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Venture capital investment soars to dot-com boom levels

Venture capital investment soars to dot-com boom levels

The average deal size last year was $6.1-million, the highest since 1999

Canada saw another banner year for venture capital and private equity in 2016, hitting levels of investment not seen since the dot-com boom.

That's the conclusion of the Canadian Venture Capital & Private Equity Association's annual report, which will be released Friday. It reported more than $3.2-billion in venture capital was invested in 530 deals in 2016. It's not only the seventh year in a row of the dollar figure went up, but the figure is up 41 per cent from 2015.

The average deal size was $6.1-million, the highest since 1999, and information and computer technology (essentially, software and hardware) collected the lion's share of the investments: $2-billion spread across 330 deals, including six of 2016's top 10 deals. Ontario and Quebec remain the most active provinces for VC investing, posting 55-per-cent and 47-per-cent dollar increases respectively over 2015.

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The report highlights 11 so-called megadeals of $50-million or more, which represent a cross-section of Canadian tech and life sciences companies that are reaching global scale. Those top-tier deals include everything from the biggest VC deal of the year (Thalmic Labs Inc. raised $158-million), to an $87-million deal for pharmaceutical company Zymeworks Inc. and even an agri-business deal for Farmers Edge Inc. worth $58-million.

Among the most active funds of the year was iNovia Capital, a backer of Thalmic, which participated in 17 deals worth $308-million. Managing partner Chris Arsenault warns that the impressive overall numbers don't necessarily reflect huge returns for Canadian venture funds in the future.

"My biggest concern from a Canadian perspective, 70 per cent or more of the capital that went into our portfolio companies over the last year has been foreign capital," he says. "When you think of these exits, that are going to be much larger exits in size, most of the returns are also going to be going south, versus being recycled within our own Canadian ecosystem."

Mr. Arsenault attributes that missed opportunity for Canadian investors to not feeling confident yet that the gains in the innovation sector in recent years represent a trend and not a blip.

"There's this uneasiness from a Canadian LPs [limited partners, or someone who joins with a VC to fund specific deals] perspective, to see VCs raise too large a fund," says Mr. Arseneault, "Not too long ago, having discussions with certain limited partners in Canada, talking about them participating in a $200-million pre-money valuation of a Canadian company, nobody was comfortable. The comment I got from two large limited partners was: '$200-million is an exit valuation, not an entry valuation.' If you haven't seen a billion-dollar exit, do you believe a billion-dollar exit is possible?"

Exits overall were down from 2015, which saw near record numbers of mergers or acquisitions of venture-backed firms. In 2016, 28 M&A deals added up to about $521-million (there were no IPOs in CVCA's data), compared to almost $2-billion in 2015, split mainly between 42 M&A deals worth $1.4-billion and 4 IPOs that raised $537-million.

That said, 2017 has gotten off to a hot start according to Mike Woollatt, chief executive officer of the CVCA, who says: "It seems there's like an exit every day now." Several hundred-million-dollar-plus sales have been reported or rumoured for such companies as SkipTheDishes Restaurant Services Inc., Bit Stew Systems, Luxury Retreats International and BlueCat Networks – potentially adding up to almost $800-million in the first two months of the year.

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Another interesting area of growth is the CVCA itself, which has seen 40-per-cent growth in its membership over the last two years as funds expand, new funds are set up and more entrepreneurs join the venture investing industry.

"Domain expertise is becoming more and more crucial in Canadian venture, and that's a sign of maturation of the industry," says Mr. Woollatt. "You're seeing less and less investment bankers getting involved, and more and more industry players that target a specific approach going after companies they can help grow. They can bring more than connections and dollars, they are bringing know-how and experience."

The CVCA report is based off its Infobase database, details of which are provided both by the not-for-profit organization's members and media reports of deals in Canada. In one case, a deal in the $90-million range was ranked fourth on the list of top fundings of 2016, despite no mention of any accompanying details like name of the companies involved, other than that one was located in Quebec. Mr. Woolatt says there have been other still-private deals in the past that the CVCA knew of but was not given permission to publicize, and this is the first time the association has made explicit reference to those deals.

If you have any information on that mystery deal, my contact information can be found by clicking on my byline.

On Feb. 28, visit The Globe and Mail's data store at to purchase comprehensive tables from the Canadian Venture Capital & Private Equity Association. Tables include the top venture capital and private equity deals of 2016 and the CVCA's exclusive member list.

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