative and absolute capital. 

International investments in Canada have encouraged overall VC funds in the country, mainly at later stages of growth. But, the study found that this may be true for initial investment rounds, too. “There were 22 per cent more Series A investments made by foreign firms than by Canadian VCs in Canada and more than twice as many foreign firms investing in Canada than Canadian firms making investments.” 

This figure indicates capital sufficiency for Series A investment rounds and maybe even later rounds. This also means that there is no pressure from a small local financial market on Canadian firms. 

Researchers analyzed 76 companies and found that 18 per cent of financed companies were solely supported by Canadian VC firms, and around 30 per cent did not have any Canadian investor. The study also found that the businesses that did not have any Canadian investors received nearly 2.7 times more money as compared to companies that had Canadian investors only. 

Sources of VC by location for 76 Canadian firms receiving Series A investments, 2018 (Source: Canadian Venture Capital Sufficiency Study)

As far as the top Canadian tech firms are concerned, organizations that were dependent solely on the U.S. and other international funding in their Series A round acquired more money as compared to organizations financed by Canadian investors. Tech companies that relied solely on international funding were also the ones that could become unicorns.    

The report also indicated that a key reason shaping people’s perception of venture capital in Canada is perhaps the weak results on the scaling front. Despite being ranked third in the world for the sums of venture capital invested per year, Canada takes the last place in the world at turning these funds to unicorns. The report also mentioned that the country will still stand last even if it creates four times as many unicorns that it is currently able to create. 

In 2016, Snowy Cloud Inc. and SLOAN Consults submitted its report – The Scale-up Gap: A Blueprint for ICT Firm Growth –  to the Innovation, Science and Economic Development Canada (ISED). This report shed light on the lack of capital as a challenge among young or small-sized businesses.

Another report conducted in 2017 by the Advisory Council on Economic Growth – Unlocking Innovation to Drive Scale and Growth – also found that insufficient risk capital is a challenge for fast-growing firms in Canada.

“There is evidence that young Canadian firms would benefit from bigger injections of expansion capital. In a survey, more than twice as many fast-growing companies in Canada cited insufficient access to risk capital as their greatest concern in comparison with high-growth firms in the United States. The average later-stage venture deal (B or C rounds) is 41 per cent smaller than such deals south of the border,” the report read. 

Lastly, the Impact study talked about the challenges posed by the VC system in Canada. One of the main challenges is that there are a large number of VC firms with too little capital in the country. This potentially results in competition for small investments that do not promote the full growth of the companies.

“With smaller investments, these companies have less capital to support losses and important business functions (e.g. marketing and sales) that would help them grow faster,” the report read.

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Jim Love, Chief Content Officer, IT World Canada

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Pragya Sehgal
Pragya Sehgal
Born and raised in the capital city of India - Delhi - bounded by the river Yamuna on the west, Pragya has climbed the Himalayas, and survived medical professional stream in high school without becoming a patient or a doctor. Pragya now makes her home in Canada with her husband - a digital/online marketing fanatic who also loves to prepare delicious meals for her. When she isn’t working or writing around tech, she’s probably watching art films on Netflix, or wondering whether she should cut her hair short or not. Can be contacted at [email protected] or 647.695.3494.

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