Technology & Life sciences Connecting Startups to VC Funding in Canada introduction
While the majority of respondents have accessed early seed investment from friends, family and angel investors, many have yet to tap into venture capital the financing needed to help companies significantly expand operations and grow. May 2016 2
Introduction Much like the individual companies that comprise it, the startup community in Canada is ready for the next stage of growth. It is estimated that there are between 3500+ active tech startups in Toronto alone. The federal government is looking to build on this momentum with its $800 million innovation fund, geared to creating an ecosystem of support for startups in the renewable energy, life sciences and technology space. There are certainly a growing number of success stories, including D2L, Hootsuite, Kik, and Shopify, to name a few. It is equally true that when it comes to innovative ideas and research, Canada punches above its weight class. The challenge is turning those ideas into commercially viable products/services and growing those businesses here in Canada. In order to better understand the startup community and its unique needs to grow to the next level, BDO used the opportunity of its first annual Connecting with Venture Capitalists Pitch Day and Networking Session to survey its audience of founders. While the majority of respondents have accessed early seed investment from friends, family and angel investors, many have yet to tap into venture capital the financing needed to help companies significantly expand operations and grow. According to the Canada Venture Capital & Private Equity Association, in 2015, $2.25 billion in venture capital (VC) was invested in Canada via 536 deals a 10-year high. The trend is expected to continue thanks to $2 billion raised by venture investors last year. Bottom line: It s a good time to be a startup in Canada particularly for those that are ready to grow to the next level. Research Methodology and Demographics Connecting Startups to VC Funding in Canada was prepared by BDO, based on the results of a survey conducted with participants at BDO s first annual Connecting with Venture Capitalists Pitch Day and Networking Session. To learn more about this and upcoming events and connect with fellow entrepreneurs and VCs, join BDO s Connecting with VCs LinkedIn group. Respondents were largely in the life sciences (23%) and information technology and hardware industries (15% respectively). The companies are early on the path to commercialization and, with the majority (47%) in the prototype stage operating on pre-seed/angel (79%). More than half work at companies with fewer than five employees. For more detailed demographic information, see Appendix A at the end of the report. May 2016 3
What is the current stage of your company? Canada s startup community is at an inflection point. Early stage startups are poised to take their ideas from prototype to final product just as venture capital investment in Canada is growing. In addition to Canadian VC funds, U.S. firms have also discovered the tech incubators and accelerators taking hold across Ontario. In both cases, investors are looking for the next big deal. For startups, these firms and the money they bring represent much needed transitional, providing an essential runway to take these businesses from product to commercialization and revenue growth. What is the current stage of your company? What sources of have you used to finance your company? To this point, respondents have relied on family and friends (54%), personal savings (38%), angel investors and tax/government incentives such as the Scientific Research and Experimental Development (SR&ED) program (24% respectively). This reflects the size of the companies, the majority of which have fewer than five employees. These businesses are too new and represent too much risk for the banks. Interestingly, almost 11% of respondents report having used crowd to finance their business. This highlights both a sophisticated understanding of how these social media platforms work and an efficient strategy to simultaneously raise funds and gain market validation. This number will likely grow in the future as more companies take advantage of crowd to access much needed cash quickly with pre-sales, proving they have a commercially viable product. What sources of have you used to finance your company? (Select all that apply} Pre-Seed/Angel <$500K raised Seed $1.5M - $3M (first..) Seed/Extension Series A Series B Multiple VC rounds Late State/ pre IPO Private Equity Family & Friends Government Loans Tax/Government Incentives Cash Flow Venture Capital Bank Loans Angel Investors Crowd Savings Other (please specify) May 2016 4
The Role of VC What type of does your company plan to use for future growth in the next two years? The findings further support the fact that Canada s startups are preparing for the next stage of growth. Venture capital (73%), private equity (51%) and government (49%) were the top cited sources of being sought to fund the next stage of growth. Almost one third of respondents are looking for strategic alliances to help them grow. Like venture capital, strategic alliances bring more than just money to an investment. They offer advice and guidance from investors/partners who have experience and expertise growing similar businesses. Accessing these types of financing opportunities reveals an understanding on the part of the entrepreneur that it s not just about finding investors; it s about finding the right investors. Canada is at a point where technology entrepreneurs who have been successful and exited their companies are re-entering the startup ecosystem to invest those returns and share their knowledge to help other companies grow. M & A Debt Private Equity Venture Capital Strategic Alliance Government Funding IPO: Public Funding N/A Other (please specify) What type of financing does your company plan to use for future growth in the next two years? (Select all that apply) May 2016 5
