10 Canadian Startup and Venture Capital Predictions for 2016

Hot on the heels of my 2015 “Grade B” Prediction Scorecard, I’m now looking ahead to 2016; offering a sneak peek into some of the trends and events that may occur for tech and financing in the new year, and what opportunities and investment activities Omers Ventures will be focusing on.

1. Deal Volume.

In 2014 the Canadian startup landscape saw a large number of deals of all sizes, followed by a similar amount of financing in 2015. This trend should continue in 2016, with an increase in deal volume, but with a similar amount of total dollars invested.

This is largely based on the current stage of the industry; fewer companies requiring late-stage/larger investments and more companies at the early-stage requiring smaller investments.

2. U.S. Company.

The weak Canadian dollar will bring even more attention and activity from U.S. venture investors.

We’ve already started to see a bit of awareness in the area, and this should show up meaningfully in the Series B stage of investment.

3. IPOtential? Hardly.

With the pull-back in valuation of so-called “unicorns” and the expected pull-back from private tech financings led by non-traditional sources of funding, some may think that IPOs will come back into vogue.

I am skeptical on this in Canada, and expect that the number of Canadian tech-related IPOs will be low (i.e., one or two in total), similar to the last two years.

4. Size.

We should see more of the larger (greater than $150m) venture funds raised and announced in 2016 than we did in 2015.

5. Crowdfunding.

Regulatory changes and investor interest have paved the way for crowdfunding, and we should see a large jump in crowdfunded financings in Canada.

This trend will be focused on the earlier stages of investment (see #1) and should last for some time, or at least until individuals realize that long-term success in early-stage technology investing requires a broad portfolio approach and a deep follow-on financing capability.

6. Continued “consumerization” of enterprise applications.

Many consumer trends have yet to fully penetrate the enterprise, but we should continue to see funding of startups that bring more cloud, mobile and social capabilities to this area.

Email will remain the dominant communications platform, and I don’t anticipate much penetration of other messaging or collaboration apps at the enterprise level.

7. Virtual Currencies.

Bitcoin and blockchain technology had its fair share of headlines last year. Bitcoin increased in value by 26% versus the U.S. dollar, making it the best performing currency of 2015. Meanwhile, the number of banks and other financial institutions announcing trials using blockchain technology exploded. While valuations were overly high for many of these startups, we should see a bit of reality-check for many companies this year. The long-term promise of blockchain and related technologies is immense, but the near-term disruption that it can provide will not live up to the level of hype that has been generated.

I am hopeful that the work we are doing in the blockchain area will result in a few Fintech-related investments for OMERS Ventures this year.

8. Augmented and Virtual Reality.

Though AR/VR will be big in the long-term, 2016 will not be a turning point for the industry. We will see some exciting VR products introduced to consumers, but these will likely be adopted mainly by hardcore gamers. Mobile VR will grab mainstream consumer interest, but will remain an experiment until consumers have a meaningful way to engage with VR content.

In the meantime, we will see a new set of startups emerge to build VR apps, create content, and enable software layers (e.g. data analytics) for the ecosystem.

9. Machine Learning.

Many of the algorithms associated with “deep learning” were developed and perfected at universities here in Canada. These capabilities show themselves in apps like Siri and Google Maps, and are now beginning to power a new wave of hardware – self-piloting drones, autonomous vehicles and robotics.

2016 will show a breakout of Canadian startups built around machine learning, particularly in enterprise applications where data sets are readily available.

10. Wearables.

Adoption for wearables continues to be slower than expected as consumers have yet to realize superior utility not already offered by their smartphones. A solid use case is needed, one that goes beyond measuring basic activity data, like steps or calories.

We may see a new category of wearable get the spotlight in 2016 (e.g. biometric shirts, monitoring bands, in-ear assistants), but the wearable community won’t find its killer app.

Bonus: Politics.

No, not a “Trump vs Clinton” comment. 2015 saw a drop in oil price, a drop in the Canadian dollar and a slowdown in the Canadian economy. This exposed our economic reliance on oil, a weakened manufacturing base and overall lack of diversification. I believe that the Liberal government will come through on its promise that they “get” that the innovation economy is important to this country.

Let’s look (and hope) for the appropriate policy and budget announcements throughout the year.

Foreign Friends.

The products and services of China-based companies such as Xaomi, Tencent, Alibaba and other up-and-comers such as NextEV and DJI are well known in North American tech circles, but because they typically serve their domestic Chinese market, they are not well known amongst North American consumers.

At least one of the offerings from one of these companies will become a well-known consumer-brand in North America.

Hard to believe an entire year has passed since I penned 10 Canadian Technology Finance Predictions for 2015.

After 12 months of incredible innovations from many talented startups and entrepreneurs across the country, a sizzling hot funding environment, and an epic Blue Jays baseball season (had to throw that in there!), it is time to look back on these forecasts, compare them to reality, and check my scorecard.

Predictions On Funding: Early-Stage Investment Will Begin to Increase; Early-To-Mid-Stage Will Remain the Most Difficult Financing Stage; And Later-Stage Company Financings Will Continue to Flourish.

