Scaleup Capital

One frequently hears complaints about the lack of capital available for technology companies in Canada so we have set out to determine why this is the case. What we’re finding is that if you have a good company, one that is growing quickly, capital is available. The following research papers cover different aspects of scaleup capital.


Great Expectations

In several prior reports we looked at the impact that smaller VC deal sizes has on the slower growth of Canadian companies and on the availability of late stage capital. For this report, we wanted to look at whether smaller deal sizes may be as a result of any action that entrepreneurs themselves are taking.

To do this we looked in detail at 35 companies seeking financing. What we found that their forecasts expected, on average, a 160% compound annual growth rate in revenue. While aggressive, this in itself is not an issue. Their other expectations though are problematic in that they expect to achieve these results with very little capital while recording profits of 34% of revenue.

Clearly these expectations are phantasmagorical and problematic as their requests for capital would, under any scenario, be insufficient to propel growth at these rates. What we concluded was that as a result of seeking too little capital, entrepreneurs may be inhibiting their own growth and thus contributing to our challenge at scaling companies.


The Rich Get Richer

Canadian VC deal sizes continue to lag those in other countries and at the same time, the returns of Canadian VCs also lag American VC returns. Canadian VCs made a strategic decision to invest the way they did as they could just as easily have chosen to invest twice as much in half as many companies. This begs the question; does the smaller deal size result in smaller returns?

To figure that out we looked at the results of 587 US companies and 131 Canadian ones. What we found was that the more funding a company has, the faster it grows and the faster a company grows, the more funding it can get.  This seems to be one reason why Silicon Valley based companies, who have the greatest levels of funding out-perform the rest of the US and why the US outperforms Canada.

We believe that Canadian VCs are inadvertently limiting their own returns. They are making strategic decisions to finance companies later, less frequently, and with less money than companies in the US, thus potentially generating low returns.Rich Get Richer

Government Venture Capital

If Canada’s problem now is our ability to create large, public and industry leading world-class companies, then we thought in this scaleup research it would be worthwhile to examine the ability of BDC’s venture capital division and MaRS Investment Accelerator Fund to pick and nurture world-class companies.  What we found was that while they are effective at picking successful companies, they both lack the requisite funding at early, mid and late stages to turn these investees into world-class companies.

The Narwhal List

In order to provide a tool to enable entrepreneurs and investors to gauge how attractive firms are from a financial standpoint, we are pleased to introduce a way to measure Financial Velocity. Financial Velocity is defined here as the amount of funding a firm has raised divided by the number of years it has been in existence. It is expressed in millions of dollars per year. This measure reports the rate at which companies raise and consume capital.

We have assembled a list of the top Canadian businesses based on Financial Velocity and are pleased to introduce the Narwhal List. This list shows Canadian venture capital backed companies with the highest Financial Velocity.The Narwhal List

Failure to Scale

Policy experts and innovation practitioners have criticized Canada’s innovation system for its inability to grow and scale companies. This has been a baffling issue because Canada’s technology sector has been successful at starting companies and generating innovations with high potential. In this study we wanted to determine whether the way in which Canadian companies raise funds also adding to the scaling problem?

This scaleup research reveals three critical issues:

  1. Canadian companies wait longer before they start raising funds.
  2. They raise funds less often.
  3. They raise less money over time.

And as a result of this pattern, even our best companies are not particularly attractive to investors as their growth rates fall well below that of the most successful US companies.

Canada’s Venture Capital Puzzle

The lack of venture capital in Canada has been denounced consistently in studies and think tank reports, and by the media, entrepreneurs, and even venture capitalists themselves. But while the general consensus is that Canada does not have enough venture capital, we somehow manage to rank #4 in the sale of technology companies.

How can we have too little venture capital funding but be so successful at selling companies? The answer lies in how we are funding companies and what stages we are able to fund.