If it's not built, they can't come
Hallelujah! Hallelujah! Hallelujah!
Hallelujah! Hallelujah!
For the Lord God Omnipotent reigneth.
Hallelujah! Hallelujah! Hallelujah! Hallelujah!
— Hallelujah Chorus Hymn, Handel’s Messiah
The excitement about the changes to Section 116, as disclosed in Minister Flaherty’s budget, is justified. But it must be understood that the vast majority of Canadian entrepreneurs raise their first round (or second or third) from domestic investors, prior to succeeding south of the border.
If an entrepreneur tried to raise a Series A round in Seattle versus a Series C round, the historical paperwork of Section 116 existed in either case. So we must assume that the fact that U.S. VC investors appear to almost (but not) exclusively invest in later rounds — when they do invest in Canadian tech names — has nothing to do with Section 116…and everything to do with the state of the investment opportunity at that point in time.
Let’s look back over the past 15 months at some of the Canadian deals that involved U.S.-based venture capital funds. This list isn’t the entire waterfront, but the point is clear:
Capital Reserve Canada
Edmonton, Alberta
$10 million First Round
Auctus Private Equity Management, Inc., Boston
September 2009
I Love Rewards
Toronto, Ontario
$8.7 million Second Round
GrandBanks Capital, Boston
JLA Ventures, Toronto
OVCF, Toronto
May 2009
$4.75 million First Round
JLA Ventures, Toronto
Laurence Capital, Waterloo
November 2007
Indicee Inc.
Vancouver, B.C.
$6 million First Round
Yaletown, Vancouver
Granite Ventutes, San Francisco
June 2009
Microbridge
Montreal, PQ
Undisclosed $ 5th round
Coller Capital, New York
FTQ and Multiple Capital of Montreal
February 2009
$1 million First Round
Multiple Capital, Montreal
March 2001
OneChip Photonics
Ottawa, Ontario
$19.5 million Third Round
GrowthWorks, Toronto
BDC, Ottawa
Morgenthaler Ventures, Menlo Park
DCM, Menlo Park
March 2009
Second Round
Morgenthaler Ventures, Menlo Park
DCM, Menlo Park
December 2007
QuickPlay Media
Toronto, Ontario
US$12 million 5th Round
General Catalyst Partners, Cambridge, MA
JLA Ventures, Toronto
Ventures West, Toronto
June 2009
Undisclosed $ First Round
JLA Ventures, Toronto
May 2005
Varicent Software
Toronto, Ontario
$35 million Third Round
FTV Capital, San Francisco
EdgeStone, Toronto
RBC Venture Partners, Toronto
October 2009
$4 million First Round
EdgeStone, Toronto
December 2006
Zeugma Systems Inc.
Richmond , BC
$9 million Fifth Round
Granite Ventures, San Francisco
GrowthWorks, Vancouver
GTD Capital, Texas
Ventures West, Vancouver
Vertex Venture Capital, Israel
March 2009
Undisclosed $ First Round
Yaletown, Vancouver
Ventures West, Vancouver
September 2004
For the changes to Section 116 to actually have an impact, Canada still needs a vibrant domestic Seed, Angel and Early Stage Venture Capital ecosystem. That’s what the CVCA’s 5 point Commercialization Support Program is all about.
If it’s not built, U.S. investors can’t come.
MRM
Mark, you bring up a very good point. The changes to Section 116 are very good news, but no one should think that this will open the floodgates to US capital waiting to enter the Canadian market.
As shown in your post, and as we’ve seen in our portfolio companies, US investors that like a Canadian deal will find a way to get it done. What the evidence has shown is that these deals are almost exclusively later, larger size rounds (where the higher costs of a cross-border deal can be justified). And what the changes to 116 have done is lowered the transaction costs in these deals significantly (lawyers specializing in cross-border deals being the main losers here).
The hope now is that with lower transaction costs, it now makes sense for US investors to get involved in earlier stage rounds.
Here’s the issue though. Early stage deals are typically done close to home (eg. by local VCs). This is for a couple of good reasons. First, VCs typically are far more hands-on in these types of companies as they require a lot more assistance. Practically, you need to be physically close to the company to provide that level of support. And second, local VCs typically get the ‘first kick at the can’ – it’s the key advantage that local VCs have – their local network and their ‘feet on the street’. Realistically, the first thing a ‘remote’ VC will think when they get a cold call from an unfunded early stage company in another geography is "Did every VC in your local market already decline you?".
Don’t get me wrong, this is very good news. I’m all for lowering transaction costs, and this does that dramatically. But no one should think this is the solution to the lack of capital in the Canadian market. What this will do hopefully is make deals that are smaller than big later stage rounds, and later than early stage first rounds now practical for US investors to get involved in.
Holy crap! I couldn’t have said that any better 🙂