What are your company s top strategic priorities over the next year (select up to three)? Financing (63%), building business partnerships and opening sales channels (54%) and getting their initial products to market (49%) are the top three priorities cited by respondents. Accessing the right capital at the right time is always a challenge for new entrepreneurs. The fact that respondents are focused on strategic partnerships to pave the way into new markets as they prepare to launch their initial products is smart business and bodes well for the broader economy. Partnerships are an important tool to help take ideas from concept to commercialization an area where Canada has traditionally lagged, for a few reasons. Often the innovation is formed in academia, which has struggled when it comes to bringing intellectual property (IP) to market. Too often, entrepreneurs run out of capital before they can commercialize and end up selling their IP to larger players, who then reap the benefit of growing strong businesses. Thankfully, the advent of organizations such as MaRS, Communitech, Spark Centre and Research and Innovation Centres are helping entrepreneurs bring their innovations to market. Improving marketing Getting Initial... Developing business.. Growing existing... Increasing R&D/ product... Reducing cost structure Exiting from business Increasing cash flow... Improving risk controls Financing/ fundraising Exiting unprofitable... Customer acquisition Setting up/ improving... Recruiting board member... What are your company s top strategic priorities over the next year? (Select up to three) HR/Talent acquisistion May 2016 6
What obstacles have you faced as a Canadian startup? Access to enough money from the right investors followed by the ability to bring on top talent both in terms of technical skills as well as leadership are the top challenges Canadian startups are trying to overcome. While the venture capital market in Canada is growing, it does not compare to the U.S., where US $58.8 billion was invested across the country in 2015 compared to just over CAD $2 billion in Canada. In addition, Canadian investors tend to be more risk averse than their U.S. counterparts a hurdle for companies introducing new technologies to the market. Another key obstacle: Canadian startups simply do not have the same resources in the form of big salaries to attract and retain highly skilled developers, programmers, ecommerce and CRM experts as larger, established companies. As a result, stock option plans play a huge role in recruitment of the best talent. In addition to the federal government s promise of an $800 million innovation fund to support the startup community in the recent budget, it is maintaining the preferential tax treatment of afforded stock option benefits. This is particularly good news for startups. Access to eneough capital Access to experienced... Access to specific IT... Access to key management Access to US customers... Access to the right source... Access to experienced... Other (please speficy) Please indicate which of the following obstacles you have experienced as a Canadian based company. (Select all that apply) May 2016 7
Hiring Practices What are the most important hiring considerations? Startups today are highly focused on hiring not just for technical expertise although that is critical for 56% of respondents but almost equally for cultural fit (50%). They have a clear sense of their values as an organization and the behaviours that will set them apart in the marketplace and drive growth. As they bring new people into the business, they do not want to risk disrupting culture. They also want to ensure new hires have the skills and ability to both scale the business and grow with it. Attracting the best people... What are the most important considerations regarding growth company hiring practices? (Select all that apply) Which group of employees or advisors are hardest to find in Canada? Top IT programmers and developers are the most difficult talent for any technology company, regardless of size or industry, to find and retain. They are highly sought after and this is true not only in Canada but globally. The opportunities for individuals with these skillsets are vast. The next most in-demand group to hire and retain: key management/executives. Many companies in the early stages aren t as focused as they should be on this level of back office leadership but it is absolutely essential to scale a business efficiently. Technology companies in particular often grow too fast and then lose momentum because they don t have the systems in place to support and sustain that growth. An experienced management team can help mitigate that risk. Which group of employees or advisors do you find the hardest to find in Canada? (Select all that apply) Cultural fit Board Right technical... Advisors Capacity to grow as company... Right soft skills Previous growth Key management team members... IT/Programmers/ Development... Marketing staff Other (please specify) Sales staff Other (please specify) May 2016 8
