Unlike some other Canadian AI companies, Coveo has flown relativity under the radar since it was founded in 2005. That hasn’t stopped the Québec City-based company, which uses artificial intelligence (AI) to power a range of software-as-a-service (SaaS) solutions for enterprises, from securing hundreds of millions of dollars in investment.
“We like to think of ourselves as an Olympic stallion, meaning that we’re a real company with real revenue, real customers.”
– Louis Têtu, Coveo
On Wednesday, Coveo announced it has raised $227 million (all numbers CAD) in a later stage investment round led by OMERS Growth Equity. The round also saw participation from existing investors, including Evergreen Coast Capital, Fonds de solidarité FTQ, and Investissement Québec (IQ), as well as other financial institutions. The majority of the round was made up of equity, with around 10 percent debt investment. A spokesperson for Coveo told BetaKit that a “very small” portion of the round also included secondary financing.
Coveo completed five rounds of funding prior to this current round, raising its Series A in 2006. The company has received investment from the likes of BDC Venture Capital, and Montréal-based investors Tandem Expansion and Propulsion Ventures. According to Crunchbase, Coveo chairman and CEO Louis Têtu, who was behind software company Taleo (acquired by Oracle), also invested in the company’s Series A and B.
This most recent raise comes a year and seven months after the company raised a $131 million ($100 million USD) round led by Evergreen Coast Capital, a private equity affiliate of San Francisco-based Elliott Management, one of the world’s largest and oldest investment firms. The $227 million brings Coveo’s total investments to date to around $446 million.
Coveo’s raise places the company among the largest-ever Canadian investment rounds, which have been breaking records throughout 2019. The top spot is currently held by Newfoundland software company Verafin, which secured a $515 million venture deal in September. BC-based Clio follows close behind, having raised a $330 million Series D, with Montréal’s Sonder receiving $274 million earlier this year.
Coveo’s $227 million also follows the much-anticipated Series B round of Montréal-based AI company Element AI, which closed $200 million in a round that was expected to be larger.
Despite Coveo’s latest investment placing it among an elite group of Canadian companies fundraising at sizes more commonly seen in Silicon Valley, Têtu told BetaKit the amount of capital was necessary for Coveo to be a global competitor in its field.
“You [have] got to invest commensurate with the market opportunity,” Têtu said. “We’re Canadian, but for the past 30 years [my partners and I] have worked across the world and we took our last company on the NASDAQ and etcetera [sic], so we work with global standards.”
“It’s all relative because you’re competing against companies in the Valley, in Mountain View, and Palo Alto.”
“The Canadian economy and the investment landscape is getting competitive now and you suddenly have funds like OMERS and others writing bigger investments and cheques, but … it’s all relative because you’re competing against companies in the Valley, in Mountain View, and Palo Alto, that raise two, three, four hundred million. And this is the game we’re in.”
Coveo operates in a market that Têtu sees as growing to a total addressable market of more than $100 billion in the coming years. In fact, statistics show that the global AI software market is expected to experience massive growth, jumping to more than $118 billion USD in 2025.
The Québec City-headquartered company uses AI and machine learning (ML) to build search commerce products that use data to create personalized experiences through software services, similar to an Amazon or Netflix. Coveo creates products for its customers, focusing on customer service intelligence, contact centre intelligence, and e-commerce in general.
“For me, it comes back to three points: a good tailwind coming from the proliferation of data, a great management team with the demonstrated ability to execute, and a great product,” Mark Shulgan, managing director and head of growth equity at OMERS told BetaKit. “AI-enabled enterprise search is a large and growing market that provides real value to customers that use it. This is precisely the space where Coveo is poised to thrive.”
Têtu explained that Coveo’s decision to raise a large amount of capital less than two years after raising $131 million, which he noted has not entirely been spent, will fuel Coveo’s goal of investing aggressively in the e-commerce, and AI markets. Following its 2018 raise, Coveo stated plans to use part of its funding to grow its R&D centres in Québec City and Montréal and later that year the company announced expansion plans for Montréal, with an office that was set to accommodate 300 employees by 2020.
