Canadian Early Stage VC Outlook for 2021

Canadian Early Stage VC Outlook for 2021

‍

Here’s the good news: we expect to see continued growth in the number of Canadian seed-stage VC deals, as well as the dollars invested in 2021.

The bad news is that growth is increasingly due to non-Canadian sources. 

At RiSC Capital, we spent 2020 in the weeds talking to investors and digging into the tech of over 300 early-stage Canadian startups. 

What surprised us the most was the growing number of non-Canadian incubators/accelerators and investors in our ecosystem. 

In the past 15 years of investing startups in Canada, I don’t recall competing against top-tier US investors for Canadian seed-stage deals or entertaining pitches from so many startups that participated in non-Canadian accelerators.

Unless we establish more support to protect our seed-stage IP, this encroachment will continue to grow in 2021 and may be detrimental to our economy. 

What is the point of having large VC funds in Canada to keep our unicorns in Canada if US investors already own the unicorns? 

Currently, in the Canadian early-stage VC landscape, we have good Canadian incubators/accelerators like The UoT Hatchery, NextCanada, VentureLab and Velocity, as well as a growing number of  non-Canadian incubators/accelerators that are passive investors by providing education and/or cash for a small piece of the pie. We also have non-Canadian active investors looking for leading-edge Canadian IP. And we have hybrids of the two. 

According to PWC’s MoneyTree report, of the 194 seed-stage deals in Canada in the second half of 2019, 35% of the investors were US-based, 4% were European, and 3% were Asian.
‍

Here are some examples: 

US-based Techstars arrived in January 2018 - Techstars Launches in Toronto‍

US-based Google Accelerator arrived in February 2020 - Google Womens Founders Accelerator‍

US-based Acceleprise arrived in October 2019 - Acceleprise Officially Launches in Toronto‍

European base EF (Entrepreneurs First) arrived in 2020 - EF Launches in Toronto‍

US-based gBeta arrived in 2019 - GBeta Launches in Toronto
‍

It is excellent that our high-quality product attracts so many foreign organizations to Canada. But this is mainly happening because our Canadian dollars are not filling the gap.

As far as investors are concerned, we have recently seen top-tier Accel, Kleiner, DCVC, Sequoia participate in early-stage terms sheets. 

SOSV, a US-based Venture firm, was the third most prolific investor in the seed stage in Canada in 2019, according to PWC’s MoneyTree report.

As well, many US VCs have set up offices in Canada including Evok Innovations and 2048 Ventures. 

So, what should Canadians do? 

We need to allocate more capital to early stage investing to limit the future drain of returns on our best innovations. This support can come from government, institutions, family offices and successful tech founders. The Council of Canadian Innovators is an example of one organization that already gets it.