By: Matthew Braga, Tuesday May 28th, 2013
A lack of homegrown funding is driving Canadian tech startups to seek out foreign equity investment, according to a new study – but there’s a difference of opinion whether that threatens to drain talent from the country or is a crucial part of building the country’s next BlackBerry or HootSuite-sized success.
The study, “Impacts of Foreign Equity Investment in Canadian Firms,” was conducted by not-for-profit wireless technology commercialization group Wavefront, prepared for the small business and tourism branch of Industry Canada. It’s key finding: “[a] scarcity of investment funding in Canada tops the list of reasons why successful Canadian companies seek out foreign investors, particularly in the U.S.A.”
But it also found that startups actively sought financing from outside the country out of a desire to grow beyond the Canadian market, to work with more skilled, connected or experienced investors and companies or to align with foreign entities for strategic purposes.
Responses were gathered from interviews with 17 founders and executives of Canadian companies, as well as venture capital executives and associations. The goal was not to provide a quantitative representation of Canadian startups acquired and funded by foreign investors, but rather, provide case studies and insights for the sake of further industry discussion.
“If you want to build a world-class company, you can’t build it completely insulated within Canada,” said Andrew D’Souza, chief operating officer at Toronto-based education startup Top Hat, who spoke with the Financial Post about his company’s own funding experiences which resemble some of those contained in the study.
“Having a brand name U.S. VC [venture capitalist] has allowed us to attract top-tier foreign talent, which would have been hard to do otherwise.”
His company received $8-million in Series A financing from California-based Emergence Capital Partners and Montreal’s iNovia Capital last July, and an additional $1.1-million in follow-on funding from Palo Alto, Calif.-based Felicis Ventures in January.
“I think most Canadian VCs are pretty general VCs who invest much more broadly in broader investment opportunities than U.S. VCs who have pretty focused investments,” said Vancouver angel investor Boris Wertz, founder of Version One Ventures, who was not interviewed for the study, but is active in the venture capital community.
“If you had the choice, you would rather take money from a more general VC?”
Mr. D’Souza echoed Mr. Wertz’ sentiments, and said it was important his company found investors with the right level of expertise and knowledge about his company and the market in which it competes.
Emergence Capital Partners, for example, is a fund that focuses solely on cloud-based, SaaS services, made early investments in Salesforce, Yammer and Box, and has VCs with past experience working with companies like Top Hat.
“Based on my experience … Silicon Valley investors tend to have the right attitude about scale and building a business,” said Mr. D’Souza.
“We didn’t necessarily say we needed someone from the Valley, but we knew we wanted someone with that kind of thinking.”
But some companies don’t just get foreign investment in the form of venture capital – they get acquired. This introduces a new set of positives and negatives, according to the Wavefront report.
Based on case studies of recent Canadian acquisitions, it concluded that buyouts do have a number of short- and long-term benefits, including improved access to global markets, increased credibility, reinvestment into other Canadian businesses, and the potential for new and follow-up enterprises.
Of the 17 companies interviewed, 11 “have not yet experienced major relocation consequences, and in fact net combined Canadian employment increased for these companies.”
“However,” continues the report, “a principal challenge for Canada is to create a healthy business climate within our borders that is conducive to attracting foreign investors that keep business assets in Canada.”
Acquisitions of so-called “knowledge based enterprises” could be seen as detrimental when this knowledge – patents, code, leadership or talent – is shifted across borders, “even when the company decides to retain operations and professional assets on Canadian soil.”
But the study also references companies such as Salesforce, which, despite conducting multiple acquisitions in Canada, has chosen to keep these operations in place, and actually come out in support of “investing in Canada.”
A recent Financial Post article also heard from other successful companies such as Vidyard, Thalmic Labs and BufferBox – the last of which was acquired by Google last year – that have chosen to make Waterloo, Ont. their home, despite spending time in the Valley and raising millions in VC funding each.
“Give or take six years ago, every time I introduced one of my companies to a U.S. VC, one of their first questions was ‘Are you ready to relocate to the Valley?’” said Mr. Wertz – and most weren’t.
Mr. Wertz says that a number of things have changed in recent years. Not only has it become easier for foreigners to invest in Canadian companies, but investors are beginning to recognize the value – the differences of perspective and talent – in establishing a presence outside of the Valley.
“Today, they don’t ask that question anymore.”
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