This year, Canada’s tech sector is poised to break the all-time high for venture capital (VC) funding, beating out the last record in 2019 by a colossal margin.
2021 was undoubtedly a landmark year for Canadian tech. According to the most recent data from the Canadian Venture Capital and Private Equity Association (CVCA), tech firms had raised a record $11.8 billion by the end of Q3 alone.
“There’s probably never been a better time for the tech ecosystem in Canada in terms of its ability to outperform and punch above its weight.”
Cities like Toronto and Vancouver have continuously broken venture funding records this year, while megadeals and unicorn designations abound. There is a growing consensus that Canadian tech is facing an inflection point—thanks largely to circumstances that could not have been predicted a few years ago.
“It’s extremely rewarding to see what’s happening today and that Canada is now on the global radar,” said Janet Bannister, managing partner at Real Ventures.
But as Canadian tech crosses off a year of explosive growth, the ecosystem still faces challenges: a war for talent, a clamour for early-stage support, and post-pandemic uncertainty. Whether Canadian tech startups can continue to sustain their current momentum in 2022 remains to be seen.
Yet, Dave Unsworth, general partner at Information Venture Partners, believes Canadian tech has the opportunity to seize its moment, and go even bigger in the coming year.
“There’s probably never been a better time for the tech ecosystem in Canada in terms of its ability to outperform and punch above its weight,” Unsworth noted.
“Success begets success”
The increased appetite for tech-based solutions (driven by the remote world of COVID-19) and abundance of dry powder in the venture market have created strong demand for new tech sector investments this year.
Unsworth believes that the “tremendous amount of capital” flowing into the VC asset class is one of the largest contributors to Canadian tech’s 2021 acceleration.
“I think this boom still has legs, only in that there just seems to be a lot of money still be getting pumped in the asset class.”
“Certainly, the pace and the size of venture capital fundraising is at all-time highs,” Unsworth said. “I think this boom still has legs, only in that there just seems to be a lot of money still being pumped in the asset class from traditional sources, and probably non-traditional sources as well.”
Bannister agreed that, as an asset class globally, venture capital has skyrocketed, chiefly because it has consistently “outperformed every other asset class.” Per a 2021 report from Pitchbook, VC funds worldwide recorded the strongest performance among all private capital strategies. Since VC and the tech sector often go hand-in-hand, it’s easy to connect this to the tech sector’s massive growth in 2021.
“The reality is that people are now recognizing that technology is transforming every industry and that as technology transforms every industry, the upside potential in these technology companies is much higher,” Bannister added.
Unsworth said the ecosystem is also proving its maturity through the size of venture funds raised across Canada in 2021. Canadian funds managing far upwards of $195 million (the global average) became somewhat of a norm in 2021, with White Star Capital, Inovia Capital, Amplitude Ventures, and Lumira Ventures representing a few of those firms.
Another indicator of Canada’s success in 2021 is the maturity of its tech companies. In the last decade, Canada has experienced several game-changing exits, many of which have taken place in the last year. The exits indicate Canadian companies are veering away from the age-old trend of being acquired early by incumbent US players in favour of scaling to better valuations.
Go-public transactions, in particular, are everywhere in Canadian tech at the moment, from Coveo’s $215 million IPO to Thinkific’s $184 million IPO. And while there has been a shifting temper of public markets, with less successful IPOs, companies like Hootsuite are still eyeing the opportunity.
Once a Canadian rarity, unicorns also appear to be popping up every quarter. Galvanize, Trulioo, FreshBooks, Ada, and Clio were just a handful of Canadian tech firms that attained unicorn designations this year.
“Unlike many years ago, a lot of these companies that have gotten to scale and either joined an IPO or a very strong exit are creating ripple pools of people that have built those companies, that can then go on and start their own companies,” Unsworth said.
Bannister agreed that the “network effect” of the Canadian ecosystem was another key contributor to venture funding growth in 2021. Whether it’s the entrepreneurs behind Ottawa’s Shopify, Vancouver’s Clio, or Winnipeg’s SkipTheDishes, employees from Canada’s unicorns have sought to leverage their success in building more disruptive Canadian tech companies, often through direct investment.
“All successful tech ecosystems have a network effect,” Bannister said. “It’s why Silicon Valley dominated the world for so many years—success begets success.”
