Seed stage financing in Canada

Back in August 2007, Heri wrote about changes to early-stage financing in Canada. His thesis is that Canadian investment companies tend to be later stage and much more capital intensive. There doesn’t seem to be the support of new initiatives like seedcamp, Techstars and YCombinator to support early-stage entrepreneurs and venturing. The reduced initial startup infrastructure costs has been covered by Daniel Drouel and Joe Kraus.

I thought I’d start with the CVCA members list (also on Gagglescape) looking at IT investors who explicitly make seed and early-stage deals. Here’s what I could find:

There seems to be a disconnect between early-stage tech (or do we mean web) entrepreneurs and investors in Canada. There is apparently money available. There are apparently investable ideas. What is the problem? One of the David’s (David McIntyre or David Berkowitz) at Ventures West suggests that we do too many seed deals when compared to the US and Europe.

Let’s assume that capital isn’t the main issue. Then what is it? Access to talent? Customer acquisition costs? Customer acquisition time frames? Possible exits? I don’t know. Here’s a hypothesis with no data, no research, just ill-informed opinion. A mad guess. Maybe it’s the lack of a web media and advertising stack in Canada. The relatively small Canadian population means that the market is already dominated by Canadian incumbents and US players. Thus making it difficult, though not impossible as StumbleUpon is proving, to build a large enough “local” audience to attract significant advertising dollars. This leaves local players to build their own tools, e.g., OurFaves is a Torstar Digital, or to look beyond our borders for markets, e.g., Kaboose acquired Bounty.com for UK audience. This means that Canadian startups will look more like Freshbooks and less like Facebook or Reddit. I need to spend some more time noodling on this.

BTW did anyone else not realize that BlogTV is a Israeli company.

10 thoughts on “Seed stage financing in Canada”

  1. <p>Off the top of my head:</p><br />
    <br />
    <p>1 & Tax issues keep Americans at bay, to some extent.<br />2 & Lack of exits by Canadians dampens enthusiasm and awareness generally.<br />3 & Many Canadian investors still haven't found their nerve since Bubble 1.0. OK, I wasn't going to say nerve, but you know what I mean. Some VC's have told me that LPs just aren't allocating to this sector now.<br />4 & We're still lacking serious depth of geek mgmt talent here. We make up for it with nerve and enthusiasm to some extent, but we don't have the teams to inspire investor confidence that our friends down south have. This is, of course, a vicious circle.</p>

  2. <p>Oh, and to justify the startup costs of creating and to pay the operating costs of managing a seed fund you need serious deal flow & lots of depth and a track record of exits. So I think for the time being we'll see other approaches & like <a href="http://www.mapleleafangels.com/&quot; target="_blank">Maple Leaf Angels</a> & here.</p>

  3. <p>Hi David, </p><br />
    <br />
    <p>Here in Quebec, I only saw one early seed stage financing this year, which is Garage Canada financing Praizedmedia for about 1$ million.</p><br />
    <br />
    <p>I still think there isn't definetely not enough seed investment in Canada; I thought back then there wasn't enough investors, but your list shows otherwise. </p><br />
    <br />
    <p>I am not sure the size of the audience matter. You mention Israel which is an excellent example, the country is well known for its technological innovation and startups, even though there is a very small population. </p><br />
    <br />
    <p>I was thinking about the entrepreneurship intensity. Having entrepreneurs, investors, engineers, etc. gathered, intensly exchanging in one place, working relentelessly on new projects is what's happenning in Silicon Valley or Israel. Here in Canada, technological entrepreneurship is scattered all around the country and it's difficult for an entrepreneur to find new ideas, implement them, and get (financial) support. </p><br />
    <br />
    <p>Hopefully, democamps, barcamps (thanks btw), and tech blogs have the power to change this.</p><br />
    <br />
    <p>but this is a wild guess too.</p><br />
    <br />
    <p>happy 2008!</p>

