Canada's Startup Boom: Fueled by Global VC Investment

Canada's Venture Capital Surge in Q2 2021

Our ongoing analysis of global venture capital activity in the second quarter now focuses on Canada. While numerous markets have demonstrated strong performance, with the United States leading in total investment dollars, Canada’s figures are particularly noteworthy.

The nation, increasingly recognized within the startup ecosystem as the origin of Shopify, has already surpassed its previous annual records for venture funding in 2021. CB Insights data confirms that Canadian startups have secured over twice the capital compared to their 2020 totals this year.

Canadian VC Performance Compared to Latin America

Analysis of the same data reveals that Canada’s venture capital outcomes are now comparable to those of the entire Latin American region. Both regions experienced similar levels of exits and megadeals during the second quarter, alongside a comparable number of total venture capital rounds.

This parallel development prompted further investigation.

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Insights from Venture Capitalists

To gain a more comprehensive understanding of the Canadian market, The Exchange consulted with several venture capitalists. Matt Cohen, an investor with Ripple Ventures based in Toronto, described the current situation as a “venture explosion” in Canada, resulting in “unprecedented” outcomes for the country.

Considering both the data and investor feedback, Canada’s startup sector appears to be capitalizing on a combination of factors. These include both local and international investment trends, a diverse range of industry focuses, and the presence of multiple innovation hubs.

Let's delve deeper into these developments.

A Significant Surge in Venture Capital Funding

Data from CB Insights reveals that Canadian startups secured $6.3 billion in funding across 414 transactions during the first six months of 2021. These figures represent a substantial improvement compared to Canada's performance in 2020, where 617 deals resulted in a total of $2.9 billion raised.

Canada has already surpassed its previous record for venture capital investment ($4.3 billion in 2019) and is projected to exceed its highest-ever deal count (720 in 2018).

Exceptional Growth in Q2 2021

The second quarter's performance was particularly remarkable, exceeding expectations based on the first half of 2021 results. Consider the following data visualization:

Canadian startups experienced their most successful quarter to date, both in terms of deal volume and total funding amount. Capital raised increased by almost tenfold compared to the low point in Q4 2020.

Deal Sizes and Market Breadth

It’s noteworthy that no single Canadian startup deal in the quarter exceeded $500 million in value. Trulioo’s $394 million Series D round was the largest transaction.

Following Trulioo, ApplyBoard secured $300 million in its Series D funding, and Vena raised $242 million in its Series C round. This distribution suggests that the Canadian investment landscape isn't heavily reliant on a few companies securing massive, billion-dollar investments.

This indicates a broadly positive trend within the Canadian startup ecosystem, rather than performance driven by isolated successes.

The Foundation for Growth

While venture capital inherently favors outlier companies, the current growth in Canada has a solid foundation. According to Damien Steel, a managing partner at OMERS Ventures and its global head of ventures, the recent “spike” in venture capital activity is a result of investments made over the past three years, particularly in early-stage companies.

These earlier investments have matured and are now yielding significant returns, contributing to the current surge in funding.

Record-Breaking Exit Activity

In addition to increased funding, Canada also achieved a record number of exits during the first half of 2021. Although Q2 2021’s exit volume was slightly lower than Q1, both periods ranked among the best on record for Canadian startups.

The modest decrease in the June quarter did not significantly detract from the overall positive trend.

Understanding the Driving Forces

This influx of capital and heightened investor interest begs the question: what factors are fueling this growth? Further investigation will reveal the underlying causes.

Factors Fueling Growth in Canadian Startup Investment

The surge in mergers and acquisitions observed in the United States is now extending to Canada. U.S. companies are increasingly seeking investment opportunities north of the border, where competition for deals is comparatively lower. As Vanessa Larco of NEA explained to TechCrunch, expanding internationally provides investors with “more room to deploy capital.”

The acceleration of innovation across all sectors and regions is a key driver. Furthermore, the pandemic has heightened investor awareness of opportunities beyond traditional markets. Consequently, cross-border investment in Canadian startups is experiencing significant growth.

This trend isn't limited to U.S. investors; global capital is flowing into Canada. “We’ve seen money from all over the world flood into Toronto, especially from Asia into the artificial intelligence industry,” stated Cohen, referencing data from 2017 regarding Chinese VC interest. Investment is widespread, reaching cities like Montreal, Ottawa, and Vancouver, as highlighted by Steel.

