Despite Canada’s growth-funding gap, tech will flourish

According to a report recently published by Vancouver-based venture capital firm Yaletown Partners, capital supply for tech companies in Canada is both insufficient and inadequately distributed beyond the early stage.

The report, entitled Canada’s Technology Investment Gap: Unlocking the Sector’s Key Growth Opportunity, reviewed more than 20,000 financings over the last decade, as well as 3,000 exits that took place since the year 2000 across Canada and the U.S. It found that gaps in capital supply, particularly in the $5 million to $25 million range of growth-stage financings, caused Canadian tech companies to scale more slowly, take longer to exit, and achieve smaller outcomes than their U.S. technology peers.

“Only in the last decade has Canadian risk capital really started flowing into tech – historically it’s been very mining-centric.” – Justus Parmar, CEO of The Parmar Group

Eric Bukovinsky, Principal at Yaletown Partners, said that the challenges Canadian tech entrepreneurs face when attempting to raise funds are often intertwined, leaving many of our fledgling tech companies scrambling for resources just when they are starting to gain traction. “Tech in Canada has been fairly underfunded, partly because historically the returns [on investment] haven’t been outstanding. Compared to the U.S., here you have a newer, risk-averse investor who hasn’t seen those consistently outstanding returns with tech,” Bukovinsky explained.

“The technology market is much more mature in the U.S. than in Canada. In the States, an entrepreneur will build a company and exit five to six years later, and go on to build the next business. In Canada, that cycle is longer, lasting about 10 years.”

The problem, according to Bukovinsky, is not just that Canadian tech companies are coming up against a growth-funding gap, but also that this gap causes them to seek foreign capital sources for later-stage rounds of financing, which presents its own set of obstacles that leaves many out in the cold.

“A lot of U.S.-based venture funds want to write much bigger cheques, but they want to see $25 million+ annual revenue from a company before they’ll provide funding,” Bukovinsky said. “I have to tell our U.S. partners that it’s a different situation here, that they need to think mid-teens in terms of an entry point, because of the scalability issues caused by the growth funding gap in Canada.”

The report was released at a precarious time for Canada’s tech industry, shining light on the issues that have stalled our tech ecosystem’s prosperity over the last decade. Now, recent global events such as Brexit and the mining industry’s rebound from a five-year bear market have many entrepreneurs feeling anxious about a further diminished supply of available risk capital, as Canadian investors revert back to their comfort zone of mining.

Bukovinsky, however, remains optimistic that Canada’s tech ecosystem will continue to flourish as it matures, despite uncertain economic times. “Generally speaking, foreign sources make up a large portion of what we see in investment dollars, so it will have some sort of impact. Is Brexit a general problem for U.S. companies looking to invest in Canada? Probably not,” he said.

Justus Parmar, CEO of The Parmar Group, which invests in both mining and tech, is also optimistic about the future of tech in Canada. He sees the Canadian mining market’s recovery as a boon that will ultimately help to alleviate the technology growth-fund gap.

“Only in the last decade has Canadian risk capital really started flowing into tech – historically it’s been very mining-centric,” Parmar said. “It will remain challenging to find later-stage financing in Canada, but as Canadian mining investors prosper, they will continue to diversify. Canadian risk capital is a finite pool, but it grows as investors make money. A bull market in mining will be positive for Canadian tech.”

Caitlin Cheadle

Caitlin Cheadle

Caitlin Cheadle is a media and content production professional based out of Vancouver, BC.