The view from here: Best practices to thrive in Canada’s current & future VC environment
Article originally published in May 2016 edition of Private Capital Magazine
By Boris Wertz
Founding Partner, Version One Ventures
With Q1 2016 data reflecting Canadian VC investments at an all-time high, what better time to reflect on the state of the Canadian VC landscape? In a nutshell: We’re building a healthy ecosystem, but also facing cyclical market and tech challenges (and opportunities, but I’ll get to that later).
According to data from the CVCA, Canadian VC investment was strong in 2015, with 536 completed deals, capturing $2.3 billion — a 24 per cent increase in deal volume, and 12 per cent increase in financing compared with 2014. Those are the best numbers we’ve seen since before the 2008 financial crisis. Exit numbers give us even more reason to be optimistic: There were 42 total exits for Canadian start-ups that netted a $4.4 billion transaction value. Then, take into consideration Q1 2016 data and a whopping $838 million in VC investments – nearly double the amount in the same quarter of 2015.
Of course, enthusiasm about these numbers can be tempered by the fact that we have just a fraction of the activity seen in the U.S. Close to US$60 billion was invested in U.S. start-ups in 2015. Even if you consider the ten-to-one population ratio, the amount of money pouring into U.S. companies far outpaces the cash going into Canadian start-ups.
Throughout the high tech industry, there is a lot of concern about the number of unicorns and if we’re currently at the bubble. Markets are markets, meaning that cycles of boom and bust are inevitable.
The Risk of Being Risk Averse
High-flying success in tech sectors attracts VC attention. More and more money pours in. Yet with more investors comes the risk of lower returns. As a result, investors become more risk averse: rather than seeking out emerging high-tech markets, they put their money in proven sectors that have already had big exits. As Jerry Neumann cautioned: “Don’t worry about irrational exuberance fueling a bubble, that is not what is happening. Worry about fear of risk.”
Looking back at history, the combination of an influx of investors and being at the tail end of a technology platform has led to inferior VC returns. This is where we are now. The good news is that just as markets are cyclical, so is technology. We’re due for a new technology platform that will re-spark high- tech, high-risk investments—as well as the big returns and exits that go along with it.
Historically, we’ve seen a major new tech cycle every 10 to 15 years that brings along a new era of computing: we saw this with personal computers in the 80s, the Internet in the 90s, and now with the smartphone era. If this 10 to 15-year pattern continues to hold true, we should be entering the growth phase of the next big era in just a few years. That means that we should already be in the early stages of the next big era.
The big question for investors is predicting what this next big computing platform will be. It’s possible that it will be one of the large cloud platforms, like Amazon Web Services (AWS), Google or Microsoft Azure. Certainly, the next platform will be driven by a few key computing trends: the rise of Artificial Intelligence, computing everywhere, microservices for faster development cycles, and conversational interfaces and voice-driven UI.
So now that we have a lay of land, where does that leave us? Here’s how to thrive in the current VC environment:
- Go beyond borders: Just as we expect our Canadian start-ups to play on a global stage, we as investors need to think beyond domestic opportunities. Today, Canadian LP money invested in Canadian start-ups is too high a percentage of our overall VC activity.
- Raise your expectations: By looking beyond their backyard (and even beyond the U.S. to the rest of the world), investors see a greater number of opportunities, and thus gain a better appreciation of what “great” looks like—in terms of companies, talent, management teams and ideas.
- Specialize: Canadian VCs need to develop an area of expertise that’s not based on geography (i.e., focusing on SaaS companies or hardware rather than Vancouver or New Brunswick). Thematic and thesis-driven investors can bring more value to their portfolio founders, helping them navigate the specific challenges in their industry.
- Be fearless: The Canadian VC community is picking up steam, but now we need to think big. We need to look globally and be ready to take the high-tech, high-risk opportunities to catch the next computing wave.
*Boris Wertz is the founding partner of Version One Ventures, an early-stage venture firm based in Vancouver and Silicon Valley.