Trudeau's plan to lure Silicon Valley investors to Canada

Elaine Pofeldt, special to CNBC.com
Canadian Prime Minister Justin Trudeau
Getty Images

When former elementary school teacher Tami Zuckerman dreamed up the idea for VarageSale, a Toronto-based site that runs local online garage sales, she had no shortage of funding options.

After her husband, Carl Mercier, a developer and serial entrepreneur, helped her build and launch the site, the couple began hunting for capital and raised an undisclosed amount in seed and Series A funding from both Canadian and U.S. backers. Then, in April 2015, they pulled in $20 million in a Series B round in October 2014 from the Silicon Valley firms Lightspeed Venture Partners and Sequoia Capital, bringing the total raised from all investors to $34 million.

Trump & Trudeau talk trade
Trump & Trudeau talk trade

"For them it was really about our retention numbers," said Zuckerman. "Fifty percent of our members were coming back to the app six times a day. One of the investors said they hadn't seen that kind of activity since they invested in WhatsApp."

Zuckerman, whose firm has grown to 55 employees since 2012, isn't alone in finding that Canadian start-ups like her own are being taken seriously by investors. Thanks in part to a large-scale government commitment to supporting high-growth job-creating businesses, many homegrown start-ups are attracting financing from both Canadian venture capital firms and U.S. firms, which often invest alongside them. Last year Canada saw four venture capital deals above 100 million Canadian dollars (USD $76.3 million as of Feb. 23), compared to 2015, when there were none, according to the Canadian Venture Capital & Private Equity Association. "Tech is seen as an important sector for the country," says Zuckerman.

It's a very visible one, too. "You routinely see Prime Minister Justin Trudeau show up in the same room where all the founders show up," said Ben Baldwin, founder of ScaleDriver, a Toronto management consultancy that advises executives on building innovation, and founder of The Founder City Project, a network of start-up and scale-up founders.

Trudeau's action plan

Statistics tell the story. Venture capital investment in Canadian start-ups hit a 15-year high with $3.7 billion invested in 571 financings last year, according to Thomson Reuters. Growth was driven by large-cap deals with 14 companies raising rounds of $50 million or greater, smashing the record hit in 2000. The sectors attracting the most funding: information technology, life sciences and clean tech. While this is just a fraction of the $58.8 billion U.S. market, it is a trend with an upward trajectory.

Trudeau: Last thing Canadians expect is for me to lecture another country
Trudeau: Last thing Canadians expect is for me to lecture another country

One major driver of funding for innovative companies has been the Canadian government's Venture Capital Action Plan (VCAP), which established four private-sector-led funds of funds to back promising businesses. The goal: to help develop a more robust local VC marketplace.

Starting in 2014, the Government of Canada began teaming up with provinces to make capital commitments to the funds of $1 for every $2 pledged by private-sector investors, up to a maximum of $50 million each. The Government of Canada put in $340 million, enabling four private-sector funds to raise a collective total of $1.4 billion. So far, $886 million of the money has been committed to 21 new and emerging venture capital funds, and 186 Canadian firms have received funding.

You routinely see Prime Minister Justin Trudeau show up in the same room where all the founders show up.
Ben Baldwin
founder of The Founder City Project

The first fund, the Northleaf Venture Catalyst Fund, which reached its maximum fund size of $300 million in 2015, has committed capital to six venture capital fund managers and made direct investments in fast-growing Canadian companies, such as Wattpad, Vision Critical, Silanis, eSentire and FreshBooks.

OMERS Ventures, the venture capital arm of Canada's largest pension fund, has also poured money into the start-up ecosystem. It has backed about 30 start-ups in the five years since it launched, says Sid Paquette, a managing director. He believes it is the only direct-investment pension fund in Canada investing in the venture asset class. "It's absolutely not common," he said.

Building a marketplace

Unlike in the United States, public money is the primary driver of the Canadian venture capital market. "Predominantly it is pension plans investing in funds and it is family offices investing in funds," said Paquette.

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Heyman: Canada is the most important relationship we have

With financing abundant, start-ups are aiming higher.

"It seems like every week, there is a $25 million or $50 million financing announced in Canada," said Karamdeep Nijjar, a venture capitalist at iNovia Capital in Toronto. "The bar has been raised. I think people are not just interested in being acquired by a bigger player but becoming that bigger player on their own."

Section 116 of the Income Tax Act of 2010 has also helped spark investments in start-ups, says Ameet Shah, a partner at Golden Venture Partners, a seed-stage fund in Toronto whose start-up, Five Mobile, was acquired by Zynga in July 2011. The change in tax law liberated foreign backers of Canadian start-ups from filing pages of documents if a company in which they have invested is sold. "It has made it a lot easier for U.S. investors to invest," said Shah.

The talent chase

The latest initiative designed to fuel entrepreneurial companies is the Canadian government's proposed Global Skills Strategy, designed to make it easier to attract "low-risk, high-skill talent." Expected to take effect later this year, it aims to make it possible for companies to get a work permit visa for potential hires within two weeks. "That would really help companies like ours," said Allen Lau, CEO of the fast-growing, Toronto-based storytelling platform WattPad, which has 130 employees. "There's no such thing as too much talent. This will help us to attract talent on a global basis to help us scale the company."

Certainly, even with all of the government support, the Canadian venture capital scene has a long way to go before it is as robust as Silicon Valley's. "There aren't that many funds in Canada designed to serve this industry," said Michael Litt, co-founder of Vidyard, a video platform for business in the Kitchener area, near Toronto, that has raised $70 million in three rounds of financing. "However, bringing money across the border and raising money stateside doesn't seem to be an issue."

Litt now runs a fund that has invested in 50 start-ups. "The advice I always give these individuals is they should definitely go south of the border," said Litt. Given the favorable exchange rate, notes Zuckerman at VarageSale, "U.S. funding goes a lot further in Canada."

— By Elaine Pofeldt, special to CNBC.com

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