Grow me the money

From vencap firms to angel investors and crowdfunding, Canadian tech firms have access to more financing sources than ever — and a whole new crop of stars is emerging.

Since 2012, D2L, a Waterloo, Ont.-based online learning company, has achieved the kind of financing success that used to elude all but a handful of Canadian firms. In fundraising drives in 2012 and 2014, the company (formerly Desire2Learn) attracted $165 million in equity. A sizable chunk of that amount came from large US venture capital outfits that scout deals all over the world.

By its very nature, D2L is global in perspective. Its mission, as noted on its website, is to "improve the way the world learns." Currently, the company sells its learning platform to schools, universities, healthcare institutions and corporate clients across Canada, as well as the US, Europe, Latin America and Asia. It has 1,200 customers worldwide and maintains offices in several countries.

Despite D2L’s global slant, its senior officials have been adamant about staying in Canada. CFO Brandon Nussey explains that he was drawn to D2L five years ago specifically because of founder John Baker’s goal of building the "next great Canadian tech company." And as the latest financing reveals, that choice hasn’t disadvantaged the company as it amasses a war chest that Baker believes will allow D2L to become a global player based here. "That is happening with a bunch of Canadian companies," Nussey observes. "Now that we’ve had some successes, we’re seeing investors and entrepreneurs setting their sights higher."

D2L’s story offers a glimpse into the current state of tech financing for Canadian entrepreneurs. Since the late 1990s, Canada’s venture capital (VC) sector has seen its fortunes rise and fall more than once. At their high point at the beginning of the millennium, VCs attracted $4.6 billion — an influx fuelled in part by a tax credit for investors who contributed to labour-sponsored venture capital funds. The lowest point came in 2009, when Canadian VC funds attracted barely more than $1 billion. But since then, growth has been steady and 2014’s totals are almost twice what they were five years earlier.

During this latest cycle, a new generation of Canadian information technology stars — Shopify, Thalmic, Hootsuite and D-Wave, among others — has emerged. And they are "just the tip of the iceberg," according to Mike Woollatt, CEO of the Canadian Venture Capital and Private Equity Association.

The new stars have emerged in large part because they’ve taken advantage of dramatic changes in the way startups connect with investors. This new financing "ecosystem" includes angel investor networks, mentoring programs and accelerators — all tremendously useful aids in taking a good idea from concept to commercialization (see "The new tech financing ecosystem: a glossary" below). While Canadian firms used to get $2 million in growth-stage financing, they can now attract anywhere from $30 million to $100 million, says Chris Arsenault, head of iNovia, a Montreal-based VC firm. "The market is healthier than it’s ever been. People are more and better networked than ever before," he says.

Arsenault’s firm, which is the second largest of its kind in Canada, recently set up an office in tech-friendly Waterloo — an understandable move, since information and communications technology deals accounted for 66% of VC financing in 2014.

Robert Nardi, Deloitte’s national practice leader for technology, media and telecommunications, has also seen the times change. "There’s been a significant shift," he says. Nardi cites the feedback Deloitte received on questionnaires filled out by firms that submitted entries for the company’s latest Fast 50 ranking. "Nearly 90% said they stayed in Canada because there’s sufficient financing available."

One major change is that US venture firms are more willing to buy into Canadian deals, even if the target firm doesn’t want to relocate. That is partly because of administrative changes at the Canada Revenue Agency that allow those investors to streamline their filings, but it is mostly due to an overall change in attitude. Tech startups are more aggressive and US investors know that if they don’t provide funding, the startups will find it elsewhere.

Brian Cozzarin, an associate professor of management sciences with Waterloo University’s engineering faculty, notes that the number of "incoming" cross-border VC rounds jumped to 112 in 2013 from 31 in 2009. In D2L’s case, the company attracted capital from VCs in Silicon Valley, San Francisco and New York, as well as Canada.

While Woollatt believes some US VCs are looking to Canada because Silicon Valley valuations are too "frothy," others say the influx of offshore capital isn’t just about bargain hunting.

"They want winners and companies that can be dominant players," says Ajay Agrawal, a professor of strategy at the University of Toronto’s Rotman School of Management and founder of the Creative Destruction Lab, a program for seed-stage technology companies that has attracted the attention of both ambitious entrepreneurs and investors. He points to the fact that a decade ago, D-Wave, a Vancouver quantum computing firm, attracted an equity stake from Draper Fisher Jurvetson, a Menlo Park, Calif., VC powerhouse. "That sent quite an important signal," says Agrawal. "Once a US firm was inside the tent, they were encouraged to bring along their brethren."