“You don’t go to war raising $10 million in artificial intelligence,” Têtu stated. “It’s just not the way it works … no more than you build an AI company putting a bunch of research scientists in a room without a commercial notion.”
“Business is a trivial thing, you need to be the best in the world at something.
When asked his thoughts on the idea that other AI companies have struggled to commercialize products amidst the hype around the ever-emerging technology, Têtu told BetaKit that it is about addressing a specific market gap and having a real product to do so.
“Business is a trivial thing, you need to be the best in the world at something. In our case, we have 220 people in research and development building one cloud-native SAS platform,” he said. “It’s about being focused every day … we don’t spend a whole lot of time into Justin Trudeau’s cabinet.”
“Not that I dislike Justin Trudeau, I just have an opinion about companies that waste a lot of their time without creating value and spend a lot of time lobbying. And I have a problem with that.”
Têtu’s comments hint towards fellow Québec-based AI software company Element AI, which has been known to extensively lobby the federal government at a rate higher than most AI companies in North America. Despite the fact that it has received at least $5 million in federal money, Element AI has noted its intentions go beyond funding, hoping to help shape the national policy and legislation around the Canadian AI industry.
“Some [AI companies] have 27, 28 people … in the lobbying and PR departments, we have one,” stated Têtu. “But we have customers’ revenue, real products, and we’re recognized.”
The CEO noted that Coveo has seen strong growth over the past year, now with more than 500 employees and around 600 global customers. Coveo names amongst its customers and partner integrations large global brands, including Salesforce, Intel, Adobe, Dell, Honeywell, Microsoft, AppDirect, ServiceNow, and American Express. According to Têtu, Coveo receives 89 percent of its revenue from recurring subscriptions, and has seen those subscriptions growing at a rate of 55 percent per year.
“We build products that essentially we position distinctively into certain markets, we understand exactly who they’re aimed at, what value they bring, we create commercialization models,” Têtu told BetaKit. “In the tech market, unfortunately, too many times there’s a lot of fluff and stories of capital. I would say, a unicorn is a mythical animal and we like to think of ourselves as an Olympic stallion, meaning that we’re a real company with real revenue, real customers.”
“Coveo is a great example of a company that has grown beyond the venture stage.”
Shulgan added that OMERS’ Growth Equity, which was launched in 2018 to address the gap between OMERS’ venture and private equity strategies, decided to invest in Coveo given its ability to scale.
“The Growth Equity program is targeting investments in companies that have moved beyond the early stage and typically generate revenues of $50M or more, while still experiencing growth rates of more than 20 percent,” Shulgan said. “Coveo is a great example of a company that has grown beyond the venture stage, as demonstrated by its market leadership, strong customer base, and substantial revenue.”
Coveo plans to use its latest funding for “aggressive” growth. Têtu explained that Coveo’s subscription model requires a lot of upfront capital that sees returns from subscriptions in the form of annual annuities. With its subscription services growing by more than 55 percent per year, Têtu noted Coveo will require funding to stay competitive.
On top of that Coveo is spending more than $40 million in sales and marketing this year alone, with plans to continue investing heavily in e-commerce. Têtu hinted that Coveo may also pursue some acquisitions, stating that, in that case, “it’s going to be a really good idea to be sitting on $300 million of cash.”
Têtu also addressed rumours of Coveo going public. He called this late-stage round essentially a way for the company to stay private, noting that Coveo felt the private capital market was competitive with the current public markets, calling an IPO a “waste of time.” However, Têtu added this was likely the last round of venture investment Covoe planned to raise, hinting at a potential IPO, though the CEO did not offer any specifics.
The CEO did state that Coveo is currently, and plans to continue, investing “at a clip” that they did not want to disclose in the public markets. “We decided to stay private because we kind of want to do our own thing and invest, frankly, beyond aggressive,” Têtu said.
“We think, and it sounds like the data show, that [Coveo is] a pretty significant company,” he said. “It’s a very significant technology platform and very unique in a market … looking at a total addressable market north of $100 billion.”