Exit strategies When do you plan to exit your business? The findings point to a potentially dramatic shift in the trajectory of technology companies in Canada. In the recent past, tech entrepreneurs were focused on a fast exit, selling their intellectual property to much larger players and making quick gains to move on to the next innovation. Given a lack of to commercialize those innovations, it was and can be a wise move. However, in this study, less than 3% of respondents are on that path. Instead, just over one quarter plan to exit within the next three to five years, while 35% have no plan to exit. Respondents want to build and grow their businesses as opposed to making a quick financial gain and exit. It appears they are looking to build a legacy. This is a good thing for the overall economy, which will benefit from job creation and revenue growth here at home. 0-2 years 3-5 years When do you plan to exit your business? How to Effectively Pitch for Venture Capital Make sure your pitch clearly shows investors how your product differentiates itself in the market and why they should invest in you. This goes beyond your actual product to include your team and what they bring to the table. Prove that your product has market validation and there is demand. Be clear about how much money you require and exactly how you will spend it. Articulate your end goal. Where do you want to take the business? Do you want a quick exit or do you plan to grow the business for the next 40 years? Show potential investors that you are willing to work with them and adapt. Any investor will want a say in your business because they are assuming the risk. 5 + years No plan to exit May 2016 9
Conclusion Canada s startup environment is strong and poised to take advantage of growth financing in the form of venture capital. While the amount of venture capital in Canada is growing, it is also limited. As a result, accessing capital remains the biggest challenge startups in Canada face as their financial needs move beyond what angel investors and friends and family can offer. In many ways, this is a pivotal time for technology startups in the country. It is a fact recognized by the current government in its first budget with the announcement of an $800 million Innovation Fund to help take ideas and turn them into marketable products. Commercialization is an area where Canada has traditionally lagged globally. Too often, entrepreneurs run out of money before they can build viable businesses. As a result, they sell valuable IP to larger players, who then reap the long-term benefits. While this can be a profitable exit strategy for entrepreneurs, it is clear that respondents are looking for something more. They want to build sustainable businesses and are in it for the long term. More than one third of respondents reported they have no plans to exit. This is good news for Canada, which will benefit from job creation and growing revenues. To this end, respondents are focused on finding the right and building strategic alliances to maximize dollars with insights from investors who have a proven track record building and growing businesses. Of course, startups can only achieve long-term success if they have the right investors and the best talent to help create and innovate their products and scale the business. Not surprisingly, attracting and retaining top technical and leadership talent is another key concern and challenge for startups. However, these entrepreneurs are not just looking for the best people; they are looking for the best people who fit their corporate culture. They understand that fit is what will help ensure engagement and performance. It s an exciting time both for entrepreneurs and investors as the next wave of innovative technologies hits the market and the companies behind them take root. May 2016 10
Appendix A: Demographics What is the total number of employees that work for your company? Answered:38 Skipped:1 Which sub-sector does your business best fall under? Answered:39 Skipped:0 What is your company s state of? Answered:38 Skipped:1 Less than 5 5 to 19 20 to 49 50 to 99 100 or more Enterprise software Hardware/ Equipment Information Technology Life Sciences/ Medical... Media and Communications Telecommunications Other (please specify) Idea/ Concept Beta/ Prototype Early Revenue Growing Revenue May 2016 11
To learn about how BDO can help your company with these and other challenges, contact your local BDO office or: Peter Matutat Partner National Technology & Life Sciences Leader 905 946 5470 pmatutat@bdo.ca Brion Hendry Partner 905 946 1066 bhendry@bdo.ca About BDO s Technology & Life Sciences Practice BDO s dedicated team of professionals serving the Technology and Life Sciences sectors brings you broad-based experience, in-depth knowledge and business savvy that can be critical to your success. Our professionals propose solutions to your challenges and support every phase of your growth from start-up to listed public company. The BDO T&LS team, comprised of leaders in key markets across Canada, brings together the resources of our global network of over 1,400 offices in more than 150 countries around the world. We are entrepreneurial, we understand your issues, and we are focused on providing you with exceptional client service. About BDO One of the nation s leading accounting firms, BDO provides assurance, accounting, tax, and advisory services. With strengths firmly rooted in the communities we serve, our professionals deliver highly individualized services informed by deep industry knowledge and nearly 100 years of experience serving Canada s local markets. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs. www.bdo.ca/technology BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name of the BDO network and for each of the BDO Member Firms.