Hey Canada, Time to Build More Mobile Champions

by on April 8, 2014

All across the web, from blogs to mainstream media, there is a tremendous amount of evidence that Canada’s technology ecosystem has never been more vibrant and alive than it is today.

2013 was definitely a great year for Canadian startups with positive signs that the Tech ecosystem is maturing and producing more high quality startups than ever before (More on this herehere and here).

But how did we get there? How fast is Canada’s tech ecosystem growing and what type of companies are behind this growth story? Let’s pause here and look at what happened in Canada over the last 5 years, from the aftermath of the global financial crisis until today.

I quickly ran the numbers thanks to data available on CrunchBase and CB Insights. Two major observations can be made:

  1. Canada’s startups have never had as much angel and venture capital funding available than they have today. The country sees more deals of increasingly larger size on average.
  2. Most of the growth and size of Canada’s Tech ecosystem is attributable to Internet companies. Investments in Mobile and Hardware companies remain tiny and slow-growing categories.

First of all, Canada as a country is a tenth of Silicon Valley’s size in terms of total invested capital in Technology. Nothing surprising there. The surprising thing however is that Canada’s total invested capital has been growing just as fast as Silicon Valley in the last 5 years — at a 33% annual growth rate. Not slower as I initially presumed, not faster as some would hope, just as fast.

Looking at the 717 Tech companies that received Angel/VC funding over the last 5 years, Canada has attracted $2.8 billion in total disclosed investments.

More large deals in the last 2 years

Canada is seeing more deals than 5 years ago and these are of larger size on average. This is reflected in Canada’s Top 20 financings over the last 5 years. Interestingly, 12 of these 20 deals happened in the last 2 years including the three largest: Hootsuite’s $165M financing, Shopify’s $100M financing and Desire2Learn’s $80M financing.

Internet companies own the podium of venture financing in Canada: 7 of these 12 deals that took place in the last 24 months were Internet companies (namely HootSuite, Shopify, Desire2Learn, ACCEO Solutions, Real Matters, Broadband TV and SecureKey Technologies)

Canada’s Internet sector is catching up

The story behind Canada’s emerging and vibrant ecosystem has been written by Internet companies — namely software, services and eCommerce solutions deployed via the browser-based web. 70 cents for every dollar invested in Technology companies in 2013 were invested in Internet companies, up from only 22 cents in 2009. This represents a staggering compounded annual growth rate of +77% in total invested capital.

Investors did more deals and signed increasingly bigger checks. 2013 saw more than 4x as many Internet deals than 2009 (from 25 deals to 131 in 2013) and the average deal size has significantly increased from $2.4 million in 2009 to $4.6 million in 2013 (or $3.3 million if we exclude HootSuite’s massive round of $165M).

Of course, part of this is explained by a relatively higher valuation environment versus 5 years ago but it’s also a sign of a more mature pool of Canada-based Internet companies. That pool include HootSuite, Shopify, Beyond the Rack, Chango, Well.ca and Indochino among others.

In comparison, in the Valley, the Internet sector has been growing almost twice slower than it did in Canada (with a 39% annual growth rate). Average deal sizes are still much higher in the Valley, and this hasn’t changed much in 5 years (the average Internet deal was about $8.6 million in 2013 up from $7 million in 2009).

So, while Canada’s Internet sector has been catching up, other segments of the ecosystem remain small and grow at a slower pace. The on-premise Software industry attracted only 6 cents for every dollar invested in 2013 (down from 23 cents in 2009) as investors progressively redirected investments from the traditional software market into Enterprise SaaS. The Hardware, Semiconductor and Electronics industry had some ups and downs while the Mobile & Telecom sector attracted limited growth in investments.

The Mobile imperative

Canada’s Mobile sector has yet to show such a growth story. Some would argue that it doesn’t matter as we see the boundaries between Internet companies and “mobile-first” or “mobile-only” companies becoming more and more blurry. This argument makes sense. Obviously, no one is ignoring mobile, simply because every Internet company out there sees mobile rising as a percentage of all user visits. But in a world of nearly two billion smartphones and newly emerging leaders (Whatsapp, Uber, Snapchat, Square and others), there is also an argument that the winners of the browser-based Internet age are not likely to be the same in an application-centric mobile age. After all, Microsoft didn’t rule the transition into the Internet age, new companies such as Google, Facebook and others did, with enormous value creation along the way. If Canada wants to continue to be a thriving Tech ecosystem, it will require strong Mobile champions. Here is where it stands.

First of all, total invested capital in Canada’s Mobile & Telecom has grown at an annual growth rate of 5%, with 2013 being a 4-year low (with $105M in 2013, up from $85M in 2009 but down from $151M in 2012). The sector now accounts for only 12% of total investments in Tech.

Second of all, when we break down investments in the sector, it’s more about Mobile and less about Telecom: Mobile companies have seen investments growing annually by 27% over the last 5 years and 85% of investments in Mobile for the period were made between 2011 and 2013.

This is encouraging, but there are many reasons to expect a lot more investments in the sector, especially now that BlackBerry’s talent base is forced to look at new opportunities.

Finally, while Canada’s Internet sector is definitely thriving, it’s just too early to tell which companies will be Canada’s champions in Mobile.

If the size of funding rounds is any indication of a company’s potential (not sure it is), likely candidates include:

  • The mobile payment & point-of-sale company LightSpeed Retail (raised a $35M Series A from Accel Partners and iNovia Capital),
  • The messaging app Kik Interactive (raised a $19.5M Series B from Spark Capital, Union Square Ventures, RRE Ventures and Foundation Capital)
  • Drivewyze, a mobile platform for the transportation industry (raised $7.5M from iNovia Capital and Emergence Capital).
  • Frontdesk, the mobile business management software (raised a $4M Series A last month from Floodgate, Version One Ventures and Second Avenue Partners)

In some of the key segments of Mobile such as enterprise mobile device management or mobile security, Canada remains a no man’s land with only a handful of early stage companies.

Does Canada need to build strong Mobile champions to ensure the survival of its young Tech ecosystem? If not, what about Canada’s ability to be part of the race for the next major computing platforms of the coming decade?

This piece was originally posted on Medium.