Canada has a lot of technology talent: it's a hub for innovative game design and clean tech ventures, for example. It has its share of smart software companies, but when it comes to helping them all grow, it needs help.
In Canada, venture capital firms invested $1.9bn during 2014, representing 379 deals, according to the Canadian Venture Capital Association (CVCA). That sounds impressive, until you look south of the border to the US. There, venture capitalists invested $48.3bn in a whopping 4,356 deals, according to PwC.
The relative size of the countries doesn't account for the disparity. Canada's population is 11 percent the size of the US, and its GDP is 10.9 percent. Yet VC firms north of the border invested just four percent of the capital that the US did, in 8.7 percent of the deals. Why?
There just simply isn't enough Canadian money around for high-growth, high-risk firms, said the CVCA's CEO Mike Woollatt. "Without a doubt it's true that VC is underfunded," he said, adding that he has seen a shortage of capital after the early-stage rounds, in particular.
Particularly telling are the small average deal sizes in the Canadian market.
"Our members are trying to focus on staying in the game in these companies for longer periods of time, and as a result we need bigger VC funds being able to raise funds easier," he said.
According to the CVCA, Canada's biggest VC investment in 2014 was in education software company D2L, which it said raised $91.3m. That didn't even make what PwC calls a 'megadeal', the threshold for which is $100m. The US saw 40 of those in 2014, with two investment deals topping $1bn each.
In the face of such financial muscle, smaller VC funds can find it difficult to stay the course and support a company in the long term, said Mike Satterfield. He is general partner at Yaletown Venture Partners, the seventh most active VC firm in Canada. His firm invested $52.6m in capital in 2014.
"There are some high profile financings that happened where US investors came in and made spectacularly good investments that were not that great for the early investors in the company," he said.
Satterfield has experienced this himself. An early stage investor can retain a high level of equity in a company, but when large US VC firms swoop in, they can invest more money than many Canadian VCs can afford to stay in the game. That dilutes the Canadian investors' original stake.
"You need a smaller number of bigger funds that have the financial reserve to tough it out during further financing," he said.
Satterfield sees a broad, systematic problem with Canadian VC. Companies which are unable to raise money from the US may find themselves unable to generate the kind of capital that they need from companies north of the border. That makes it harder for them to become a leader in their space, which reduces the size of their exit.
The biggest Canadian exit in 2014 was Kinaxis, which supplies SaaS supply chain solutions. It went public, raising a respectable $100.6m. In the US, LendingClub raised $5.4bn in its IPO, and of course Facebook stumped up $22bn for WhatsApp.
So it's true, compared to the US, Canadian companies are like damp fireworks. They typically go off with a polite pop instead of a highly lucrative bang. The reason they fizzle early is a lack of financial fuel.
One problem could be a lack of interest among the private capital companies that are sources of money to VC firms in Canada. These companies, including pension funds and insurance firms, have heavyweight capital to throw around.
In many cases, though, the money goes to sectors that they know and trust to deliver a solid return. The most popular sector for private capital investments - energy - got 27 percent of the money last year. Canada's oil business takes a lot of capital investment.
Where is the tech industry's expansion-stage capital likely to come from? The Venture Capital Action Plan (VCAP) could make a difference, said Satterfield. In January 2013, the Canadian government earmarked $400m in funds to help kickstart high-growth Canadian firms.
The money was to be distributed via 'fund of funds' companies (consider them a kind of wholesaler for VC capital). They in turn dish out the money to VCs, who then funnel it into small firms with lots of potential.
It isn't a completely free ride. The private sector must pile in two times the capital that comes from the government.
In 2014, fund of funds money contributed 15 percent of the $1,166m raised by VCs, with 'government' (representing other government programs) accounting for another 22 percent. Clearly, the government is turning the crank for high-risk, high-growth company funding.
"We will see the full impact in 2015," said Boris Wertz, founder of Vancouver-based early-stage VC Version One, who said that VCAP will help bridge the funding chasm. "That will mostly go to series B companies," he predicts.
Some success stories
Austin Hill doesn't really care which side of the border his money comes from, as long as it finances his development. The Montreal-based serial entrepreneur recently scooped up $21m in funding for Blockstream, a company that promises to enhance the blockchain, a security technology that underpins bitcoin. He wants to enable a new generation of developers to use blockchain-style technologies for other things.
"There are investors like OMERS Ventures who are making strong, big bets on great Canadian companies who have become leaders in their fields," said Hill. He got his funding from US VC firms run by the likes of Google's Eric Schmidt and Yahoo founder Jerry Yang.
"The new AirBnBs in terms of success stories are companies like Shopify, Freshbooks, and Hootsuite, and they have been ignored by early stage VCs, but OMERS and other US investors are now investing in them strongly," argued Hill.
OMERS Ventures is the venture capital arm of large Canadian pension fund OMERS. John Ruffolo, the VC's CEO, describes the firm as a lifecycle investor.
"From a Canadian perspective, we're the most deep pocketed late stage investor," he said. "That gets high visibility, but what people don't see is that we're also making a lot of smaller, earlier-stage bets."
OMERS Ventures invests in areas where it has deep experience. That includes cybersecurity, advertising technology, and the Internet of Things.
A changing landscape
So Canadian money is there for companies if they can get through a dearth in mid-stage funding. And the landscape for this expansion capital is changing.
Satterfield argued that 20 years ago there was no venture capital to speak of in Canada. The country has come a long way in a short time, he muses.
"If you look at what it takes to make it happen, you have a groundswell: Entrepreneurial companies, anchor companies that spin off, people with commercial ideas, terrific education system for technical employees - you have lots of the right ingredients here," he said, adding that there is nothing broken in the Canadian funding system.
For now, Canadian firms will feast on a relatively rich market for early-stage funding, and may go south for mid-stage money should it not be available north of the border. But in the longer term, things may change. Satterfield said: "It strikes me as reasonable that priming the pump will make things happen."