Large IT financings drive Canadian venture capital to seven-year high of $2 billion

New data on Canadian venture capital provides encouraging signs that Canada's financing climate for technology-based companies is improving, with $2 billion in investments in 2013 — the country's strongest showing since 2007. The 31% increase from 2012 helped propel two more Canadian cities into the top-ranked jurisdictions globally for VC investment thanks to major financings in two promising tech plays.

Yet the data — compiled by Thompson Reuters on behalf of the Canadian Venture Capital Association (CVCA) — also report that VC fundraising has taken a tumble, falling 24% in 2013 to $1.3 billion. The conflicting signals shed light on a VC ecosystem in transition as public and private players work to fill in the gaps of company financing.

The continued roll-out of the federal government's highly anticipated Venture Capital Action Plan (VCAP), the enhanced role of the Business Development Bank of Canada and increased funding for the Canada Accelerator and Incubator Program (CAIP) illustrate the coordinated effort at play to improve the financing environment for the tech sector.

Ecosystem improving

"The ecosystem is in better health (but) it takes more time for companies to get to an inflection point — six to nine years … A lot of market participants had to pull together to work collectively and be more efficient," says Jérôme Nycz, BDC's executive VP subordinate financing and venture capital.

"We're back up to 2007 levels … 2014 will be a pivotal year. We'll see if the trends continue and what the government does," says Mike Woollcott, the CVCA's inaugural CEO. "British Columbia, Ontario and Quebec are now in the top 10 in North America. We're seeing some great growth."

Last year's encouraging VC investment profile reflects the rapid rise in companies developing Internet-related mobile telecom and applications, attracting $497 million. Combined with software investments of $378 million, the total for information technology is $1.1 billion, up 19% or 54% of the year's disbursements.

The top government VC funds are BDC ($78.1 million) and Sustainable Development Technologies Canada ($35.7 million). The top funds classified as pension, retail and corporate are Fonds de solidarité FTQ ($78.2 million) and OMERS Ventures ($58.6 million).

The top five private independent VC firms are Aviro Capital ($20.6 million), Relay Ventures ($17.1 million), Lumira Capital ($17.0 million), iNovia Capital ($16.0 million) and Yaletown Venture Partners ($14.5 million)

The biggest financing of 2013 are Vancouver's HootSuite ($170.7 million), Ottawa's Shopify ($100 million) and Enerkem, a Montreal-based developer of biomass conversion technologies ($87 million).

Of the $2 billion, private independent VC firms provided just $629 million but Nycz says that could increase once the VCAP funds find their way into the market.

Many are hoping the full implementation of VCAP will be a game changer. About one third of the program's $400 million — announced in the 2012 Budget — has now been committed with the remaining two thirds to be announced in 2014. BDC has already invested $50 million in four existing funds that show promise and Northleaf Capital Partners — the first of four planned fund of funds — is now up and running.

Combined with a growing number of incubators and accelerators across Canada, Nycz is confident that the private sector will return to the market in pursuit of freshly de-risked investment opportunities.

"Incubators and accelerators bridge the chasm and make companies VC-ready, helping to attract A-round financing," he says. "With VCAP funds coming on line, private funds will participate ... I hope banks and pension funds will also get back in the market in 2014. There's a lag effect. Northleaf is up and running and the three other funds of funds are in the process of completion and approval."

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