Early-stage funding, talent remain a concern
While the last two years may have hastened digital transformation for many organizations, in turn leading to demand for tech startup products, growing pains remain for Canadian tech startups, particularly at the earlier stages of growth.
While the number of Series A-and-up investments is increasing and smashing records, seed deal volume has remained stagnant relative to other funding stages, according to CVCA data.
Over the last year, Hockeystick and briefed.in have tracked a slowdown in seed-stage venture deals in several tech ecosystems, most notably Western Canada. Bannister, who runs an early-stage-focused fund, noted that seed investing is a local game, so ensuring Canada has a robust and sustainable capital base should be a key priority for 2022.
“International investors will come into Canada at the later stage, but they will not invest at the seed stage,” she added. “As a country, we need to ensure that there is enough money and support for early-stage companies.”
“All successful tech ecosystems have a network effect. It’s why Silicon Valley dominated the world for so many years.”
One continuing trend in 2021 was the influx of foreign capital into Canadian startups, with Tiger Global being one such active investor in Canada this year. According to L-SPARK’s State of SaaS report, the growth of Canadian investors was outpaced by the growth of US investors this year. Some of the largest deals closed in 2021 had significant backing from US investors, from Softbank’s participation in Clearco’s $268 million round to TCV’s investment in Trulioo’s $476 million Series D round.
Increased US investor participation begs the question of whether Canadian investors are playing a big enough role in the growth of the Canadian ecosystem. Unsworth believes that while Canadian investors are playing a significant role in this growth, there is room for more players to get involved.
He emphasized that Canada has particularly laggard in getting pension plans into the venture ecosystem.
“All of Canada is a beneficiary of what happens in the early-stage tech market,” Unsworth said. “So we do need those pension assets in early-stage Canadian venture. If you look at other markets, they have huge endowments and pension plans supporting the venture ecosystem. We need that similar interest.”
The pension plan organization OMERS is certainly leading the charge as a significant force in the Canadian tech industry. Its investment arm, OMERS Ventures, recently surpassed 10 years in operation and now boasts nearly $2 billion in assets under management. Bannister noted that results like these should indicate that tech investment isn’t just “charity” for pension funds.
“This is good business for them, both in terms of the financial upside that they can get, as well as the strategic benefits,” she added.
Another challenge that Bannister sees continuing in 2022 is Canada’s enduring war for talent. From Amazon to Pinterest and Twitter, Big Tech has recognized the breadth and diversity of Canada’s tech talent this year. “We’ve got more experienced talent today than we’ve ever had by a longshot,” said Unsworth.
US expansion to Canada, compounded with the growth of Canadian companies and the continuation of remote work, has only intensified the country’s demand for talent.
“The world has woken up to the fact that there is world-class tech talent in Canada. As a result, many tech firms are opening offices in Canada, and that’s creating a more challenging recruiting and retention atmosphere,” Bannister said.
Is this trajectory sustainable?
Canada may have made strides in its pandemic recovery in 2021, but we’re not out of the woods yet. The emergence of the Omicron variant has further held up return to work plans and threatens to throw Canada’s pandemic recovery off track.
Another mounting concern relates to whether the incredible growth of Canadian tech investment is another dot-com bubble in the making. The speed and scale of the tech sector’s growth have led some to speculate that the sector could be headed for trouble.
“Whenever you’re ripping at a pace like this, and in such a hot market, you can also get overextended,” Unsworth said. “Then, when the markets turn— and when they do turn, they tend to turn quickly—you can end up losing a lot of money.”
Unsworth has seen two major market retractions (the dot-com bubble and the 2008 financial crisis) and said that the difference in 2021 is the current maturity of the tech sector. With more and more money flowing into VC funds, the maturity of homegrown firms, and investment levels at all-time highs, he expects an eventual market pullback won’t necessarily be fatal.
“In a world where interest rates start to go up significantly, and inflation starts to go up significantly, and people can find returns elsewhere and generate alpha elsewhere, I think that’s when you might start to see some calming, and hopefully, that’s a calming and not a crash,” he added.
Bannister noted that when Shopify went public, many speculated the company was overvalued. “But looking back, that was such a bargain,” she said, adding that only with hindsight will we truly know if we were in a bubble in 2021.
Image source Unsplash. Photo by Clay Banks.