Canadian business owners will tend to say that there is not enough venture capital in the country. On the one hand, it seems logical that a Canadian start-up would have an easier time raising capital in the United States , given the abundance of venture capital south of the border.
On the other hand, Canadian venture capitalists will tell us that there are not enough fast-growing startups to make venture capital investment in Canada worthwhile. Do you know of a fast-growing Canadian startup that has not been able to raise capital recently? We don’t know of any.
What is the reality? Is Canada lacking venture capital, or are Canadian startups not growing fast enough? The answer could help us determine where we should focus our efforts to create a viable venture capital ecosystem, as well as measure the effectiveness of the ecosystem to date.
In this series of blog posts, I will share some of the insights we have gained as we try to answer these questions. I hope to pose additional questions that will help us continue to build a world-class venture capital ecosystem.
This study was conducted before the onset of the COVID-19 pandemic and its results do not take into account the changes that the crisis has brought about. However, we believe that the results of the analysis remain relevant in the current context. In particular, they highlight the strengths and weaknesses of the Canadian venture capital ecosystem, data that could prove useful in developing policy aimed at creating a more competitive ecosystem in the context of the recovery.
Comparing Canada's Venture Capital Performance with Other Countries
To begin, we looked at how the Canadian VC ecosystem performed relative to other major ecosystems. While we are very proud of the record levels of VC investment in Canada in 2019 (Chart 1), we also understand that this is largely driven by growing investment in the global VC ecosystem (Chart 2).
Canada's Venture Capital Performance, 2015-2019
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Canada's Venture Capital Performance Compared to Other Countries, 2015-2019
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To get a true picture of Canada's performance relative to other countries, we need to analyze the data in depth. Furthermore, since it takes a long time to transform a start-up into a large company, we need a 10- to 20-year view of how our ecosystem is performing 1 .
Figure 3 shows the percentage of companies in each country founded in the last 20 years that are now valued at more than US$ 250 million (for the purposes of this analysis, let's call them " Success Stories " 2 ).
Figure 3: Percentage of venture capital-backed companies that reached a valuation greater than US$250 million
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Of all companies founded since 2020, Canadian companies stockholder database rank at the bottom of the list, with a score of 0.5%, compared to 2.9% for U.S. companies. In other words, if you had founded a company in Canada with venture capital in the last 20 years, you would have had a 0.5% chance of reaching a valuation above US$ 250 million . Your chances would have increased sixfold if you had founded your company in the United States , and threefold in the case of Israel.
We repeated the analysis for all companies founded in the last 10 years and found no notable differences in the results.
If you’re a Canadian business owner, don’t let these numbers discourage you. As we’ll explain in upcoming blog posts, there could be significant benefits to your business being based in Canada.
Is the Canadian venture capital ecosystem effective?
We then measured the efficiency of our venture capital ecosystem (Figure 4). If we assume that a venture capital ecosystem is a machine that creates startups, we can assess the efficiency of these machines by comparing the risk capital we need to inject into the ecosystem to create a success story.
Figure 4: Venture capital invested by companies with a valuation greater than US$250 million
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Again, Canada is at the bottom of the list. For each success story since 2020, US$ 1.7 billion has been injected into the Canadian ecosystem, compared to US$1 billion in the United States , US$ 1.1 billion in Israel, and US$ 1.2 billion in France. In other words, the Canadian ecosystem uses 55% more venture capital per success story than the American ecosystem.
There is clearly a problem. Canada's success rate is lower than that of its peers, and our ecosystem is relatively inefficient when it comes to investing in highly successful companies.
Assessment: Is it the right criterion for evaluating success?
Canada does not have a great track record when it comes to companies achieving valuations above US$ 250 million , but the country may be better placed when it comes to smaller exits . 3
Figure 5 compares the proportion of withdrawals over US$ 50 million that occurred in different valuation ranges for different countries . 4 In the United States , for example, 20% of withdrawals were for a deal value between US$ 50 million and US$ 100 million , 34% were for a deal value between US$ 100 million and US$ 250 million , and 45% were for a deal value over US$ 250 million .
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We find that while the Chinese and US VC mega-ecosystems have significantly higher numbers of exits above US$ 250 million , the opposite is true for Canada, where exits are mostly in the US$ 50-100 million range.
The above analysis considers all venture-backed companies that were founded in the last 20 years. We have repeated the analysis for all companies founded in the last 10 years (Chart 6). This new analysis shows an even stronger trend towards the US$50-100 million range for exits in Canada.
Figure 6: Size of withdrawals meeting criteria by country since 2009
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This might suggest that, given the size of our ecosystem, being valued above US$ 250 million might not be an adequate indicator of success. How does Canada fare if success means being subject to a withdrawal of more than US$ 50 million ?
Canada is very good at small withdrawals
If we narrow the benchmark for success, Canada appears to be performing better than other major venture capital ecosystems. If the metric for exit success is set at more than US$ 50 million , Canada’s success rate is only half that of the United States .
Figure 7: Start-up success rates by various benchmarks
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What’s more, the efficiency of our venture capital ecosystem is said to be world-class. When we use a benchmark of over US$ 50 million for withdrawals, we are almost 60% more efficient than the United States . Only Israel and France are more efficient.
Figure 8: Venture capital invested per success story company by various benchmarks
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We know full well that a US$ 50 million cash out is not an attractive outcome in many cases, especially for later-stage investors. However, early-stage investors who would be happy with cash outs of US$ 50 million or more should take a closer look at the opportunities in Canada. Their money could create much more value here than in the United States or almost anywhere else in the world.
That said, the question remains: Why are Canadian exits so heavily in the US$50-100 million range compared to other major VC ecosystems? And while Israel presents a similar picture, it also outperforms Canada by two to three times on the various other metrics we analyzed for this blog. How can this be explained?
We will try to answer this and other questions in part two of this series.
1. For each of the tables below , it is important to highlight three elements:
A. We ran each analysis twice: once for all firms founded since January 1 , 2020, and once for all firms founded since January 1 , 2009. We wanted to ensure that our findings were independent of time horizon. We found no significant differences in results when time horizon was taken into account.
B. We only included companies that were backed by angels, venture capital funds, or business accelerators at any point in their existence. Since we are measuring the effectiveness of our venture capital ecosystem, we did not want self-funded or spin-off startups to impact the results.
C. All data were collected in October 2019.
2. We define a “ Know Yourself Success Story” as a venture-backed company with a valuation of at least US$ 250 million . We chose success stories over unicorns (companies with a valuation greater than US$1 billion) because the number of unicorns in a market such as Canada would likely be too small. Any errors in the data would have had a significant impact on our conclusions ( i.e., if Canada actually had four unicorns rather than the assumed three, this would represent a 25% discrepancy in our results). If, on the other hand, over a sufficiently long period of time, Canada had 20 to 30 success stories, any errors in our data would have a lesser impact on our conclusions.
3. Note the difference between companies that have achieved a valuation above a certain amount and companies that have been squeezed out, which were valued above a certain amount. The squeeze-out amount refers to the amount of capital a company received in a squeeze-out transaction, usually an initial public offering (IPO) or a merger and acquisition. The valuation refers to the value of a company after a financing transaction. For example, a start-up company that was sold to a larger company for $100 million is said to have squeezed out that amount. On the other hand, a start-up company that raises $10 million for 10% of the equity would have a valuation of $100 million ( $ 10 million times 10 ).
The data in this blog is taken directly from PitchBook unless otherwise noted. While we understand that PitchBook data may contain errors, we believe that the results of our analyses should be relevant to your decision-making and that PitchBook is the best source we have for understanding macro trends in global venture capital markets.
