Canada's Tech Ecosystem Shows Resilience Amid Pandemic
December 17th, 2020 Venture Capital
Silicon Valley Bank (SVB) is the bank of the world's most innovative companies. For more than 35 years, SVB has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centres around the world. With commercial, international, and private banking services, SVB
Silicon Valley Bank (SVB) is the bank of the world's most innovative companies. For more than 35 years, SVB has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centres around the world. With commercial, international, and private banking services, SVB helps address the unique needs of innovators.
Here's a look at Canada's performance this year with answers from Paul Parisi, who leads Silicon Valley Bank's Canadian business as Head of Canada.
How are the events of 2020, including the pandemic, affecting Canada's tech ecosystem?
The innovation ecosystem is showing resilience in the face of national and global challenges, underscoring the growing contribution of tech companies to the country's overall economy – from Montreal to British Columbia. Despite a decline in venture capital investment in Q32020, in the wake of a strong Q2 driven by government stimulus programs and VCs capitalizing their portfolios, and, according to the CVCA Q3 Venture report, venture investment in 2020 is still on track to be the second-highest ever after a record 2019. We see several positive trends that will bolster the long-term growth of Canada's innovation sector. At the top is the promise of innovation to help solve our most pressing challenges, with solutions ranging from life science to AI, fintech to edtech, and a new focus on energy and resource innovation.
Among the trends we see: Deal sizes are growing larger, and a larger percentage of those investments are going to later-stage companies, enabling these firms and their technologies to scale. In the first three quarters of 2020, $3.5 billion in venture capital investments were made, according to the CVCA. All told, VC investment in Canada has grown nearly 3x between 2015 and 2019.
What accounts for the boom in VC interest?
Capital is coming from Canadian and international investors and venture capitalists – though US participation has dropped off somewhat in 2020, these investors all want to be part of the growth story. In the first three quarters of 2020, a third came from US investors, according to CPE Analytics. While deals may be taking longer to close, especially for younger companies, entrepreneurs, and investors, buoyed by scaling companies and the government's investor-friendly position on immigration, tax credits, and incubators, are showing great confidence in the Canadian innovation ecosystem.
What's else is different about deal-making this year?
As mentioned, deal sizes are a huge one. SVB analysis shows that in the first three quarters of 2020, rounds of $1M-$10M now account for 43% of activity compared to 34% in 2019. Over the same time, rounds of less than $1M also account for 43%, but that is down from 51% a year earlier. Large growth rounds and government stimulus are fueling the shift, which is likely to continue. Bigger investments allow homegrown Canadian companies that are performing well to take the next step and start making plans to launch in the US or other international destinations when economies rebound.
Another trend I find intriguing and important: Entrepreneurs are finding themselves in the limelight more than ever to be problem solvers. The challenges we face are giving founders and investors even greater purpose to spur ever faster innovations. We find aspects of fintech and AI blending across all sectors in a world racing toward go-to-market digital solutions. There is an opportunity to build something lasting and meaningful in Canada, and some positive peer pressure from entrepreneurs to not exit too early, and instead see if you can build some category leaders.
Several Canadian provinces have growing innovation clusters. How will greater geographic diversity change the ecosystem?
Much has been commented on how the tech ecosystem is expanding beyond the Toronto-Waterloo corridor to other provinces. We are hearing from investors that they are looking farther afield for deal flow as geographic proximity is not as important as it was before. And we have got the numbers to prove growing geographic diversity is happening. In fact, eight of the largest 20 tech deals in the first half of 2020 were outside the Toronto area.
SVB analysis also finds that while the Toronto area still accounted for nearly half of all Canadian VC deals in the first three quarters of 2020, British Columbia, and Quebec each laid claim to nearly one in four deals. In BC, this growth is driven in part by sectors such as edtech and esports, which are not among the better-known Canadian sector niches of AI, life science, and energy and resource innovation. Recognizing the region's growth in activity, in October SVB named the bank's first director of technology banking for Western Canada, based in Vancouver.
Montreal is already a strong hub and the government is encouraging new investment in Alberta. Sector diversity also makes for a healthier ecosystem.
How has access to talent been affected by 2020 challenges?
Canada's talent base is strong, and pandemic-related lifestyle changes are leading to more Canadians heading home to join existing businesses or launch new ones. And, for those who may have been considering leaving Canada, there is less of a need to go.
Has it been the US political climate or COVID? Probably both, but the idea that somebody must be physically located in Silicon Valley, Boston, or wherever else is no longer required and I believe that will be a sustainable trend in the long term. Many companies in the tech and innovation space had already begun to transition to virtual teams well before COVID-19, because the search for top talent often requires that teams be disbursed in various locations.
Highly skilled immigration has stalled during the pandemic, but the Canadian government continues to be a strong backer of policies to attract foreign talent and we expect it to pick up when health concerns subside. The Canadian innovation ecosystem has blossomed in part because of our open-door policy encourages the world's brightest minds to set up business here.
What advice is SVB giving companies as you look to 2021?
Running any kind of business in these times is not easy, and growing one is even harder. If nothing else, the past year has reaffirmed the importance of how to use the levers at your company's disposal – whether that be equity, venture debt, reducing cash burn – to achieve the best outcomes. As evidence of our maturing ecosystem, Canadian founders and investors are gaining a deeper understanding of how to manage in uncertain times and plan for future opportunities. Learning to adapt will benefit companies in the near term and beyond. All in all, these foundational blocks point to long-term success. Looking ahead to 2021, we are optimistic that the fundamentals driving Canada's innovation ecosystem will continue, and SVB will be here to support this amazing growth story.
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