On funding pace and activity, I predicted seed stage investment would pick up from the slowdown that we had the year before; pace of later-stage investment for companies with proven revenue and growth would continue; and startups would continue to feel a funding “crunch” in the Series A and B stages.

2/3. As shown in data from the CVCA for the first three quarters of 2015 (and extrapolating a bit for the last three months), there was indeed an increase in seed financing activity. By the end of Q3, we had already witnessed more seed financings than in all of 2014! Last year’s increase was primarily driven by 12 new accelerators, incubators and early-stage funds created throughout the year (Source: Pitchbook). Also, the volume of later-stage investments continued to be strong, as the pace in 2015 was akin to the year prior.

However, my belief of a slow-down for early-to-mid-stage investments in 2015 did not materialize. The volume and value of investments at this stage in fact outpaced 2014. This trend was certainly reflected in OMERS Ventures’ investments throughout the year, with early-to-mid-stage companies like Jobber, Mojix, Kaleo, and Klipfolio all joining the family.

Prediction On Exits: Large Exits Will Be Few and Far Between; Medium-Sized Exits Will Be Relatively Uncommon, While Small Exits Will Increase in Occurrence

3/4. Comprehensive data on small exits is hard to come by, but according to CVCA, by the end of Q3, the number of VC exits in Canada between $150M and $500M was equal to the number above $500M (three each). These exits outpaced 2014, which saw only one in each bucket.  At OMERS Ventures, we were fortunate to be an investor in Shopify which IPO’d earlier in the year.

Prediction: SaaS Financings Will Continue to Grow in Frequency

4/5. According to Pitchbook, 2014 saw Canadian SaaS companies raise $400M over 60 deals, while 2015 had a meaningful uptick with $600M (50% increase) over 85 deals (42% increase). OMERS Ventures was a participant in a number of SaaS investments through the year, including 360 Incentives, Pressly and Wave.

Prediction: Wearable Devices – A Few Flourish, Many Fade

5/6. Overall in Canada, the amount of financing related to the wearables industry was down by 59% in 2015 versus 2014, but the year was not all doom and gloom. Vancouver-based Recon Instruments was sold to one of its strategic investors – Intel – in June, demonstrating a growing interest among enterprise players to participate in wearable technology.

The sector also enjoyed a prominent IPO through FitBit, which in June raised over $730 million through a public offering on the NYSE. One of OMERS Ventures’ portfolio companies – InteraXon – is also working hard to make meditation easier for the masses through the Muse headband, generating positive reviews recently in the WSJ and Toronto Star.

Prediction: Even More Stuff Will Be Connected

6/7. A year ago I penned that Canadian startups will continue to play a strong role in the Internet of Things (IoT) and Machine-to-Machine (M2M) sectors. I didn’t realize it at the time, but with approximately 300 IoT startups across the country, this was a fairly straight-forward prediction.

The year saw the exit of Skywave Mobile – a top five exit as of the end of Q3-2015 – while Geotab continued on its streak of industry awards, including CEO Neil Cawse winning the EY Ontario Entrepreneur-of-the-Year, a program in which I am a proud judge. Other notable IoT company news included Kitchener-based Miovision, which raised $30 million, and Vancouver-based BitStew Systems, which raised $17 million. This continues to be a sector of focus for OMERS Ventures, having led a round of funding for Mojix in April.

Prediction: Canadian Startups Will Play a Role in Bitcoin and Bitcoin-Related Technologies

7/8. A recent article in the Economist summarizing the bitcoin/blockchain industry gave quite a bit of ink to Toronto-based Ethereum (digital currency meets programming language). Montreal’s Blockstream, founded to develop new ways to accelerate innovation in crypto currencies, continues to make waves building off of its $21M “seed round” announced in late 2014. At OMERS Ventures, we have been quite active in the FinTech sector over the last 12 months in constant pursuit of connecting with key players, innovators and influencers. We are very proud to have William Mougayar, a renowned thought-leader in the blockchain industry, to our advisory board as we continue to explore and look at investments in this space.

Prediction: Use of Analytics from The App-Install Universe Will Expand into Adjacent Markets

7/9. My prediction was that Canadian game development expertise in analytics (typically used in the game world for optimizing advertising and app-install capabilities) would make its way to the business software world.

As much as I still like the idea, I’m not aware of this happening.

Prediction: Increased Interest in Hardware Infrastructure

7/10. My final prediction was related to hardware and infrastructure-related startups; that they would see a resurgence in interest and funding. Although some interesting companies announced some fairly large rounds of financing throughout the year – Corsa, GaN, General Fusion – I wouldn’t really say there has been resurgence in interest or funding in the sector.

All-in-all, seven out of the ten predictions I made a year ago played out through the course of 2015. We’ve seen these manifest themselves in the people, work, financings and events that we’ve been fortunate to be involved with at OMERS Ventures during the year, and expect many of these trends to continue.

And while I don’t think I’ll be quitting my day job anytime soon in pursuit of a career in psychic assessments, I am looking forward to another crack at genie fame soon when I release 10 Canadian Technology Finance Predictions for 2016.