A few years ago, a Canadian startup raising tens of millions of dollars would have made headlines, but it’s now becoming a daily occurrence. Canadian venture capital has just had its strongest first half ever, with nearly 400 transactions worth an average of $ 21 million. Venture capital funding has grown from $ 1 billion a year ten years ago to over $ 8 billion in the past six months, and the perceptions of the world of technology in this country have been completely amended.
We are inundated with successful funding deals, which is great. But the deals to lose sleep are the smallest that don’t come to an end.
While Canada’s most advanced startups are well capitalized, there is an early stage drought, where companies raise their first money to start developing product ideas and securing initial customers. It is at the top of the capital funnel, the beginning of the pipeline of our national technological economy. Funding for these early-stage companies has barely increased since 2009, and angel investors cut their funding from $ 163.9 million in 2019 to $ 102.9 million in 2020, as COVID-19 forced deals online, and even as national venture capital funding flourishes generally.
Angels case size seems to be going back to normal this year, but even normal levels of seed funding are barely sufficient. While the headlines and investors mostly focus on the bright new generation of scale tech stars in Canada – companies like Think Research, GESSat, Boast.ai and Prodigy – many VCs still consider investing at an early stage as too risky. If they spend time and money doing high diligence and managing a portfolio, they might as well focus on more mature companies, as their research efforts can be turned into bigger bets. .
A deep understanding of our rich tech landscape offers a different perspective and fuels the pipeline of entrepreneurial activities that Canadian technology needs to thrive. Without timely seed funding, a budding Axonify, Fiix, TopHat, or Maple might never take off, and there will be fewer large Canadian companies in the pipeline available for future investment.
The good news is that there is a recipe for start-up investing: procurement, selection and syndication. These are the key ingredients of seed funding, which we have learned and apply every day to the MaRS Investment Accelerator Fund, the most active seed fund, with more than 150 transactions over the past 12 years. Developed nationally, this model can keep Canada’s pipeline well supplied.
Supply: As the upper end of the opportunity funnel, early stage investing is full of companies that won’t make it; it is the nature of the beast. Now is not the time to focus on one technology, industry, or business model, as more advanced investors often prefer. The world can change in the blink of an eye, as we’ve all learned in 2020. The IAF prefers to be industry agnostic. We lean towards fintech, cleantech, software and digital health, but that’s because our partnership with MaRS gives us access to deep expertise in these areas.
Selection: For 12 years, we were forced to stay within our original Ontario government mandate, which was to focus on start-up projects with maximum IAF investments of up to $ 750,000. Although many rounds of funding are now above our maximum investment, we are still viewed as an institutional investor with strong ties to transactions at a later stage. We are a research intensive fund, without a shadow of a doubt. We get to know our businesses well and build strong relationships to help them grow. You often see late stage funds competing for pole position with more mature companies when big bucks are needed, and don’t always get the access they want. Or they send small checks to start-ups with little diligence, hoping it pays off with access later. Neither approach is ideal; our process of engaging and supporting the business has served us very well.
Syndication: The intimate knowledge of these companies not only benefits us, but the entire ecosystem. Other investors know how we work and pay attention to the decisions we make and the companies we work with. It helps us make shift deals by creating co-investment syndicates, and it helps us stimulate follow-up funding opportunities, even if we do not participate in these rounds ourselves. Over the past twelve years, MaRS IAF has had 600 co-investors and generated $ 1.6 billion in follow-on funding.
In other words, seed funding is not just about performance. These are table stakes, but a goal at the start-up stage is also to move the ecosystem forward, to create a pipeline of large companies that grow and attract follow-on funding. Seed-stage financing might not be as âsexyâ as billion dollar valuations and headlines, but it’s essential, and we’ve developed a model to do it right. We should increase it to help grow Canada’s national technology economy.