The venture capital powered expansion of region’s tech sector

WATERLOO REGION — The region’s startups and fast-growing tech firms are attracting more investors than ever.

There are several reasons, including:

  • Multiple generations of successful entrepreneurs from Waterloo Region’s growing tech sector investing in new companies.
  • Costs increased for taking a company public — thanks to stronger regulations following massive corporate frauds at Enron and its accounting firm Arthur Andersen — more private equity investors came to the table and never left.
  • After the dot-com bust in the early 2000s the work of research analysts was separated from investment banking, making it more difficult and expensive to go public. The 2003 changes were aimed at blatant conflicts-of-interest where research analysts pushed stocks during initial public offerings their banks had invested in.
  • The region’s startup ecosystem expanded into many sectors of the economy — medicine, education, cleantech, finances, real estate, video marketing, construction, insurance, forensics, digital media, carbon-neutral packaging, nanotechnology, Cyber Security and more.

In the past, a successful arc for a startup went something like this — after founding it raises a series of increasingly large investments that lead to an initial public offering, or acquisition by a bigger tech company.

But now, the most high-profile startups in this region raise far more money from private-equity markets than through initial public offerings.

The best companies and institutional investors figured out it was better to stay private and grow fast without quarterly earnings pressure,” said Communitech CEO Chris Albinson.

The result is startups like ApplyBoard do a large round of investment to support expansion rather than go public, he said.

“I don’t see this changing as it is mostly better for the companies, founders and institutional investors that have access to the companies,,” said Albinson

For years, Waterloo Region’s tech was defined by BlackBerry, which raised $115 million when it went public as Research In Motion in January 1998.

Two years before that Waterloo-based, OpenText went public and raised $61 million — it was the first internet search engine to be traded publicly. For years it has been the biggest software company in Canada.

Last year, two local startups, Magnet Forensics and D2L went public. D2L raised $155 million in November 2021. Magnet raised $115 million in May 2021.

But a single round of venture capital investment in February for one startup was worth more than both IPOs combined.

Waterloo-based eSentire raised $325 million from private investors and venture capitalists. It was the fourth round of investment for eSentire, which is hiring hundreds of new employees.

Other startups in the region, most notably ApplyBoard and Faire, have raised hundreds of millions of dollars in venture capital in recent years and are valued in billions of dollars.

Even five years ago, private equity numbers like that were unheard of in the region’s tech sector.

Randall Howard has experienced the changes in tech financing from both sides —- as an entrepreneur and later as an investor.

During the 1990s a startup with $20 million in annual revenues could get listed on Nasdaq, said Howard, but now they need annual earnings of at least $100 million.

Howard was chair and chief executive officer at MKS from 1984 to 2000. He’s a founder, leader and investor who now concentrates on angel-stage investments.

The tech-bubble burst in 2000, and a few years later the Enron scandal resulted in scrutiny that increased the costs of IPOs by five to 10 times, and the pace of public offerings slowed to a trickle, said Howard.

“In the absence, tech has had bigger and bigger venture capital deals,” said Howard.

“Venture capitalists have been very important in funding later-stage companies that would normally have gone public in the past,” he said. “eSentire falls into that category; there are others, but it is one of the bigger ones.”

Howard does angel-stage investing through the Archangel Network of Funds — an umbrella for four different funds focused on the early injection of capital into new startups.

“That stage doesn’t get a lot of attention, but to be honest, good capitalization in that stage is what leads many of these small companies to scale up and become majors that will do the huge job creation that we really need,” said Howard.

Since Communitech was founded in 1997, the tech workforce in this region has doubled to more than 25,000. To keep it expanding, the startup scene needs more early-stage investments, said Howard.

Mike McCauley learned that from experience. By the time McCauley graduated from mechatronics engineering at the University of Waterloo in 2011, he was a co-founder of BufferBox. The startup built a network of secure lockers to take delivery of packages while people are at work.

After going through Y Combinator in San Francisco, the company was acquired by Google for more than $25 million in November 2012. McCauley worked for Google’s CampX for a while before returning to Kitchener.

In 2014, McCauley and Michael Litt — the co-founder and CEO of Vidyard — started Garage Capital. They do early-stage investing in the next generation of startups. Garage Capital was an early investor in ApplyBoard.

Garage Capital raised more than $50 million during the past eight years, and invested in more than 90 companies with a collective valuation of more than $17 billion. Garage Capital’s portfolio includes Dozr and Nicoya Life Science among many others.

“We go out and raise capital from investors and put a portfolio together and invest in companies,” said McCauley. “To build amazing, great companies, it takes a long time, and we are prepared to do that.”


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