  4. <p>Interesting post, but this isn't a Canada-specific issue. This is an issue with early stage risk capital, and it relates to the fact that most venture firms now manage so much money that it simply doesn't make sense to invest in small deals. If you have a billion dollar fund, you can't afford to invest in seed rounds. Let's say you have a 10X exit on a $2M round (~10X the size of the average seed round according to most angel group statistics)-congratulations, you've moved your assets ~2%. It just doesn't make sense to do these deals, hence the move toward larger, later stage deals with a clear path to liquidity. This capital gap is being filled by some of the names you mentioned, along with angel groups, which are getting more and more organized and are starting to gain a good deal of negotiating power due to the VC movement. The <a href="http://www.angelcapitalassociation.org/&quot; target="_blank">Angel Capital Association</a> has some great statistics on this, and John May (<a href="http://www.newvantagegroup.com/&quot; target="_blank">New Vantage Group</a>) does an excellent presentation on the the size of this problem in early stage investing.</p>

  5. Off the top of my head:

    1 & Tax issues keep Americans at bay, to some extent.
    2 & Lack of exits by Canadians dampens enthusiasm and awareness generally.
    3 & Many Canadian investors still haven't found their nerve since Bubble 1.0. OK, I wasn't going to say nerve, but you know what I mean. Some VC's have told me that LPs just aren't allocating to this sector now.
    4 & We're still lacking serious depth of geek mgmt talent here. We make up for it with nerve and enthusiasm to some extent, but we don't have the teams to inspire investor confidence that our friends down south have. This is, of course, a vicious circle.

  6. Oh, and to justify the startup costs of creating and to pay the operating costs of managing a seed fund you need serious deal flow & lots of depth and a track record of exits. So I think for the time being we'll see other approaches & like Maple Leaf Angels & here.

  7. Hi David,

    Here in Quebec, I only saw one early seed stage financing this year, which is Garage Canada financing Praizedmedia for about 1$ million.

    I still think there isn't definetely not enough seed investment in Canada; I thought back then there wasn't enough investors, but your list shows otherwise.

    I am not sure the size of the audience matter. You mention Israel which is an excellent example, the country is well known for its technological innovation and startups, even though there is a very small population.

    I was thinking about the entrepreneurship intensity. Having entrepreneurs, investors, engineers, etc. gathered, intensly exchanging in one place, working relentelessly on new projects is what's happenning in Silicon Valley or Israel. Here in Canada, technological entrepreneurship is scattered all around the country and it's difficult for an entrepreneur to find new ideas, implement them, and get (financial) support.

    Hopefully, democamps, barcamps (thanks btw), and tech blogs have the power to change this.

    but this is a wild guess too.

    happy 2008!

  8. Interesting post, but this isn't a Canada-specific issue. This is an issue with early stage risk capital, and it relates to the fact that most venture firms now manage so much money that it simply doesn't make sense to invest in small deals. If you have a billion dollar fund, you can't afford to invest in seed rounds. Let's say you have a 10X exit on a $2M round (~10X the size of the average seed round according to most angel group statistics)-congratulations, you've moved your assets ~2%. It just doesn't make sense to do these deals, hence the move toward larger, later stage deals with a clear path to liquidity. This capital gap is being filled by some of the names you mentioned, along with angel groups, which are getting more and more organized and are starting to gain a good deal of negotiating power due to the VC movement. The Angel Capital Association has some great statistics on this, and John May (New Vantage Group) does an excellent presentation on the the size of this problem in early stage investing.

  9. <p>Another aspect of concern for the Venture Capital industry in Canada is Labor Sponsored Funds. Since LSFs play a dominant part in Canadian Venture Capital industry, various issues surrounding LSFs can be directly attributed to some of the differences in US vs Canada when it comes to startup financing. See commentary published by the C.D.Howe Institute in this topic, where Prof. Douglas Cumming makes an argument for better Canadian policy for Venture Capital: <a href="http://www.cdhowe.org/pdf/commentary_247.pdf</p&gt; " target="_blank"><a href="http://www.cdhowe.org/pdf/commentary_247.pdf</p>&quot; target="_blank">http://www.cdhowe.org/pdf/commentary_247.pdf</p></a&gt; </a>

  10. Another aspect of concern for the Venture Capital industry in Canada is Labor Sponsored Funds. Since LSFs play a dominant part in Canadian Venture Capital industry, various issues surrounding LSFs can be directly attributed to some of the differences in US vs Canada when it comes to startup financing. See commentary published by the C.D.Howe Institute in this topic, where Prof. Douglas Cumming makes an argument for better Canadian policy for Venture Capital: http://www.cdhowe.org/pdf/commentary_247.pdf

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