Room for Optimism in Assessing the Future of Venture Capital in Canada

May 22, 2015

With venture capital funding reaching record levels in 2014 and the dawn of an entrepreneurial renaissance, Canada’s robust technology industry appears to be as strong as ever.

However, despite this growth, average deal sizes in Canada have remained relatively small. Canada’s average round size of $4 million in the first quarter of this year ranked last among the world’s top ten nations by number of venture capital financing deals.

The truth is that early stage companies are still facing a tough market and the optimism in recent years surrounding the big-dollar financings of companies like Shopify and Hootsuite may be hiding a capital crunch when it comes to the availability of venture financing.

As it stands, Canadian startups remain largely dependent on angel investors and smaller local venture capital firms. Although there is a healthy market for attracting angel investors and Series A round funding, a capital cliff starts to appear when Canadian startups begin earning significant revenues and look for Series B funding to continue their growth.

The problem has been compounded by the fact that the number of companies hitting the Series B wall continues to grow as so many new companies have been created in recent years, many of which are maturing at the same time.

Although there is no quick fix, the continuum of funding options for Canadian companies has room for optimism as the strength of the Canadian technology sector attracts more foreign investment, entrepreneurs who have had previous success come back as investors, mezzanine financing becomes more broadly available and the federal governments’ Venture Capital Action Plan is fully rolled out.

However, at the moment the options for startups looking for Series B funding in excess of $10 million in Canada are essentially limited to two major players: Georgian Partners Inc. and OMERS Ventures.

While a few other players remain on the sidelines, outside of these two options, startups looking for Series B funding in excess of $10 million have traditionally been forced to either turn south of the border, sell earlier than they would have liked or go public before they were ready.

Although US-based financing comes with certain advantages, additional domestic options are needed in order to bolster a strong technology sector in Canada that has a solid foundation and bright future but needs more capital to grow.