Canada’s Obscure Startups Break Out

After languishing in relative obscurity for more than a decade, Canadian tech startups and their venture backers are starting to get noticed. And not just by other Canadians. Brand-name investors—Accel Partners, Kleiner Perkins Caufield & Byers, Union Square Ventures and Sequoia Capital—are trekking up to the Great White North in search of billion-dollar opportunities.

“We are seeing lots of local companies getting funded by tier-one U.S. investors who are coming to Canada because of good deal flow and very rational valuations,” says Mark MacLeod, a general partner at Real Ventures in Montreal. “Folks who are getting sticker shock in the U.S. are coming here more and more.”

This includes Khosla Ventures, which recently led a $17.3 million financing round in Toronto-based social publisher Wattpad. Meanwhile, New Enterprise Associates and others pumped $80 million into Desire2Learn Inc., a provider of cloud-based online learning platforms in Waterloo, Ontario.

Emergence Capital Partners led an $8 million round in Top Hat Monocle, a mobile education platform based in Toronto. And, in a deal that raised some eyebrows, Accel single-handedly put $30 million into Montreal-based ecommerce infrastructure company Lightspeed.

“Accel, who we’ve co-invested with twice, came into my own backyard and put a ton of money into Lightspeed when nobody even knew they were actually raising money,” says Chris Arsenault, a managing partner at iNovia Capital in Montreal. “But, hey, they believed the best company in the space was right here in Montreal.”

U.S. investors like Accel also believe that Canada now has what it takes to build billion-dollar companies. Arsenault, too, has noticed a cultural shift. He says Canadian entrepreneurs possess a new swagger and attitude he never really saw before.

“They are not afraid to go big,” he says. “They know they can do it. They know billion-dollar companies can be built outside Silicon Valley.”

In particular, he points to Canadian startups like social media management system HootSuite and private shopping site Beyond the Rack, as well as Lightspeed and Desire2Learn, as companies that are on the cusp of the billion-dollar valuation mark.

The problem, though, is that Canadian startups have a history of selling themselves short. Recently, for instance, San Francisco-based purchased three promising Canadian companies: Rypple, Radian6 and GoInstant.

The bad news is that two of the three acquisitions were well below the $100 million mark.

“All three were awesome companies that I would have backed for growth in a heartbeat,” says Arsenault. “I thought they all could have gone on to become, if not billion-dollar companies, pretty close to it.”

Some would argue it’s just not in Canada’s DNA to produce breakout companies like that. After all, Canadians are humble and self-effacing by nature, and their startups reflect those national characteristics.

Howard Gwin, for one, doesn’t buy that nonsense. He says the problem is largely structurally.

“Canadian companies are at a disadvantage from the get go. With so much less capital, they can’t afford to make mistakes and it becomes more difficult to weather the storms.”

Howard Gwin

Managing Director

OMERS Ventures

Specifically, the Canadian venture ecosystem does not have the institutional capital to support a company from startup to exit. That means promising companies have to jump at the first buyout offer, because follow-on financing may not be available for them.

“The fact is that Canadian startups typically secure less than half the capital than their counterparts in the U.S.,” says Gwin, a managing director at OMERS Ventures in Toronto. “So Canadian companies are at a disadvantage from the get go. With so much less capital, they can’t afford to make mistakes and it becomes more difficult to weather the storms.”

A study by research firm Startup Genome found that Toronto startups are 17% less likely to monetize directly than Silicon Valley startups, and that Vancouver startups get 80% less funding than their Silicon Valley counterparts, likely due to a shortage of angels and VCs.

OMERS, however, is determined to place Canadian startups on equal footing. Launched at the end of 2011, OMERS is now the largest venture fund in Canada with an initial war chest of about $200 million, and plenty more to come. It is the direct investment arm of a major pension fund that manages more than $50 billion on behalf of 400,000 municipal employees in Ontario. The venture firm’s mission is to invest heavily in a small number of companies that it believes can achieve billion dollar outcomes.

“There is no doubt that OMERS is really shaking things up,” says MacLeod at Real Ventures.

The OMERS playbook is simple.

“Put more money into fewer companies that can make it, and stick with them from start to finish,” Gwin says. “We spend our time on the few companies that can break out, not on lots of so-so companies that many not go anywhere. We need some big outcomes in this market, because that is what’s going to drive all the good things for the ecosystem, like new angels, new entrepreneurs, new funds and new LPs.”

