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U.S. Venture Capital Is Pouring Into Canadian Enterprise Tech Startups

‘U.S. funds have been coming across the border aggressively in the last five years, which has helped fuel cohorts of investable companies,’ says a lead investor at Georgian, a Toronto-based VC firm

U.S. investors are pumping cash into Canadian information-technology startups, which last year raised a record $13.6 billion in venture capital, more than double a previous high set in 2019, according to researcher PitchBook Data Inc.

Many are being drawn north by thriving tech hubs in places like Toronto and Vancouver, where in recent years Alphabet Inc.’s Google, Microsoft Corp. , Intel Corp. and Uber Technologies Inc. have either opened or expanded offices and research-and-development campuses, say startup founders and investors.

That, in turn, has fostered a growing pool of skilled tech workers, who are becoming increasingly scarce in the U.S., they say. Canada’s homegrown tech workforce also is benefiting from engineers, coders and software developers leaving Silicon Valley and other U.S. hubs, many taking advantage of remote-work opportunities, a lower cost of living and more open immigration rules, they say. At the same time, investors say, the presence of giant tech firms has helped cultivate university research labs and advanced training programs, often working in partnership with Google, Micorosoft and other corporate backers.

Last year, the average deal size among Canadian tech startups jumped to $15.5 million, from $6.8 million in 2020, with funding rounds of $25 million or more accounting for 75% of total capital invested, up from 51% in 2020, PitchBook said on Thursday.

Despite a decade of rapid growth in its tech market, “Canadian startups have historically struggled to raise capital and have been comparatively underfunded compared to their peers south of our border,” said Scott MacDonald, co-founder and managing partner at Toronto-based investing firm McRock Capital.

Over the last three years or so, Mr. MacDonald said, global venture-capital investors—especially U.S.-based investment firms—are taking notice of the country’s maturing startup ecosystems, clustered within large metro areas across Ontario, Quebec and British Columbia, among other provinces. Since 2020, more than half of all Toronto-area venture-capital deals have included at least one U.S. investor, according to PitchBook.

OSF Digital, a Quebec City-based software firm that helps retailers transition to e-commerce, on Wednesday announced a $100 million Series C fundraising, led by U.S.-based growth-equity and buyout firm Sunstone Partners. Other investors in the round included Delta-v Capital and Salesforce Ventures, also U.S.-based firms, the company said.

“All of our investors are based in the U.S.,” OSF Digital’s Chief Executive Gerry Szatvanyi said, adding that “once the word got out that we were raising a third round, we got a great deal of interest from the market.”

The Covid-19 pandemic turbocharged digital transformation across industries, Mr. Szatvanyi said, “and we are one of the few companies who innovated quickly enough to not just keep up, but grab market share.” The company currently has more than 1,800 employees and 49 offices world-wide.

Kim Furlong, chief executive of the Canadian Venture Capital and Private Equity Association, said enterprise IT startups in the cloud-based software-as-a-service market are currently capturing the biggest part of venture investing in Canada, followed by artificial intelligence, life sciences and financial technology.

The VC industry trade group, based in Toronto, tracked a record 752 startup funding deals last year, an all-time high, including 72 worth 50 million Canadian dollars (around $40 million) or more. Last year also saw a record eight venture-backed public market debuts, among them that of Coveo Solutions Inc., a C$1.1 billion listing on the Toronto Stock Exchange. Coveo is an enterprise AI software firm based in Quebec City.

“U.S. funds have been coming across the border aggressively in the last five years, which has helped fuel cohorts of investable companies,” said Margaret Wu, a lead investor at Toronto-based venture-capital firm Georgian. More early-stage funding and support systems have developed across the country, she said, while growth-stage funding has become available through local players.

Georgian, which targets business-to-business software makers, last year took part in a $100 million round for Xanadu Quantum Technologies Inc., a local quantum-computing company that Georgian first backed in 2019. Georgian was also an early investor in Shopify Inc., an e-commerce company based in Ottawa with a market capitalization of roughly $73 billion.

Steve Munford, chief executive officer at Vancouver-based identity-verification startup Trulioo Information Services Inc., said many Canadian tech firms are remaining independent rather than trying to cash out with an initial public offering or other exit. Instead, they have bigger ambitions to become global leaders in their markets. “This attracts global capital,” he said.

Like OSF Digital, much of Trulioo’s capital comes from U.S. firms. Last summer, Trulioo raised $394 million in a Series D round led by TCV, a growth-equity firm based in Menlo Park, Calif., which valued the company at $1.75 billion. Other investors have included Goldman Sachs, American Express Ventures, Citi Ventures and Blumberg Capital.

“You’re seeing Canadian tech companies that are growing and profitable, disrupting very large markets,” Mr. Munford said.



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