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Funding for entrepreneurs is booming in Canada, but how long will the party last?
As the Canadian Venture Capital and Private Equity Association (CVCA) traces the steady flow of money from investors to startups, its president is looking further into the future and questioning where the next phase of funding will come from. About $1.5-billion was invested in more than 255 deals in the first two quarters of 2016. The average deal size also increased by more than 50 per cent to $6.1-million, the CVCA said in a report last week.
Mike Woollatt, president of the CVCA, said the strong investment trend is likely to continue throughout the rest of 2016. Last year, about $2-billion was raised by venture investors, and that capital is now seeking more deals. Also keeping the results buoyant will be the high number of recent fund closings, more American investors circling the market and the broad range of growing Canadian startups seeking investment.
Despite these positive indicators, Mr. Woollatt is concerned that the volume and value of VC deals will fall when the funding tied to the government's 2013 Venture Capital Action Plan (VCAP) eventually runs out. "There's a lot of money there right now, a lot of it has to do with what VCAP was able to do in the ecosystem," he said.
As part of the VCAP program, the former Conservative government put $350-million toward venture industry funding. The money was earmarked for investment in four "fund of funds" focused on investing in technology. But to get the money, these funds had to encourage private-sector groups to invest significantly alongside the government. The Ontario and Quebec governments also added to the pile of capital, which exceeded $1-billion. "We've given all these funds money, and all these funds are now running around spending it. So 2016 looks good. And 2017, I'm guessing, will still look good. [But] 2018 looks ugly," he said.
He said VCAP was always intended as a multistage plan to seed startups, and he's now talking to the federal Liberal government about rolling out the second and third phases of the program. After that, if all returns were put back into a funding pool for future startups, the industry should be able to sustain itself, Mr. Woollatt said. The CVCA hopes to convince Ottawa to expand the VCAP program in the 2017 budget, which is expected to have a focus on innovation and growth in Canada.