It’s not just dedicated VC firms that have turned their sights northward. Woollatt notes that the venture arms of large US tech firms such as Cisco, Google and Salesforce are also in Canada, scouting for opportunities. D-Wave recently secured another US$29 million — mainly from In-Q-Tel and a fund called Bezos Expeditions, run by Amazon founder Jeff Bezos.

In domestic venture financing, the main shift in recent years has been the decline of labour-sponsored venture funds — a tax shelter for investors who contributed to capital funds that included union participation on their boards. The first of these funds was launched in Quebec in 1982.

More recently, however, Ottawa has moved away from labour-sponsored funds because they were not seen to be especially effective in spurring innovative firms. Instead, it has launched the Venture Capital Action Plan (VCAP) — a program whereby it provides sidecar funding or invests in funds of funds if the sponsor can attract $2 for every $1 of public money. The Ontario government has also allocated $500 million to invest in VC funds, as well as providing funding for incubators.

One VC that has worked under the new program is Kensington Capital Partners, a 19-year-old Bay Street VC with $600 million in investments. Last fall, it completed a $160-million round for a new venture fund and Ottawa put in $64 million as part of VCAP. The other backers in Kensington’s latest fund, interestingly, include most of the big banks, which have traditionally kept a polite distance from VC financing. (Even now, they provide only 10% of VC dollars.)

Opinions on VCAP’s potential vary. Douglas Cumming, an Ontario research chair in private equity and entrepreneurship at York University’s Schulich School of Business, says the program and its Ontario equivalent are "promising" but he does not think they go far enough in delivering venture funding.

Shortly after he finished a Rhodes Scholarship, Wojciech Gryc found himself working at McKinsey & Co., doing data analytics for elite corporate clients. Gryc figured there was an opportunity to market similar services to smaller firms and began building a more affordable analytics platform. After setting up Canopy Labs, an upstart analytics firm, at the beginning of 2012, Gryc did a stint at the legendary San Francisco incubator Y Combinator before returning to Toronto.

A major attraction that drew Gryc back was the scientific research and experimental development (SR&ED) tax credit, a program that allows firms to claim a credit against R&D and other development expenses. Gryc says  SR&ED is crucial for his firm. The company sells its services to e-retailers and sports clubs. As its customers have increased, Canopy has had to scale up its software, a process that, Gryc says, has required a fair amount of trial and error. "If it weren’t for SR&ED, our company would be much smaller and more risk averse," he says. In 2012, Canopy raised $2 million from angel investors, but SR&ED has allowed the 12-employee firm to maintain a contingent of 10 data scientists and software engineers who spend their time refining the product and researching new approaches.

SR&ED is the largest federal innovation program. In 2014, the program’s estimated cost to the federal government in forgone revenue was just under $2 billion. "That’s massive public support," says Finn Poschmann, vice-president of policy analysis for the C.D. Howe Institute. "What there’s no evidence of is growing business expenditure on R&D."

In recent years, the federal government has begun to limit the credit given to large and multinational firms while the level of funding for smaller companies has remained steady. Today, says John Lester, an executive fellow at the University of Calgary’s School of Public Policy and a former Department of Finance economist, smaller firms earn credits that are 20% higher than those earned by larger firms. Lester is not convinced the new policy makes much sense. He worries about the practice of giving higher credits to small firms when there is no evidence their R&D provides any extra benefit for society (new discoveries, for example).

Yet Gryc says early-stage firms such as Canopy depend on SR&ED, provincial credits and angel financing. With more tech startups looking for cash, VCs can now be quite choosy. "For companies like ours, [VC] is a crowded space."

Still, Gryc and other upstarts have been able to tap into a new generation of angel investors. Many are entrepreneurs who have made small fortunes after building and exiting and have become talent spotters, mentors and investors at an age when their predecessors were still building companies. Michael Litt, who in 2011 founded Vidyard, a Waterloo tech firm that raised a US$18-million round in December 2014, recently launched his own angel-investing fund, Garage Capital, which places $25,000 to $150,000 in convertible debt in budding companies. He’s invested a total of $1.3 million in 15 firms and those dollars have leveraged others. As he says, "I’ve both raised and funded companies. I’ve sat on both sides of the table."

