Whether you get your ancient history from the Old Testament or CBC Radio’s Fireside Al Maitland, you’ve likely heard of the magi, the Persian wisemen who inspired Biblical scholars.
When it comes to tech, Ottawa has its own version of the magi, although they don’t date even as far back as the glory days of the National Capital Region’s tech boom in the 1980s and early 1990s.
Ottawa native Tyler Nelson comes the closest, having been a member of the executive team that maneuvered BlackBerry Mobile into the lead in the race to establish mobile telecommunications as the new business standard. Since then, Nelson has helped found and grow numerous enterprises, including Miami-based Ligo Partners, where he’s a venture partner, and Consero Global of Austin.
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Code Cubitt, who works as managing director of Ottawa-based venture capital and private equity company Mistral Venture Partners, began his career with the data networking pioneer Ciena and has since developed a long list of board memberships and involvement with various companies in Canada and the U.S.
Executive vice-president of BDC Capital, Jérôme Nycz, has been with the federal business development bank for 21 years, following stints with the federal government as an economist.
Together, the three men have watched as the fortunes of the Ottawa region’s tech companies have fluctuated and the types of investors have shifted.
When Nelson examines the current state of the local start-up landscape, he sees a new type of early stage investor, one that’s more savvy and organized.
“It’s easier today for early stage businesses trying to validate a minimal viable product to go and find the venture capitalists,” he says. “In absolute numbers of early stage investors, the market has grown dramatically. We have new segments of investors who are becoming professional. Family offices like Ligo Partners have become incredibly viable and competitive sources of early stage funding — competing with, and sometimes out-competing, traditional venture firms.”
Cubitt agrees the power dynamic has shifted toward investors, saying there’s more time to get deals completed.
“That’s a good thing for investors,” he says. “It means we can develop more conviction and spend more time getting to know companies before we invest. Pricing has become more investor-friendly, but there’s no shortage of problems to solve, or technology and paradigm shifts.”
These factors combine to create a positive environment, says Nycz, pointing to the amount of funding that’s available.
“There’s never been as good a time to secure financing,” he says. “Ten years ago, VC investment in Canada was about $1 billion a year. Last year (2021), we hit the high-water mark, despite two years of COVID, at $15 billion of committed capital to the asset class.”
Like a proud parent, Nycz says local investment is moving into its teen years in terms of the ratio of GDP to VC dollars, with Canada now ranking in the top three in terms of asset class development.
“Today, we’re seeing early stage investment funds, stage-up funds and continuation vehicles to look after high-performing companies in the portfolio,” says Nycz. “You’re seeing creation of special entities so that they can continue to fund the growth of these companies, which is a far cry from five years ago, when people would just bail out, sell the company early and not really generate the anticipated wealth factor.”
Looking ahead, Nycz forecasts major change, in terms of the source of capital and where the money is going.
“Looking back to the mid-‘90s, you had a lot of tech activity in the region,” he says. “Government was a good buyer of technology coming from tech companies. Now, with COVID being a factor, you’re seeing increased diversity of portfolio companies and distance becoming less relevant than in the past. You’re seeing a lot of U.S. investors who were only involved in late-stage investment with well-known companies in Canada entering the Canadian asset class at entry levels.”
Cubitt is also bullish where U.S. investors are concerned.
“A big chunk of that is investors getting tired of the Silicon Valley pricing and so they’re coming to Canada,” he says. “Some of that is the maturation of our ecosystem, where there are a lot more seed funds and just Canadian funds in general that are mature and at scale. I don’t think we have a funding problem. I think anybody who says that we do has a strategy problem. I think good ideas will always get funded and there’s more places than ever to get it these days.”
Nelson agrees, adding that, while there is a lot of “new” money around, the methodology required to find it and tap into it hasn’t changed.
“There are no novel approaches,” he says. “Raising capital is a very boring process. It’s a numbers game. It’s methodical and it’s a grind.”
He says the grind is exacerbated because there are so many places to look for investment.
“There are so many wallets you could tap,” he says. “What’s the right combination of wallets or funding models? You’ve got venture debt, growth equity. You have early stage, angels, family offices, VCs. It’s finding the right combination that matters.”
Tapping the right wallets is one thing; meeting the demands of the wallet owners can be another matter.
At some points in the past, companies in growth stage needing money had to give up control. In today’s market, Cubitt says that, while board seats may still be at stake, early stage investors are showing little interest in gaining actual day-to-day control of nascent companies.
“Early stage investors have no interest in controlling these companies. For example, I sit on about a dozen boards. I have no interest in running any of those companies; I don’t have the time or the skill set. So I have no interest in pushing out a CEO or influencing what they do. As investors, our goal is to find operators that know what they’re doing and supplement them, not replace them.”
One trend Nycz calls out is an increase in large corporations — both homegrown and from the U.S. — moving into the market, providing more liquidity and more opportunities for founders and early stage investors to invest in other pursuits.
“Some of the U.S. corporates have been able to write cheques up to $200 million to some of these Canadian companies, enabling the early investors to take some money off the table. We’ve got tremendous momentum and there’s still a lot of dry powder in the market. I think valuations might have plateaued. We’re going to see repricing of portfolio companies and that will have an impact.”
While Nycz sees unexploded gunpowder, Cubitt sees an enormous elephant, one that’s large enough to contain the estimated $300 billion of venture capital he believes is looking for a home.
“There’s going to be another wave of crazy valuations,” Cubitt concludes. “There’s a supply/demand equation to consider. On the supply side, there’s that $300 billion of venture capital that’s been raised over the last several years. Roughly a sixth of that will get invested every year, according to the status quo. On the demand side, the number of entrepreneurs looking for capital has grown faster, so the growth of late-stage demand for capital is far outstripping the growth of late-stage supply of capital. Another way to think about this: for every dollar of demand, 10 years ago, there was $2 of supply from the venture industry. Today, for every dollar of demand there is a dollar of supply.”
Knowing that, he says, the smartest entrepreneurs are looking for funding on global markets from the beginning. He says there are many seed funds in the U.S. and farther afield looking to invest in Canada and taking advantage of those sources will require companies to not just look outside the country for funding, but also for ways of taking their products there, as well.
“The best entrepreneurs,” Cubitt says, “are now not just thinking about getting across the border with their fundraising, but also with their product scope and their ambition. Companies need to be built to go global out of the gate, as opposed to just serving the Canadian market and thinking that will attract capital.
“The next couple of years are going to be terrific if you’ve got fresh capital. Now is the time to be deploying it.”
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