Many Canadian entrepreneurs have great ideas, but the Canadian marketplace does not have the depth of true risk capital to fund early stage ventures relative to the United States, says Mark Attanasio of Hillcrest Merchant Partners.
For merchant bankers, the situation is challenging but has shown signs of improvement, Mark Attanasio added in an interview. “We’ll raise the first round of capital, but the biggest challenge is finding the second or third round of capital where entrepreneurs can maintain their private business and not have to seek alternate financing sources other than traditional equity.” Hillcrest Merchant Partners is a venture capital firm that takes a methodical approach to investing in seed to growth stage technology.
A study conducted by Charles Plant at the University of Toronto’s Impact Centre found that Canadian companies take longer to get investor funding than their American counterparts, and when they do raise money, it tends to be less than in the United States.
Plant’s report studied 2,429 companies established in 2008 in Canada, the U.S., France, Germany and the United Kingdom, with a particular focus on the 983 startups that got at least $100,000 in capital investment.
Compared with other countries, Canada is fairly competitive, but when compared with the U.S., startups here are losing out, the study indicated.
“We fund them later, with less dollars, so they don’t grow as fast, so we’re not as attractive,” Plant said. “Canadians are learning that you need to apply lots of money in order to grow fast.”
If there’s a silver lining to the story, according to Alexander Munro, director of Capital Services at Toronto’s MaRS Discovery District, the gap has been narrowing between Canada and the U.S. since 2008.
“We are seeing a marked increase in talent coming into Canada, so that has been a quick surge in a lot of really good, high-tech startups,” Munro said.
The First Mover Advantage
Canada may also have a first mover advantage in certain sectors, such as cannabis, which was legalized last year. Cannabis as an industry has been targeted by Hillcrest, as it has many attractive aspects, besides just legalization, Attanasio said.
“There are so many innovative businesses being tailored to cannabis, and it goes way beyond simply growing and production,” Mark Attanasio said in an interview, “Some are looking at data-based business and market intelligence tools aimed at the industry.
Others are developing digital solutions to support order and sales management, payments processing, compliance and seed-to-sale tracking. Further, the ancillary businesses that are further down market such as retail, brands, and other consumer packaged goods is a significant opportunity.”
Despite the above-noted challenges, the Canadian venture capital investment system is robust, according to the latest report by the Canadian Venture Capital Association. In Q4 2018, $1.3 billion was invested in 165 deals, bringing the year-end total VC investment to $3.7 billion, just 2% lower than 2017.
“We are seeing more VC flowing into more Canadian companies at all stages, which is an important metric for the health of the sector,” says Kim Furlong, Chief Executive Officer, Canadian Venture Capital
“A healthy mix of new growth funds, increased interest from international investors and government support is helping to fuel the momentum.”