Other startups have turned to crowdfunding — another recent innovation — for alternative financing. In 2011, Eric Migicovsky, a Vancouver inventor, relocated to Silicon Valley after raising US$10.3 million on a Kickstarter campaign for his pebble watch. Matterform, a Toronto firm that invented a 3-D scanner, also executed a successful crowdfunding campaign.

Craig Asano, founder and executive director of the National Crowdfunding Association of Canada, says this social-media funding technique is "a huge opportunity" for tech entrepreneurs, especially those with low overheads, such as app developers. Tech giants such as Microsoft are now paying attention and getting involved in sponsoring crowdfunding summits and sending speakers. And in the UK, securities regulators have pressed ahead with reforms that allow equity crowdfunding — that is, offering supporters a stake in the firm instead of raising funds for preorders. Canadian regulators allow broker-dealers to provide those opportunities to clients, but the Ontario Securities Commission hasn’t yet approved regulations surrounding nonaccredited equity crowdfunding, forcing firms to raise capital on international crowdfunding sites that don’t face the same kinds of regulatory constraints.

Similarly, Canadian regulators have yet to turn their attention to a derivative form of crowdfunding: "crowdlending," or marketplace funding. Tabitha Creighton, who is the founder and CEO of InvestNextDoor Inc., a marketplace funding firm in Seattle, Wash., says early-stage bootstrapping firms often need bridging loans that fit "between ‘friends and family’ and equity.

In its first year, InvestNextDoor has opened more than 900 accounts with 600 businesses. Its noncollateralized loans run from US$50,000 to US$250,000 and offer lenders yields in the 9% to 18% range. Creighton says her firm will launch in Canada this year.

As they survey how the tech financing picture has shifted in a decade, venture capital insiders such as Woollatt and Arsenault find themselves pondering what will come of the virtuous cycle that has taken hold in Vancouver, Montreal, Toronto and Waterloo in the past three or four years.

Certainly, the much-vaunted livability of Canada’s urban centres will continue to attract ambitious young people to universities, while tech entrepreneurs know they can recruit talented graduates here for much less than they’d have to pay in places such as Silicon Valley. But, as Agrawal points out, most major OECD cities these days are building highly integrated entrepreneur networks. "The things we’re doing are necessary, but they’re like table stakes, just to stay in the game."

Indeed, the question that continues to hang over the whole Canadian tech and tech-financing sector is whether Canada will be able to hold on to confident, world-beating firms such as D2L once they reach the $100-million threshold. For now, Canadian firms of that scale either go public or get snapped up by US private equity giants. "The challenge for the next 10 years is building awareness here of larger Canadian companies and allowing them to become acquirers," Arsenault says. In Silicon Valley, a tech firm can scale and then sell itself to a US tech giant. We haven’t done that well, at least to this point. But, as he adds, "It’s still very early days."



Investors who offer early-stage financing, typically in the five- to six-figure range. In cities such as Toronto or Vancouver, there are numerous networks of angel investors who may band together to fund a young firm. The 12-year-old National Angel Capital Organization ( is the umbrella group, with links to 2,000 angel investors.


These centres, often owned by universities or sponsored by private companies, offer modest office space, coaching in basic business advice to graduate students and young entrepreneurs looking to commercialize a scientific or technical innovation. Examples include DMZ (Ryerson University) and Velocity (University of Waterloo) or programs such as The Next 36 (MaRS).


Programs aimed at start-ups that are emerging from incubators and that have honed their ideas. Accelerators often provide participants with opportunities to connect with potential investors and development funding. One of the best known, Y Combinator in San Francisco, has illustrious alumni, including AirBnB. Canadian examples: MaRS Innovation, Creative Destruction Lab and UTest, a U of T accelerator that provides mentoring and up to $30,000 in development funding for applicants selected to participate.


Platforms such as Kickstarter or Indiegogo allow entrepreneurs to attract revenue to their businesses through social-media networks. Typically, these campaigns offer opportunities to preorder the product at a discount, but a growing number of international crowdfunding organizations also offer prospective investors an opportunity to provide equity or small loans. (See Mass appeal, September 2014)


Capital pools that approach other investment funds or lump-sum contributors.


Pooled funds whose backers are passive investors who prefer to leave investment decisions and management to angels who specialize in high-risk startup and early-stage firms. These vehicles provide more sophisticated investors with a way of placing bets on risky plays while maintaining a balanced portfolio.