One of the biggest names in the OMERS portfolio is Vancouver-based HootSuite, arguably one of Canada’s hottest Internet companies, which secured $20 million in funding in March. OMERS also invested, among others, in Desire2Learn; AppHero, a Toronto-based social recommendation platform; and Sweet Tooth, a Waterloo-based customer loyalty program for ecommerce.

Another positive trend is that the Canadian government is actively attempting to grow the venture ecosystem. Over the past 10 years, the market has remained relatively flat, with startups raising roughly $1 billion annually, give or take a few hundred million dollars. In the dot-com days of the late 1990s, the market was more than twice that size.

But, unlike the U.S. tech market, Canada never recovered after the bubble burst. Scarred by abysmal returns, most institutional investors abandoned the asset class, never to return.

Recently, however, the federal government announced plans to inject $400 million into the market by backing a number of new and existing venture firms.

“These new resources will make it easier for entrepreneurs to access needed venture capital investments, helping high-growth firms develop and succeed,” says Finance Minister Jim Flaherty in a prepared statement.

Industry watchers believe the money can help to further jumpstart the Canadian venture ecosystem, as long as the money comes with no strings attached.

“This government effort can help create more visibility for venture capital and possibly even spur returns over the next five years such that pension funds, banks and corporates across Canada will also want to get in the game,” says iNovia’s Arsenault. “So the objective is really a good one.”

That’s not to say new funds will suddenly come flooding into the market. It remains extremely hard for VCs to raise money.

Most recently, Bridgescale Partners, a respected Silicon Valley firm with close ties to Canada, tried to raise a new fund with an innovative U.S./Canada cross-border focus. But they were forced to abandon the effort last year due to lack of interest from the LP community.

Currently, however, a new Toronto-based VC firm called Round13 Capital, headed by Bruce Croxon, John Eckert and Scott Pelton, is in the processing of raising a fund between $100 million and $200 million.

Taking a page out of Peter Thiel’s Founders Fund, Round13 has lined up more than a dozen successful Canadian tech entrepreneurs as limited partners in the fund. These backers—including the likes of Daniel Langlois, who sold Softimage to Microsoft for $200 million, and Mike Serbinis, a co-founder of DocSpace, which was sold to Critical Path for $580 million—are each writing a material check into the fund and serving as advisors.

Round13 is also targeting more traditional LPs, such as pension funds and corporate investors, but fundraising is “not the easiest thing I’ve ever done,” Pelton says.

“LPs got their heads handed to them in the dot-com crash, and there is still that institutional memory on their part,” he says. “But we are telling them it has been 12 long years since those dark days, and that they really need to give Canadian entrepreneurs a chance to succeed.”

Another positive trend is that the Canadian government is actively attempting to grow the venture ecosystem [and] announced plans to inject $400 million into the market by backing a number of new and existing venture firms.

Pelton’s pitch to LPs is that Canadian entrepreneurs are as good as any in the world, and “we have the operating experience to get them there.”

Whether Round13 can reach its target is yet to be seen. But what’s becoming increasingly clear is that entrepreneurship in Canada is indeed reaching that next level. The country is exploding with Y Combinator-like accelerator programs such as Founder’s Fuel in Montreal, GrowLab in Vancouver, and Extreme Startups in Toronto.

“There is more life in the market now than ever before,” Gwin says. “The feeling is palpable. There is a massive amount of startup activity, ideas and mojo.”

That energy was clearly in evidence on a recent November afternoon in Montreal when more than 800 people, including about 100 U.S. investors, attended the Founder’s Fuel demo day for its latest graduating class.

It’s not just U.S.-based VCs who are coming to Canada.

Canadian startups are increasingly leaving their comfort zone and exploring new opportunities south of the border.

“We encourage all our entrepreneurs to get their butts down to Silicon Valley on a regular basis so they can get a taste of the urgency and pace and paranoia that exists there,” Gwin says. “The competitor is not down the street in Toronto or Vancouver, the competitor is in the Valley. And those guys are on their third startup with angels around the table and twice the money you have, so what are you going to do to beat them?”

That’s the million-dollar question. But does Canada finally have the billion dollar answer?

Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at