While Canadian founders generally remain open to funding sources, arguments exist for prioritizing domestic investment. John Ruffolo, a Canadian investor launching a new $500 million fund, cautioned that “foreign sources refocus back into their home jurisdiction” when market conditions shift.

Smart Canadian capital is becoming increasingly available. Steel observed that Canada is “reaching a tipping point,” with a growing number of tech entrepreneurs, investors, and government initiatives creating wealth. This results in a new generation of investors with both business acumen and direct tech industry experience.

The impact of Shopify is undeniable. Steel pointed out that Shopify is now directly investing in startups, and its former and current employees are actively participating as angel investors. This includes groups like Backbone Angels and Ramen Ventures, both comprised of ex-Shopify personnel, as Cohen noted.

Beyond Shopify, other Canadian startups are also contributing to this positive ripple effect. Steel mentioned companies like Wattpad and Wave, which have similarly fostered the creation of angel investors. This development signifies a maturing ecosystem, essential for sustained growth and prosperity.

The emergence of 15 new unicorns in the first half of 2021 suggests continued momentum. This indicates a vibrant and expanding startup landscape in Canada, poised for further investment and innovation.

Investment Trends in Canadian Startups

Venture capital investments are concentrating in Canada’s major urban centers, but expansion into smaller markets is also occurring. According to Cohen, Vancouver, Toronto, and Montreal are currently receiving the largest share of funding within the nation.

Furthermore, areas like Calgary, the Prairie provinces, and the Maritimes are experiencing increased investment activity.

This growth is particularly noticeable following the substantial $2.75 billion acquisition of Verafin by Nasdaq last year.

Rather than focusing solely on location, it’s pertinent to examine the types of startups attracting this capital.

Ruffolo has observed that SaaS companies continue to be the primary drivers of venture capital activity in Canada, though the diversity of funded industries is broadening.

Key Areas of Investment

Artificial intelligence (AI) remains a prominent focus for Canadian investment, bolstered by leading institutions like MILA and the University of Toronto.

These institutions are instrumental in developing the next generation of AI specialists.

Additionally, Canada is fostering a burgeoning cluster dedicated to quantum computing research and development.

Historical data supports these observations; through 2020, the most well-funded Canadian startups were largely focused on AI or enterprise software solutions.

However, focusing on AI and software development means Canada is participating in globally competitive sectors.

Valuation in a Competitive Landscape

Given this participation in high-growth, internationally contested industries, a crucial question arises: are Canadian startups being valued comparably to their global counterparts?

The current investment climate suggests a need to assess whether Canadian companies are receiving valuations aligned with the broader market trends.

Understanding the Nuances of Valuation Discrepancies

Initial inquiries regarding U.S. investment in Canadian companies centered on the possibility of seeking discounted valuations. However, feedback from industry sources indicates a more complex reality, as articulated by Steel, with others concurring. The prevailing sentiment suggests a bifurcated market dynamic, mirroring observations in other regions.

Specifically, exceptionally promising ventures often transcend conventional valuation norms, while more standard transactions adhere to established benchmarks. Cohen explained that substantial multiples can be achieved through a confluence of factors.

• Significant market size
• A highly experienced team
• Rapid product and sales growth

“Canadian startups targeting global markets within trending sectors are frequently attaining valuations exceeding 40 times their annual sales,” Cohen stated. Conversely, companies focused on smaller or domestically-oriented markets typically see multiples in the 10x to 15x range, though considerable variation persists throughout the market.

The question of whether Canadian startup valuations now align with those of their U.S. counterparts remains open, but a clear upward trend is undeniable. Steel observed a significant increase in average Series A funding rounds.

“The average Series A round in Canada was $8 million five years ago; currently, it stands at $22 million,” Steel reported. Furthermore, deal terms are becoming increasingly harmonized across the Canada-U.S. border.

A recent report from Torys venture financing highlighted this convergence, noting the “ongoing alignment among Canadian and U.S. deal terms as Canadian startups mature and attract increased foreign investment.”

This shift can potentially be attributed to the increasing interconnectedness of the global market. As Cohen noted, geographical location is becoming a less significant factor in valuation assessments.

“We are observing a diminished impact of location on valuation compared to two or three years ago,” Cohen confirmed. This development positions Canada favorably, as Ruffolo pointed out.

“Canada is benefiting from this trend, as the quality of available opportunities is highly regarded by U.S. investors,” Ruffolo explained. “Canada’s strong engineering talent, coupled with its geographical proximity, shared language, and cultural similarities, all contribute to this positive perception.”