Borderless Investments: The Three Biggest Challenges Facing Canadian Investors Today

This article is the 4th in a series that highlights how to properly go about funding and growing your startup.

Along with the strategic value that US venture capitalists add to a company, Canadian VCs add their own distinct value.

In terms of de-risking opportunities, Canadian VCs work as a great filter. Various Canadian firms have even developed relationships with US VCs, and act as a feeder by sending deals south of the border. When seeking investment, is it not a bad idea to ask your Canadian VC what US contacts or inroads they have. Ultimately, if your company wants to thrive in the larger north-south playing field, these connections will be critical.

Moreover, there have been many instances when a US firm is interested in investing in a Canadian company, but wants a local VC (in the company’s city) to be actively involved. This is another area where Canadian VC firms can add strategic value.

SEE ALSO: The Top US Venture Capitalists Investing in Canadian Startups

The Canadian venture capital industry is relatively young, having only reached a critical mass of investor groups and entrepreneurial startups in the late 1990s. In contrast, the US VC industry has been growing since as early as the 1950s. As a result, the Canadian VC industry is experiencing its own set of growing pains, which has important implications for companies looking to raise money.



Over the past few years, Canadian technology startups secured, on average, less than 50% of the funding of their US counterparts. Later-stage companies in Canada have struggled even more, garnering only one-third of what comparable US firms raised. These trends have several implications, both for young and fast-growing companies.

First, many high-potential companies are being forced to slow growth because they simply cannot access the funding necessary to compete in a global economy. Additionally, a lack of funding prevents Canadian companies from attracting the top talent and leadership necessary to evolve their businesses and sustain a significant competitive advantage.

Second, Canadian companies are being sold too early and, in many instances, too cheaply, mostly to US buyers. This statistic is reflected in the Exit, Stage North Infographic, which shows that US corporates have been involved in nearly 70% of Canadian company acquisitions, and that the average valuation for a Canadian company was $100 million, compared to $384 million in the US.

Third, faced with a scarcity of local funding, many Canadian startups, particularly the late-stage ones, look south for financing. In a recent report by Thomson Reuters Canada, foreign investment in late-stage firms has been, on average, three times larger than domestic investment.

This may not present a challenge for the startups themselves, but it certainly has negative implications for Canada’s VC industry. As Stephen Hurwitz relates, “Canadian VC players often get diluted in late-stage financings, since many can’t play in these rounds. In a prior period in which US firms invested in 10% of Canadian VC deals, they accounted for 31% of exits and 44% of all exit proceeds. This is problematic for Canadian VC firms, and for the overall health of Canada’s VC industry.”

RELATED: The Path to Acquisition

The good news is that the Canadian government has proposed a plan to pump $400 million into the investment community, which will hopefully lead to more late-stage VCs who can fund the full lifecycle of a company. Through this money, the federal government hopes to generate at least another $600 million in private funding from both US and Canadian limited partners.

Interestingly, only a third of the money raised will need to be invested back into Canada. This is based on the notion that we live in a borderless world and that if Canada does not create relationships with top VCs the world over, then we deny Canada access to them as well as the knowledge and connections they bring.

Moreover, if we don’t invest in the best companies around the world, as well as the best companies in Canada, then we will lose the opportunity to enhance our ROI. This approach is an effort to help revitalize the Canadian VC industry. In Hurwitz’s view, “it is a far-sighted plan and, while no plan is perfect, it’s in my opinion one of the most progressive that any country has ever devised. The government deserves a lot of credit because politically this is hard to do.”



In Canada, 92% of venture capital firms were formed after 1994. In contrast, the US has firms that have been around for over five generations, enabling them to have considerably more hands-on experience.

In the US, big funds will spend millions of dollars analyzing gaps in each area of ICT, and then they will go find a company to fill it. This sector expertise is something many of the US firms develop as part of their investment strategy. For example, you will find firms in Boston with deep expertise in healthcare IT and Silicon Valley has firms focused purely on big-data startups.

Unfortunately this level of expertise is just not possible for many Canadian VCs because they don’t have the bandwidth due to their small size and there are not enough local deals to focus in on one sub-sector of ICT. As a result, Canadian VC firms traditionally become generalists, where they work to understand the problem that a specific technology addresses, rather than trying to find an innovative technology that can solve a pre-identified problem.

This lack of sector expertise can make it difficult for Canadian VCs to pull a company along, as they do not necessarily have the critical industry insights to help a startup grow.



By looking at the credentials of those working at some of the top US venture firms, it’s clear that most of them are former entrepreneurs who successfully exited companies and went on to join the venture world. This happens less in Canada, as we don’t have as many former successful entrepreneurs.

At Canadian VCs, the majority of the talent has either some industry expertise or are ex-bankers. As one Canadian VC tells us, “I worked in corporate finance for many years, and many of my colleagues from that time are now working in venture funds. But they have never run a company. That would not fly in Menlo Park.”

As for the Canadian entrepreneurs that were successful, the majority happened to live in or have now moved to San Francisco. In fact, it is believed that there are more Canadians working as general partners in San Francisco venture funds than there are in Canadian funds.

The solution? According to one Canadian VC, “Canada as a whole needs to be more cognizant of how we’re training talent. Silicon Valley wasn’t successful overnight. It took years of mistakes and proper training to reach the critical mass of talent they have today.”

SEE ALSO: Canadian vs. US Startups

One possible training program is the Kauffman Fellows program, a two-year fellowship dedicated exclusively to serving junior associates at venture firms. Individuals from around the world fly into Palo Alto through the two-year term, to meet with others in their peer group, share best practices and learn directly from some of the top folks in venture capital.

These connections  carry on well past the duration of the program, which now connects venture capitalists across six continents. While an invaluable program, Kauffman Fellows is also expensive and can run upwards of US$60,000 per individual.

This cost may not seem much for some of the large US venture firms, but it is a stretch for some of the small Canadian firms. However, without this training, Canadian firms will continue to miss out on developing strategic global relationships and industry expertise.

The UK venture industry was in a similar predicament, and in 2006, the UK’s Department of Trade and Industry stepped in and subsidized the training costs for junior talent across many of their local VC firms. Today, 10 Fellows (or 3% of all Kauffman Fellows) reside in the UK, the majority of whom remain in the venture capital industry.

The young talent today are the future leaders of Canadian venture capital firms, and in order to get them competing on the same level as their US and global colleagues, we’ve got to give them access to the same resources. This will also help mitigate the loss of top talent to the US.

In summary, Canadian venture firms can add real value to early-stage companies, provided the VCs have the right industry expertise and partnerships in place to help guide a company, and make the necessary connections to help it grow.

This content was originally published on MaRS.