Increased Q1 2016 VC deployment masks drop in Canadian deals
Just as one starts to feel good about the state of the Canadian venture capital ecosystem (see prior post “Flaherty’s VCAP doing its thing with new IVP and iNovia fund announcements” Jan. 27-16), you can’t forget that there is still a long way to go before we reach a “happy place.”
Thanks go to Mike Middleton, of Q1 Capital Partners, who churned through the recent CVCA / Thomson Reuters data to remind us all that:
Canadian venture capital activity experienced a significant uptick in the first quarter of 2016 with 152 deals reported for a value of $869 million. This represents a 61% increase over the comparable period in 2015 in dollar terms but a 4% decline in the number of transactions. The $869 invested represents the best quarter in dollar investments since Q3 2001. As is generally the case in Canada, a small number of large transactions have a huge impact on reported volumes. In the first quarter this was again the case where $446.7 million or fully 51% of the capital invested went to only 8 companies with the three largest investments being $87.8M for Zymeworks, a Vancouver-based biotherapeutics company, $80M for Montreal-based Triotech Amusement, an entertainment devices company and $75.8M for Montreal-based Blockstream, a cryptocurrencies company.
The decrease in the number of Canadian-based financings is in keeping with what is going on south of the border: American entrepreneurs saw a 10%+ decrease in new venture financings versus the same period in 2015 (according to PWCMoneyTree data).
If you stand back, consider the cloudy macro backdrop: growing tensions around the direction of the Republican Party, icky Brexit polling, economic and political challenges (if not crises) in most of the BRIC nations, weak global demand for commodities despite rock bottom overseas shipping rates, a crappy IPO window…. None of which supports the very robust capital deployments that the U.S. innovation economy was enjoying 12 or 18 months ago.
One could argue that none of that should trickle into the Canadian innovation ecosystem.
For a decade, the key domestic problem for innovative entrepreneurs was an absence of local risk capital. That problem is now mitigated, for the next five years anyway, thanks in large part to the lobbying of the CVCA (see representative prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” Dec. 26-08). We have enough funds (and Funds of Funds) now, with domain expertise, based across the country, with experienced people at the helm, to finance good stories. As such, one would hope that Canada could buck the negative trend, if in fact there’s a trend at all.
If only it were that simple.
Whether as a tech investment banker or growth capital provider, I’ve always believed that good ideas get funded. And that Canada’s key challenge — beyond the capitalization of local VCs — was our inability to commercialize enough of the R&D that’s conducted nationwide…whether it be on campus, via government labs or in research parks. Despite the fact that several Canadian VC funds are now in great shape, thanks to the prior government’s Venture Capital Action Plan, most GPs have intentionally avoided pursuing a mandate to fund pre-revenue business plans or play in the seed stage world (Real Ventures and VersionOne being two examples of outliers on that front). While commercially reasonable given the mood of the LPs, this doesn’t help.
The tech debt markets aren’t any better, and word is finally out on that front too (witness Boris’ post yesterday). Whether institutions are making a macro call, belatedly responding to regulatory pressure (see prior post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 14-14), or reacting to recent five-alarm fires within their loan portfolios, innovation-focused banks aren’t quite as keen (anecdotally) to extend or renew existing credit facilities as they were, say, nine months ago.
All of this sends more deal flow our way, to be honest. As providers of True Growth Capital, with a 5 year non-amortizing term and a maximum deal size of $40 million, we are happily filling this gap. We’ve already closed seven financings in Fund V (which closed on Sept. 30th), with two more to get done shortly. And the quality of the leads has been excellent; likely due to the reasons cited above.
Real live case studies don’t hurt either.
One of our Fund IV companies, Xactly Corp. (XTLY:Q), went public on the NYSE last summer via JP Morgan. We were the last money in that fabulous SaaS software story, and our chequebook gave the management team and VCs involved the capital the business needed to continue to grow without taking on more dilution. And the fact that Xactly shares are up >30% post-IPO is helping to spread the word. Another recent success: the acquisition of Maxymiser by Oracle (see prior post “Oracle acquires Fund IV portfolio co. Maxymiser” Aug. 20-15); we were the last money in there, too. Our capital was effectively put to work, with dramatically less dilution for the existing VC shareholders, founders and professional management team. Keeping your foot on the gas is possible, and that’s the hallmark of our flexible, long term capital! Although one was an IPO, and the other was a strategic acquisition, each is a high-quality case in point.
And thus the influx of new opportunities.
Funny that. Although we’ve now done a few dozen good deals south of the border since 2009, the likes of JP Morgan and Oracle just happen to have the clout to spread the word about what you and your capital can do for North America’s best VC-backed growth companies. We’ll take it!
Whatever the ups-and-downs of any given quarter on the VC deployment front. With a new 10 year fund, we have the luxury of focusing on the long term.
MRM
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