Canada’s red-hot technology sector smashes venture-capital funding record set in dot-com bubble

Canada’s surging technology sector has set a full-year record for venture-capital fundraising after nine months, surpassing the previous high set during the dot-com bubble.

Preliminary figures provided to The Globe and Mail by market data company Refinitiv show that, as of Wednesday, 427 companies had raised a total of $10.92-billion in venture capital in 2021.

That’s already more than the prior high of $7.57-billion set in all of 2019. But taking into account inflation, 2019′s total did not surpass the record set in 2000. That year, at the peak of the original internet bubble, companies raised $6.71-billion in venture capital, equal to $10-billion today. It’s a record that fell just this past month, according to Refinitiv.

Driving this year’s performance has been a spike in the number of $100-million-plus rounds – 34 this year – nearly triple the record of 12 set in 2019. It has come in companies across a swath of tech subsectors, including online travel, education, finance and health care; small business and enterprise software; semiconductors; cryptocurrency; and precision farming. Average deal sizes have nearly doubled, to $23.4-million from 2019′s $12.4-million.

The record funding levels are due in part to heightened investor interest in technology prompted by the broad-based accelerated pace of digitization during the pandemic. Increasingly aggressive foreign investors such as Tiger Global and Softbank have also proactively offered promising companies big dollars at high valuations and fast closings. Several companies have raised funds twice in a year after such aggressive courting, despite not needing money.

But it also reflects a maturing of Canada’s technology sector, which was scarred a decade ago by the demise of Nortel Networks and BlackBerry’s decline. Access to capital for startups was scarce, and venture capitalists pleaded with governments for financial aid. Domestic tech companies were underfunded and sold out to foreign buyers at bargain prices. The few local startups with promise were told by venture capitalists they had to move south.

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But a new wave of Canadian entrepreneurs started building digital companies, taking advantage of trends that included the mass adoption of smartphones and social media, the shift to cloud-based software and commercialization of artificial intelligence. New Canadian venture-capital firms made bets that generated returns on par with top U.S. funds. Governments committed funds to venture capitalists who financed Canadian startups.

Today’s success “is the result of a paradigm shift in the mind of entrepreneurs and investors, with strong government support and initiatives,” said Senia Rapisarda, managing director of HarbourVest Partners, a financier of Canada’s tech sector.

While many companies failed, stumbled or sold out, a significant crop have reached the scale and size to attract increasingly larger financings and valuations, and emerging as global players or industry disruptors. As such, they are attracting levels of funding and valuations more common to hot U.S. startups.

“Valuations have moved much more closely to where U.S. valuations are, and that’s really the influence of U.S. investors coming into our market,” said Alison Nankivell, senior vice-president of fund investments with BDC Capital, an arm of Business Development Bank of Canada. “It’s partly a catching up. … I think we’re all a bit taken by surprise how quickly they’re moving.”

Concerns are growing that valuations are too high, as they were in 2000, and that many investors could retreat if valuations crashed. But many of the emerging technology stars this time have more substance – although many aren’t profitable – and technology is more pervasive in all corners of life.

“In 2000, it was the early stages of the internet, there were few sound businesses, it was clearly a bubble,” said Version One Ventures general partner Boris Wertz, one of Canada’s most successful seed investors. “The biggest lesson of the past decade is these tech markets are actually much, much larger than we ever thought. COVID-19 has accelerated all that.”

Mr. Wertz added: “When it comes to valuations, yes, they’re high. But everyone has said that every year over the last 10 years, and that we were in a bubble – and it’s proven out that the underlying opportunity was much larger. So it’s hard to say if it’s too expensive.”

The buoyant private markets mirror activity on public exchanges; the Toronto Stock Exchange has had 14 technology IPOs since July, 2020, compared with 12 in the 11 years ended December, 2019. Information technology companies now account for 11.4 per cent of the S&P/TSX composite index – up from 1 per cent in 2012. “Technology is a significant tier of the market now, and it will continue to play an even greater importance as this country transitions to knowledge-based industries,” said David Wismer, global head of technology investment banking with BMO Capital Markets.

The trends are similar in the United States, where companies have raised a record US$190-billion in venture capital and the pace of IPOs has hit dot-com boom levels.

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