Why investment in Canadian SaaS Startups shot up 200 percent in 2019

SaaS

It’s a great time to be a software-as-a-service (SaaS) startup. Advances in cloud computing and the need for enterprise-level software have contributed to incredible growth in recent years, with the worldwide SaaS industry expected to be worth over $100 billion by 2020.

Of course, every startup is different, and what may work for one SaaS company might be unsuitable for another. Yet, when it comes to Saas startups based in Canada, the long-term trends driving their growth remain consistent.

Here are the top takeaways to note as Canada (not just Ottawa!) becomes a more prominent hub of SaaS startups.

1. Startup investment is part of a long-term trend

The total investment in disclosed SaaS startup deals for 2019 was $5.13 billion, compared to 2018’s $1.62 billion. While this represents a massive increase in scale, investor interest in Canadian startups is by no means brand new.

Ontario earned its title as ‘Silicon Valley of the North’ as far back as the 1980s, when Newbridge Networks was poised to disrupt the telco industry from its Ottawa headquarters. The dot-com bubble brought Newbridge and hundreds of other companies to bankruptcy, yet the strong investment in infrastructure and tech education within Canada’s borders remained. Now, this potential for success has turned into a reality, particularly in the SaaS sector.

It’s certainly not just Ontario driving this trend for SaaS growth. Deals have been inked across Canada, from the Yukon, to Newfoundland, and Quebec. While Ontario remains the leader in overall totals with $1.78 billion, the fact that millions in investment have spread nation-wide is an appealing sign of sustained long-term growth.

2. Average deal growth is up substantially

Two hundred percent growth overall is substantial, yet there is another number entrepreneurs and business investors would be wont to miss. The average deal size for a SaaS startup was $10.6 million in 2018. In 2019, that number grew to $43 million.

What could account for this 300 percent growth rate? There’s no one single reason, yet taking Canada’s SaaS ecosystem as a whole, clear signs point to similar growth rates for the future.

For example, Shopify’s acquisition of 6River late last year drew attention not only to the companies involved, but to Ottawa itself. Here was a Canadian company with worldwide reach acquiring a cutting-edge AI company based in the United States. Likewise, Vancouver-based Hootsuite and Quebec-based Coveo each received multi-million dollar investments, pushing their valuations up to $750 million and $1.3 billion, respectively.

These kinds of numbers and growth among well-known companies have a knock-on effect among smaller startups. When Hootsuite draws $50 million in investment and hits 16 million customers almost simultaneously, investors take note, and react by putting their dollars in other up-and-coming SaaS startups. Canada’s notability as a hub of SaaS activity is beginning to take root, and investors worldwide are noticing.

3. Canada (and Europe) are catching up to the US

The fact that the investors outnumber SaaS companies – 298 to 183 – is no surprise, and is a strong indicator for future investment. More surprising is the split between Candian and US investors in 2019 of 136 to 139, a near neck-and-neck tie.

For years, Canada’s tech sector has been dominated by US investments. There was (and is) simply more money south of the border. Yet, the near-parity achieved in 2019 tells us a great deal about the future of Canadian SaaS startup investment – in brief, that it will be more Canadian.

The ecosystem of Canadian companies and applications is growing, allowing startups from Vancouver, to Ottawa, to Quebec to rely more on their own networking and word-of-mouth. What’s more, this robustness has drawn the eye of investors across the Atlantic as well. Australian, German, British, and French investors all made notable contributions to growth among Canadian startups.

There’s no reason to believe that the US, still number one when it comes to startup investment, is falling away from Canada. The rest of the world is simply starting to catch up, with Canada herself leading the way on a more global approach to startup funding.

4. Business and productivity software drives the most growth

What do HootSuite, Shopify, and Coveo all have in common? Within the SaaS sphere, each company works in the industry that’s seen the highest investment: business/productivity software.

That’s not to say investment hasn’t been substantial in other industries as well. Financial services, for instance, netted $1.73 billion, a massive sum by any means, but just over half of business/productivity’s $3.4 billion.

Once again, these numbers can be attributed to Canada’s growing reputation as a provider of key business software. Startups with multi-million or billion-dollar valuations drive the appeal of newer companies working in the same field.

It’s important not to overlook the impact of other industries currently drawing millions in investment. Financial software, B2B media and information services, and IT consulting/outsourcing all received over $1 billion in investment, with the automation and application industries close behind with several hundred million.

2020: a look ahead

More growth, more investment, and more exits. Forfty five companies exited in 2019, including Wave, Solium, Lemonstand, and SimpleTax. Many of these were acquired by larger corporations, such as MailChimp’s acquisition of Lemonstand, or Solium becoming a subsidiary of Morgan Stanley.

A billion-dollar buyout isn’t in the cards for every SaaS company out there. No matter the goals, however, companies can look forward to a business environment in Canada that’s skewed toward success. One only needs to look at the data for 2019 to see where we’re going in 2020. For Canadians across the provinces, the future for SaaS looks brighter than ever.

Image source Pikrepo

Leo Lax

Leo Lax

Leo Lax is the Executive Managing Director at L-SPARK. Before L-SPARK, Leo was the CEO and co-founder of Skypoint Capital, a venture capital firm that specializes in telecom. Prior to Skypoint, Leo was employed at Newbridge Networks as Assistant Vice President and member of the Chairman’s Executive Council. Leo holds a Bachelor of Electrical Engineering degree from McGill University and a Master of Engineering degree from Royal Military College.