Who needs Silicon Valley? Canadian startups scoring bigger deals

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Who needs Silicon Valley? Increasingly, not Canadian tech startups able to secure big buckets of venture funding without moving south.

In the last 18 months a series of large venture capital investments have signalled an important shift in the Canadian technology startup scene. To hear industry insiders explain it, this is not a story about out-of-control valuations, but rather a case of a new class of maturing businesses reaching the stage where their market opportunity is now being matched by large investments.

According to the Canadian Venture Capital and Private Equity Association annual funding report, the total venture dollars invested declined in 2014 to around $1.9-billion on 379 deals, compared with 2013's $2-billion on 452 deals. The average dollar amount per deal, however, rose from $4.4-million in 2013 to $5-million.

That's still a far cry from the more than $48-billion (U.S.) in venture capital that accounting firm PricewaterhouseCoopers LLP estimates was invested in U.S. companies in 2014. But observers are confident that gap will shrink.

The Globe compiled 21 examples of the largest venture funding announcements in Canadian technology over the last 18 months. The list reveals a growing number of big-dollar deals among medium-sized startups – a change for a sector that has historically focused on mostly seed, or early-stage financing.

The Globe compiled 21 examples of historically large venture funding announcements in Canadian technology over the last 18 months. We limited it to companies that collected $10-million or more in funding, and together those 21 companies collected more than $784-million.

Those 21 companies collected more than $784-million (the massive $100-million funding of Ottawa's fast growing e-commerce provider Shopify in December, 2013, and the $60-million raised by Vancouver social media dashboard maker Hootsuite in September, 2013, make up a significant chunk of that total).

"The bite sizes are certainly getting bigger, it's without a doubt a sign of significant growth in Canadian tech," CVCA CEO Mike Woollatt said of the funding scene. "We're not competing with Canadian companies any more. There's a tech boom all over the place right now… the race to be first is mattering more and more."

Until recently, startup entrepreneurs could credibly complain about a lack of mid-level funding in Canada. Montreal's Real Ventures specializes in early-stage investing and meets with more than 800 startup teams a year, and hears from thousands more. Founding partner John Stokes said that in 2014, the company was part of 42 deals worth more than $130-million (some of that total was provided by other partners). Even more than bigger cheques, the trend Mr. Stokes sees is a quickening of the pace of development.

"There are 10 times as many startups and entrepreneurs as there used to be, and 10 times as many angel investors, who are trying to create value," he said. And the speed at which those early funding rounds are followed by second and third rounds is finally starting to catch up with the pace set by Silicon Valley.

Silicon Valley startups that raise $1-million can get a second round of $6-million in two or three years, Mr. Stokes said. In Canada, it's been taking seven or eight, but that's changing as U.S. venture capital firms get more exposure to the quality of Canada's startups, he added.

"There is an ongoing recognition that Canada is a place where some great companies can be built," Mr. Stokes said. "As you move north of the border there has been less capital, there's certainly not been less brains available, and no less ambition either."

Mike McDerment, CEO of 2ndsite Inc., the maker of Freshbooks cloud-based accounting software, is not short on ambition for himself, or for Canada. The company, founded in 2003, toiled in his mother's basement to achieve scale over many years of "bootstrapping," which means it took no outside funding. In July, 2014, it announced a $30-million investment.

Mr. McDerment wants to bust the myth that Canadian tech companies need to relocate to Silicon Valley to grow into major competitors. Industry players say a handful of Canadian cities, including Waterloo, Vancouver, Montreal and Toronto now offer reasons to stay.

"Our goal is to be an anchor tenant in Toronto. At Freshbooks, we want to build a global company that really contributes in some meaningful way to the city," Mr. McDerment said. He touts the local schools and talent pool and downplays the Valley's head start.

"The money is shameless – it'll just go wherever. It wants the opportunities," Mr. McDerment said. "I don't see why Toronto can't beat Silicon Valley."

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Waterloo startup scores $30-million

One very recent example of a fast-growing Canadian technology startup that landed a big-dollar investment is Miovision. It's another Kitchener-Waterloo, Ont.-area company you've probably never heard of, and on Wednesday it will announce it has secured its first major funding with a $30-million investment by a group of investors led by the Canadian merchant bank MacKinnon, Bennett & Co.

Miovision's CEO, Kurtis McBride, gives a lot of credit to Waterloo's tech cluster for his company's success. "I can't think of a better place to build a technology company."

Mr. McBride graduated from the University of Waterloo in 2004, and built a school project about traffic data collection into a business with 500 customers in 50 countries across the world. Not only does his alma mater graduate 2,000 potential employees a year, he says the city's mentorship network is deep and generous. "I had access to all kinds of guys that had or were building businesses, all they ever asked of me is to pay it forward."

The $30-million infusion will help Miovision roll out Spectrum, a system that connects vehicle traffic sensors wirelessly to the cloud, and could one day allow for real-time adjustments to traffic flow. That kind of system is pretty much the holy grail of the Internet of Things sector valued at more than $100-billion by analysts like Gartner. "We believe we've built the foundational layer to build up the smart city," says Mr. McBride.

The company's technology hits all the trends that Justin LaFayette, Managing Partner and co-founder at growth-investor Georgian Partners, thinks are driving an unprecedented boom in business and value creation.

An entrepreneur and investor since 1996, Mr. LaFayette sees successful startups taking advantage of three disruptive trends – software as a service over the cloud, mobile computing and advanced analytics – each of which he says are potentially as big as the introduction of the Web to business. "I don't remember in my career where major trends like that happened in overlapping fashion," he said in an interview.

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